IRS eliminates no-rule policy for business purpose and device rule issues.

• Author: Reed, Brian W.

In Rev. Proc. 2016-45 (released Aug. 26, 2016), the IRS announced that it will entertain requests for private letter rulings with respect to Sec. 355 distributions addressing "significant issues" of whether a spinoff satisfies the business purpose requirement under Regs. Sec. 1.355-2(b) or is used principally as a device for the distribution of earnings and profits of the distributing or controlled corporation under Sec. 355(a)(1)(B) and Regs. Sec. 1.355-2(d).

New Ruling Policy and Effective Date

Rev. Proc. 2016-45 states that the IRS will issue letter rulings addressing significant issues under the business purpose requirement and the device rules, provided that the issues are not "inherently factual." (Generally, a significant issue is a legal issue, the resolution of which is not essentially free from doubt.) Rev. Proc. 2016-45, which modifies Rev. Proc. 2016-3, represents a change to the long-standing IRS policy against ruling on the business purpose requirement or device rules.

Rev. Proc. 2016-45 is effective for ruling requests that are postmarked or, if not mailed, received on or after Aug. 26, 2016, relating to distributions occurring after Aug. 26, 2016.

Analysis and Implications

The application of the business purpose and device rules of Regs. Sec. 1.355-2 often involves both legal and factual questions.

To conserve resources, in 2003, the IRS issued Rev. Proc. 2003-48, a "pilot program" of no-rule policies regarding business purpose and device issues in Sec. 355 transactions, in addition to imposing a no-rule policy regarding whether acquisitions of the distributing or controlled corporation are part of a plan under Sec. 355(e). As a result, the IRS has not explicitly ruled on business purpose or device issues in a letter ruling for 13 years. Rev. Proc. 2016-45 allows taxpayers to obtain more certainty on a host of questions that have not been recently addressed by a letter ruling. Moreover, because the IRS has more broadly adopted a single-issue format for its letter rulings, they may provide greater transparency of the IRS's thinking on particular issues than before.

With this latest revenue procedure coming on the heels of Rev. Proc. 2016-40, which eliminated the no-rule policy...