The IRS yesterday announced (Rev. Proc. 2013-32) that it will stop issuing “comfort rulings” on tax-free spin-offs and reorganizations. It is touted as a cost-saving measure.
For the split-up of a corporation to be tax free under Section 355, it must be done for a “corporate” business purpose, which is by definition subjective. Because the consequences of a failed spin-off are catastrophic — the same as a taxable sale of the spun-off business, but without any cash to cover the tax — corporations used to get their business purposes blessed as a matter of course.
The usefulness of the rulings had declined in recent years, once the IRS stopped ruling on the validity of “business purposes” stated in ruling requests in 2003 (Rev. Proc. 2003-48). The rulings have also gotten more costly, and the IRS turnaround can be too slow for a business in a hurry.
Tax Analysts reports ($link) that companies that want a ruling have until August 23 to submit their requests.
It’s unfortunate, as I don’t expect the IRS to make up for the lack of rulings with better published guidance. It’s another small reason to avoid using corporations when partnership vehicles, like LLCs, are available; it’s much easier and safer to divide a partnership business tax-free.