IRS Shuns Spin-Off “Comfort” Decrees

The IRS has raised the risk in a spin-off and forced restructuring craftsmen to work harder up front to make sure a corporate divorce can fly as a tax-free deal over the long haul. The tax regulation agency said in late June that it would no longer provide advance “comfort” rulings on three key tests used in determining whether the spin-off is free of taxes to the parent and the shareholders. However, the pressure remains on the companies because the IRS still can examine the deal after it’s executed, such as when they submit their first tax returns for audit following the closing. The new IRS policy took effect on August 8. Willens says that because of the cloud hanging over tax-free qualifications, “at the margin” the number of spin-offs may decline because some companies will be reluctant to go ahead without “the absolute protection against untoward tax consequences that only a ruling can provide.” For openers, however, the IRS move stoked more activity by opening a window of just over a month to submit ruling requests. Among those racing to beat the August 8 deadline were Centex in the spin-off of Centex Construction Products and Viad Corp., which is spinning off Travelers Express Co. The IRS said it now won’t issue pre-divorce rulings on whether the spin-off is being done for a true business purpose – a key qualification for tax-free treatment. Additionally, it won’t rule up front on two disqualifying matters – whether the deal is really a device to distribute earnings and profits of the parent and whether it is actually a plan to give a person or group control of either company. Willens notes that the IRS plans to issue definitive guidance on these and other issues that may eliminate some doubtful areas. The agency will continue to offer rulings on two other matters – whether the parent is in control of the subsidiary at the time of the spin-off and whether the subsidiary has been an active business. Warnings to dealmakers doing spin-offs include holding off on any tricks that could put the tax shield in jeopardy, assembling fully documented materials to make a strong case for escaping taxes, and listening closely to skilled advisers. “The importance of securing a legal opinion with respect to the tax consequences will be enhanced,” Willens states. “Although, of course, the IRS is free to challenge transactions that are supported by such an opinion, the agency would be expected to more closely scrutinize those spin-offs that are not so supported.” Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com