Other properties received in a stock spinoff.

• Author: Zimbalist, Bill

The IRS recently issued a ruling on the tax treatment of property other than stock - e.g., cash, notes, securities, receivables and other assets ("other property") - received by a shareholder in a spinoff that would otherwise be nontaxable (Rev. Rul. 93-62).

A spinoff generally involves a corporation's distribution of 80% or more of the stock of a controlled subsidiary to a shareholder of the distributing corporation. If certain Code requirements are met, the distribution is nontaxable, except to the extent that other property is also distributed. A spinoff may involve either a pro rata or a non-pro rata distribution of stock. A pro rata distribution of stock, accompanied by a pro rata distribution of other property, will have the effect of a dividend.

Rev. Rul. 93-62 discussed a non-pro rata distribution of stock, accompanied by a non-pro rata distribution of cash. Sec. 302(b)(2) provides that exchange treatment (rather than dividend treatment) applies for substantially disproportionate redemptions of stock - i. e., (1) the shareholder's voting stock interest and common stock interest after redemption are each less than 80% of those interests immediately before redemption, and (2) the shareholder owns less than 50% of the voting power of all classes of stock after the redemption.

Example: Distributing corporation D has 1,000 shares of a single class of stock outstanding, with a fair market value (FMV) of $1 per share. A, one of five unrelated individual shareholders, owns 400 shares of D stock. D owns all of the outstanding stock of controlled corporation C, which has a $200 FMV...