On May 23, 2025, the Internal Revenue Service (the “IRS” or “Service”) issued PLR 2025210191 (the “Ruling”) regarding a reorganization under section 368(a)(1)(D) and pursuant to a distribution under section 355 of the Internal Revenue Code (the “Code”).2 Upon completion of a series of internal transactions not described in the Ruling and the ultimate public spin-off transaction, both the distributing corporation and the controlled corporation will be publicly traded corporations with share repurchase programs and/or accelerated share repurchase (“ASR”) programs in place.
In addition to customary representations, the Ruling contains a number of certain modified representations that help focus the reader on the technical tax requirements contemplated by the taxpayer and Service, specifically the requirements that (i) the distribution not be used principally as a “device” for the distribution of the earnings and profits of the distribution corporation, controlled corporation, or both (such requirement commonly referred to as the “No Device Requirement”); and (ii) the distribution is not pursuant to a planned acquisition of 50% or more of the stock of the distributing or controlled corporation (the “Section 355(e) Requirement”). Before reviewing the modified representations contained in the Ruling, some background on the No Device Requirement and the Section 355(e) Requirement is in order.
The No Device Requirement
Very generally, a distribution will not qualify for tax-free treatment under section 355 if it is used principally as a device for the distribution of earnings and profits of either the distribution corporation, controlled corporation, or both corporations.3 This means that the distribution cannot be intended to avoid the dividend provisions of the Code through a subsequent sale or exchange of the stock of one corporation and the retention of the stock of the other corporation. A device includes transactions that effect the recovery of tax basis, including redemption transactions that are treated as sales or exchanges for U.S. federal income tax purposes.4 Generally speaking, the No Device Requirement is assessed based on all facts and circumstances surrounding the distribution, with certain facts or elements having heightened relevance.5
In an extreme illustration of the device problem, consider a cash-rich, closely held corporation that would like to pay a dividend to its controlling shareholders. Also assume that the corporation’s shareholders are tax sensitive to dividends.6 Rather than pay a cash dividend, the corporation contributes the full amount of excess cash and a small unwanted business7 to a new corporation (i.e., the controlled corporation) and then distributes the stock of the controlled corporation to its shareholders on a pro rata basis. Absent the No Device Requirement, the shareholders might then be free to sell the stock of the controlled corporation–now a cash box–to a third-party buyer in a taxable transaction with basis offset, thereby reducing the amount of taxable income subject to tax at capital gains rates and resultant shareholder tax liability.8 As in the dividend alternative, this transaction returns cash to the shareholder but, due to basis offset, is comparatively more favorable than an inclusion of the full amount of the dividend. As such, the illustrative transaction would be considered a device that avoids the dividend provisions of the Code, which would render the distribution itself fully taxable to the distributing corporation and its shareholders.
The Section 355(e) Requirement
Section 355(e) imposes a separate requirement that prevents one or more persons from acquiring directly or indirectly 50 percent or more of the vote or value of the stock of the distributing corporation or controlled corporation as part of the same plan as the distribution. The regulations under section 355(e) are vast and cover planned acquisitions of the distributing or controlled corporations (including their predecessors and successors) for the period before and after the distribution. The regulations under section 355(e) also create a series of presumptions and safe harbors for assessing whether a transaction is planned or treated as planned but for a rebuttal based on facts and circumstances. While a robust discussion of section 355(e) is beyond the scope of this article, suffice to say that section 355(e) covers a lot of the same territory as the No Device Requirement, but also extends to certain tax-free transactions that result in a 50% or greater change in ownership. Therefore, section 355(e) can apply to cause corporate gain recognition9 where the subsequent planned disposition of the distributing or controlled corporation stock is effectuated in a tax-free manner.
The Modified Representations in the Ruling
Certain of the modified representations in the Ruling are not uncustomary. For example, modified Representation “b” indicates that there is no plan or intention by the shareholder of the distributing corporation to sell, exchange, or otherwise dispose of the stock of the distributing or controlled corporation following the distribution. Similarly, there is no plan to liquidate or merge either corporation, or sell or dispose of the assets of either corporation (Representation “d”) as well as a representation that the taxpayer will not engage in certain acquisition related activities during the presumptive two-year plan period preceding the distribution as established under section 355(e) (Representation “e”).
The Ruling does, however, contain a robust series of representations pertaining to the share repurchase programs and ASR program that will be in place following the distribution. Specifically, Representation “c” establishes that any share repurchases by the distributing or controlled corporation (“Post-Distribution Repurchase”) will meet the following requirements:
Any Post-Distribution Repurchase will be motivated by a business purpose, and the stock that will be repurchased by the distributing or controlled corporation, or acquired by a counterparty pursuant to an ASR of the controlled corporation, will be widely held;
To the extent that any Post-Distribution Repurchase is made on the open market,10 the distributing or controlled corporation, as applicable, does not expect to know the identity of any shareholder from which stock will be repurchased. To the extent that any Post-Distribution Repurchase is made through an ASR, the controlled corporation does not expect to know with certainty the identity of any shareholder from which stock is borrowed or purchased by each counterparty that participates in such ASR;
There is no plan or intention that the aggregate amount of stock purchased or acquired through Post-Distribution Repurchase will equal or exceed “a” percent of the outstanding stock of the distributing or controlled corporation, as applicable; and
No Post-Distribution Repurchase will be motivated to any extent by a desire to increase or decrease the ownership percentage of any particular shareholder or group of shareholders.
