Distributions causing a stock value increase met business purpose requirement.

• Author: Fox, Catherine M.

The Service's current no-ruling position on tax-free spinoffs has resulted, as intended, in more guidance defining a satisfactory corporate business purpose for Sec. 355 purposes. Rev. Rul. 2004-23 provides such assistance in situations that satisfy this requirement.

In general, Regs. Sec. 1.355-2(b)(2) requires a corporate business purpose for a tax-free spinoff, stating that a shareholder purpose is not a corporate business purpose, but it may be so closely co-extensive to preclude any distinction between them. The ruling outlines two situations in which a distribution resulted in an increase in stock value of either the distributing or controlled corporation. The ruling held that in a distribution expected to increase the value of the controlled and distributing corporations' stock after the distribution, the Sec. 355 and Regs. Sec. 1.355-2(b) corporate business purpose requirement for a tax-free reorganization was satisfied, even if the distribution benefited the distributing corporation's shareholders.

Facts

Situation 1 described a distribution of a business segment intended to enhance the value of a business's equity-based compensation plan. The separation of the two business activities was expected to increase stock value, thereby enhancing the value of the company's equity-based compensation, without diluting existing shareholders' ownership interests.

Situation 2 described a distribution of a business segment intended to increase stock value to further effect future business acquisitions in a manner that preserved capital, while limiting dilution of the existing shareholders' interests. The business's overall strategic plan included...