Rev. Proc. 96-30 provides guidance on sec. 355 business purpose.

• Author: Panoutsos, Louis A.

For both business and personal reasons, shareholders of a corporation that operates two or more separate businesses may wish to incorporate one of those businesses and distribute the stock of the new corporation to the shareholders. If the transaction meets the requirements of Sec. 355, the shareholders of the distributing corporation generally do not recognize gain or loss on the receipt of the stock or securities. Furthermore, if Sec. 355 applies to the distribution, Sec. 311 provides tax-free treatment to the distributing corporation.

One of the requirements of Sec. 355 is the existence of a corporate nontax business purpose for the distribution. The determination of whether an adequate business purpose exists can be quite subjective, especially when the transaction simultaneously results in a reduction of Federal income taxes, when it is intertwined with a shareholder business purpose, or when it can be accomplished through other alternative.

In Rev. Proc. 96-30, the Service has issued new guidelines for advanced ruling purposes on what may constitute a valid business purpose, and the criteria for establishing the existence of the business purpose. These guidelines also contain a revised checklist and questionnaire for taxpayers seeking advance rulings under Sec. 355. One of the significant differences between Rev. Proc. 96-30 and the previous checklist is that Rev. Proc. 96-30 provides advice on the criteria That the IRS will evaluate in determining whether a distribution satisfies the business purpose requirement. The guidelines list specific situations and specify the information to be submitted for evaluation of the business purpose in each of these situations. The specific situations listed are: (1) the provision of an equity interest to a key employee, (2) a stock offering, (3) the enhancement of financing terms, (4) cost savings, (5) fit and focus, (6) competition, (7) facilitating an acquisition by the distributing or controlled corporation, (8) facilitating an acquisition of the distributing corporation and (9) risk reduction. * Key employee: Employers commonly give key employees an equity stake in the business as a means of reward and incentive for future performance. If the business is operated through a division, a separation of the employers divisions may be necessary to facilitate the transfer of an ownership interest for the key employee. In such case, one of the divisions is typically transferred to a new corporation...