Considerations in seeking private letter rulings for spin-offs

On March 12, 2019, the IRS announced an extension of its pilot program for “transactional” private letter rulings involving spin-offs. The extension was expected and welcomed by taxpayers. Other recent IRS guidance regarding spinoffs includes:

(1) updated procedures for spin-off rulings that involve securities-for-debt exchanges, assumption of liabilities and certain payments of boot in connection with spinoffs;

(2) annual updates to the IRS’s ruling procedures;

(3) an announcement that special scrutiny will be applied to some “drop-spin-liquidate/merge” transactions;

(4) an announcement of an IRS study of the current “collection of income” requirement in connection with the active trade or business requirement;

(5) a revenue ruling that suspends two prior revenue rulings involving the collection of income requirement; and

(6) a request for information regarding the activities of entrepreneurial ventures that have not yet reached the collection of income stage. Taxpayers often seek private letter rulings for spinoffs from the IRS because of the dire tax consequences of failing to qualify and the lack of controlling authorities regarding material spin-off-related tax issues.

This article summarizes recent changes to the IRS’s ruling procedures and discusses considerations for taxpayers that are contemplating a private letter ruling for a spin-off.

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