The U.S. Internal Revenue Service (IRS) and the Department of the Treasury (“Treasury”) have published proposed regulations that would modify the device and active trade or business requirements for tax-free spin-offs under section 355 of the Code in three important respects.

First, the proposed regulations clarify the “device” test and its relationship to the “business purpose” requirement. Second, the proposed regulations would prohibit a tax-free spin-off if (1) two-thirds or more of the assets of the distributing corporation or the controlled corporation consist of nonbusiness assets and (2) the percentage of the distributing corporation’s nonbusiness assets differs significantly from those of controlled, under three specified tests. Third, the proposed regulations would require that the assets constituting an active trade or business must represent at least 5% of the total assets of the distributing corporation and the distributed corporation in order for the spin-off to be tax-free. Thus, the proposed regulations would effectively repeal the so-called “hot dog stand” rule, under which a de minimis active trade or business could support a spin-off of a relatively much larger collection of passive assets.

If promulgated as proposed, the proposed regulations will affect distributing corporations and their shareholders and security holders in spin-offs, split-offs, and split-ups that occur on or after final regulations are published.

For more on this topic, please see our client alert here.

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Photo of Richard M. Corn Richard M. Corn

Richard M. Corn is a partner in the Tax Department. He focuses his practice on corporate tax structuring and planning for a wide variety of transactions, including:

  • mergers and acquisitions
  • cross-border transactions
  • joint ventures
  • structured financings
  • debt and equity issuances
  • restructurings
  • bankruptcy-related transactions

Richard M. Corn is a partner in the Tax Department. He focuses his practice on corporate tax structuring and planning for a wide variety of transactions, including:

  • mergers and acquisitions
  • cross-border transactions
  • joint ventures
  • structured financings
  • debt and equity issuances
  • restructurings
  • bankruptcy-related transactions

Richard advises both U.S. and international clients, including multinational financial institutions, private equity funds, hedge funds, asset managers and joint ventures. He has particular experience in the financial services and sports sectors. He also works with individuals and tax-exempt and not-for-profit organizations on their tax matters.

Richard began his career as a clerk for the U.S. Court of Appeals for the Fourth Circuit Judge J. Michael Luttig and then went on to clerk at the U.S. Supreme Court for Associate Justice Clarence Thomas. Prior to joining Proskauer, he most recently practiced at Sullivan & Cromwell as well as Wachtell, Lipton, Rosen and Katz.

Photo of Janicelynn Asamoto Park Janicelynn Asamoto Park

Janicelynn Asamoto Park is a partner in the Tax Department and a member of the Private Funds Group. She counsels fund sponsors and their investors as to the tax and economic considerations relating to forming, operating, and investing in private investment funds, co-investment…

Janicelynn Asamoto Park is a partner in the Tax Department and a member of the Private Funds Group. She counsels fund sponsors and their investors as to the tax and economic considerations relating to forming, operating, and investing in private investment funds, co-investment vehicles, and other investment partnerships across asset classes. Janicelynn also regularly advises investors and sponsors in buy-side and sell-side secondary transactions (including in connection with GP-led fund restructurings).

Her practice also includes advising on domestic and cross-border financings and investments, inbound and outbound private mergers and acquisitions, and equity-compensation arrangements.

Janicelynn currently serves on the board of Reach Out and Read of Greater New York, a not-for-profit organization that partners with physicians to promote early literacy in low-income communities.

Before joining Proskauer, Janicelynn served as a law clerk for the Honorable Denny Chin of the U.S. Court of Appeals for the Second Circuit, and was a youth development volunteer in Honduras with the U.S. Peace Corps.