IRS will not rule that risk reduction alone is a valid business purpose under Sec. 355.

• Author: Bailine, Richard W.

In two recent meetings, IRS officials have indicated that they will not issue letter rulings sanctioning Sec. 355 transactions if the sole business purpose for the transaction is to insulate one company from another's risks. According to William Alexander, Branch Chief, Office of Assistant Chief Counsel (CORP), speaking at a Jan. 29, 1994 session of the American Bar Association Tax Section's midyear meeting, and Eric Solomon, Assistant Chief Counsel (CORP), speaking at a Feb. 9, 1994 luncheon of the Corporation Tax Committee of the D.C. Bar, risk reduction is "inherently factual" and thus not an appropriate subject for advance rulings. Solomon noted that taxpayers are frequently looking to segregate environmental risk, an area he characterized as beyond the expertise of those involved in the ruling process.

In general, the Service uses a two-part test to evaluate business purpose under Sec. 355. Not only must a taxpayer offer a valid business purpose, but it must also demonstrate that alternative taxfree transactions that might achieve the taxpayer's goals are either too expensive or impractical. According to Solomon, a proper evaluation of possible alternative transactions is not feasible when assessment of the taxpayer's stated business purpose involves a highly factual inquiry.

This does not mean, however, that taxpayers will be unable to obtain a favorable ruling on a Sec. 355 transaction if a reduction in risk is one of the purposes for the proposed transaction. Rather, taxpayers should interpret the newly...