- Any Post-Distribution Repurchase will be motivated by a business purpose, and the stock that will be repurchased by the distributing or controlled corporation, or acquired by a counterparty pursuant to an ASR of the controlled corporation, will be widely held;
- To the extent that any Post-Distribution Repurchase is made on the open market,10 the distributing or controlled corporation, as applicable, does not expect to know the identity of any shareholder from which stock will be repurchased. To the extent that any Post-Distribution Repurchase is made through an ASR, the controlled corporation does not expect to know with certainty the identity of any shareholder from which stock is borrowed or purchased by each counterparty that participates in such ASR;
- There is no plan or intention that the aggregate amount of stock purchased or acquired through Post-Distribution Repurchase will equal or exceed “a” percent of the outstanding stock of the distributing or controlled corporation, as applicable; and
- No Post-Distribution Repurchase will be motivated to any extent by a desire to increase or decrease the ownership percentage of any particular shareholder or group of shareholders.
The various components of the modified Representation “c” all aim to establish that any Post-Distribution Repurchase that occurs close in time to the distribution will be on the open market and without privity to the public shareholder. Furthermore, Representation “c” establishes that the Post-Distribution Repurchases are not intended to achieve a tax-advantaged result or a result inconsistent with the policy of the No Device Requirement or the Section 355(e) Requirement. Rather, the Post-Distribution Repurchases are business motivated transactions and will be limited in a manner that cannot increase or decrease the ownership of any particular shareholder or shareholder group.
Representation “c” is also similar to previous guidance, which has since been revoked, regarding post-distribution redemptions in the context of section 355. Under Rev. Proc. 96-30,11 the Service permitted redemptions of distributing or controlled corporation stock provided there (i) was a corporate business purpose for the repurchase; (ii) the stock being purchased was widely held; (iii) the repurchases occurred on the open market and not from certain directors, officers, or large shareholders; and (iv) the planned repurchases were limited and did not exceed 20% of the stock of the distributing or controlled corporation. The relevant portions of Rev. Proc. 96-30 were obsoleted in 200312; however, the Ruling is generally consistent with what has become current private letter ruling practice (i.e., to permit open market repurchases that were limited in scope and not tax-motivated).13
Lastly, in modified Representation “a” of the Ruling, the taxpayer establishes that the fair market value of the business assets of each corporation will be greater than 80% of the fair market value of the relevant corporation’s total assets, as measured immediately after the distribution. For this purpose, Representation “a” also treats as business assets any cash relevant to the business as well as any other “assets required (by binding commitment or legal requirement)” to be held by the relevant corporation to address certain business exigencies or for regulatory purposes. Consistent with recent private letter ruling practice, the Ruling clarifies that cash and other potential non-business assets, if sufficiently linked to the business, are to be treated as business assets for purposes of the No Device Requirement.14
What does this mean?
The Ruling offers guidance on a limited exception to post-distribution dispositions of stock in a distributing or controlled corporation, that are intended or planned at the time of the section 355 distribution. Additionally, the Ruling continues the relatively recent practice of clarifying that cash or other restricted assets associated with a business are to be considered business assets for purposes of the No Device Requirement. The Ruling provides a helpful reminder that a tax-free distribution cannot be motivated by an intention to dispose of one corporate business, while retaining the other business(es), except in certain limited circumstances. Distributions under section 355 continue to be a relatively complex area of the tax law, and entail significant risk due to the two levels of tax imposed on taxable distributions of appreciated property out of corporate solution. WilliamsMarston has significant experience advising on fundamental business transactions, tax-free reorganizations, and tax-free distributions under section 355, and is here to assist.15
1 February 27, 2025.
2 Pursuant to Rev. Proc. 2024-1, 2024-1 I.R.B. 1, and Rev. Proc. 2017-52, 2017-41 I.R.B. 283, as amplified and modified by Rev. Proc. 2024-24, 2024-21 I.R.B. 1214.
3 Treas. Reg. § 1.355-2(d)(1).
4 See section 302(a).
5 For example, a sale of the stock of the distributing or controlled corporation negotiated before the distribution is considered “substantial” evidence of device for purposes of the facts and circumstances test. Treas. Reg. § 1.355-2(d)(2)(iii)(B).
6 For example, this could be because the shareholders are individuals who would not be entitled to a dividend received deduction on the distribution and thus, would be taxed (potentially at qualifying capital gains rates) on the full amount of the dividend.
7 The contribution of a business is necessary to satisfy the “active trade or business” requirement under section 355. That requirement, along with the “business purposes” requirement, the “continuity of interest” requirement, and other requirements are beyond the scope of this article, but could also pose problems for the illustrative transaction.
8 In a pro rata distribution under section 355, a portion of the shareholder’s tax basis in the distributing corporation immediately before the spin-off is allocated to the controlled corporation shares received, such that the allocated basis would reduce the gain recognized on a subsequent sale of those shares to an amount below the amount of a full dividend inclusion.
9 Note that a transaction that fails the Section 355(e) Requirement is taxable only at the corporate level and thus, the shareholders may still be eligible for tax-free treatment under section 355.
10 Including through a U.S. Securities and Exchange Commission (“SEC”) Rule 10b5-1 plan under the Securities Exchange Act of 1934 (15 U.S.C. 78j) (“Exchange Act”), a purchase in compliance with SEC Rule 10b-18 of the Exchange Act, or a tender offer.
11 Rev. Proc. 96-30, 1996-19 I.R.B. 8.
12 Rev. Proc. 2003-48, 2003-29 I.R.B. 86.
13 See e.g., PLR 202304005 (Nov. 1, 2022); PLR 202113007 (Jan. 4, 2021); PLR 202051009 (Mar. 17, 2020); PLR 201923003 (Dec. 20, 2018).
14 PLR 202433001 (May 27, 2024). PLR 202505001 (Oct. 31, 2024). PLR 202511013 (Dec. 6, 2024).
15 The information in this article is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of Section 355 or Section 368. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax advisor. This article represents the views of the author(s) only and does not necessarily represent the views of WilliamsMarston LLC.
