IRS disagrees with TC ruling on spin-off.
Author | Herskovitz, Donald L. |
Position | Tax Court |
When the Tax Court disagrees with the IRS's position in a case, the Service publishes an "acquiescence" or "nonacquiescence" position on the court's decision (an Action on Decision (AOD)). The IRS recently released a nonacquiescence in a Tax Court decision regarding a spin-off (AOD 1998-007). The case, Clark D. Pulliam, TC Memo 1997-274, involved (1) the transfer of a funeral home business by a parent corporation (Homes) to a newly formed subsidiary (Chapel), (2) distribution of 100% of the Chapel stock to Homes's sole shareholder and (3) sale by the sole shareholder of 49% of the Chapel stock to a key employee.
Court Ruling
For a spin-off to be considered nontaxable, there must be a valid corporate business purpose for the transaction and the spin-off cannot be primarily a device for distributing earnings and profits (E&P). The sole shareholder argued that these two tests were satisfied because the distribution and sale of the Chapel stock were undertaken to (1) induce the employee to continue working in the business and (2) dissuade him from opening a competing facility. The Tax Court agreed, noting these "valid corporate business purposes" were sufficiently compelling to overcome the substantial evidence that the distribution of the Chapel stock was used as a device for distributing E&P.
IRS Position
In the AOD, the Service argued the entire transaction (both the distribution and sale of stock) must have a corporate business...
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