Mergers & Acquisitions

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The U.S. Internal Revenue Service (“IRS”) released Revenue Procedure 2016-45 (the “Revenue Procedure”) on August 26, 2016, permitting taxpayers once again to seek private letter rulings on issues of “corporate business purpose” and “device” under Section 355 of the U.S. Internal Revenue Code of 1986, as amended (dealing with tax-free spin-offs and related transactions). The corporate business purpose and device requirements under Section 355 have long been matters on which the IRS has preemptively declined to issue letter rulings or determination letters (these are commonly referred to as “no-rule” areas, the full list of which is reissued annually; see, e.g., Rev. Proc. 2016-3). The Revenue Procedure states that the IRS has determined that there are a number of unresolved legal issues relating to the corporate business purpose and device requirements that may be germane to determining the tax consequences of a transaction. As a result, the IRS will consider ruling requests, dated on or after August 26, 2016, related to the corporate business purpose and device requirements, subject to the overall standard requiring that the request present a “significant issue” and the general latitude of the IRS not to rule if, in their view, the facts and circumstances so warrant.

By removing these issues from the no-rule list, the IRS offers corporations considering a tax-free spin-off the possibility of significantly greater comfort on the U.S. federal income tax treatment of the transaction. The change in position may also reflect recognition by the IRS that while existing published and non-published guidance on corporate business purpose and device addresses many open issues in respect of these requirements of Section 355, significant issues remain that may merit seeking an IRS determination before a transaction proceeds.

The removal of corporate business purpose and device from the no-rule list follows on the heels of the July issuance of proposed regulations under Section 355 addressing the “device” and “active trade or business” requirements of Section 355. Notably, the Revenue Procedure does not specifically discuss whether questions about the application or interpretation of the new proposed regulations relating to device are amenable to ruling requests (indeed, the Revenue Procedure does not mention these proposed regulations at all). Click here for our client alert on the proposed regulations on “device” and “active trade or business”.

A brief background on private letter rulings and no-rule areas under Section 355 follows.

The Treasury Department and the Internal Revenue Service have issued additional guidance about so-called “inversion” transactions. Generally, an inversion transaction results where a U.S. corporation (“U.S. Target”) is acquired by a non-U.S. corporation (“Non-U.S. Acquirer”), but with the U.S. Target’s historic shareholders continuing as significant equityholders of the Non-U.S. Acquirer after closing. The U.S. federal income tax consequences of inversion transactions vary based on a number of factors, including the extent of the U.S. Target shareholder’s continuing equity stake, but in the broadest possible sense, an inversion can have the result of reducing the U.S. Target’s gross income subject to U.S. corporate tax post-inversion. These transactions are not new – a number of statutory provisions have been enacted by the U.S. Congress (notably, Sections 367 and 7874), and various regulatory projects and other administrative guidance have been issued by the Treasury Department and I.R.S. to address these transactions since the early 1990s. However, notwithstanding the government’s efforts, inversion transactions continue.

The latest round of guidance is Notice 2015-79 (the “2015 Notice,” issued November 20, 2015), expanding on the inversion guidance in Notice 2014-52 (the “2014 Notice”). The principal purpose of the 2015 Notice, like the 2014 Notice, is the announcement of future proposed regulations broadly intended both to make inversions harder to accomplish in a tax-preferred manner and to restrict the benefits of certain U.S. post-inversion structuring transactions. These future proposed regulations will have effective dates that are designed to foreclose immediately, as a practical matter, the future use of the structures and techniques described.