Spin-Off Taxation – Current State | USA

Leverage and getting an appropriate capital structure for parent and SpinCo (the spun-off corporation) is one of the most important goals in a typical spin-off; at the same time, the parent company is also often interested in extracting as much value from the SpinCo as possible in a tax efficient manner. Joesph Pari discusses some of the strategies corporations use to achieve these goals, identifying in particular the limits of certain strategies with regard to leverage in tax-free transactions.

The IRS ruling process was historically used quite extensively, but it became less widely used as ruling times grew increasingly long. The IRS listened to calls from taxpayers and their representatives to expedite the process, instituting a temporary fast-track programme, which takes 12 weeks.

This process has incorporated a willingness to consider certain issues previously viewed as difficult ruling areas, for example the pre-revenue spin-off, which would not have passed the historic active trade or business test. This is an example of the IRS’s willingness to move taxpayers through this process.

A lot of activity is being seen with regard to non-US distributing companies, as US tax advice is needed where there is a significant US shareholder base.

A reverse Morris trust occurs where a company is engaged in a spin-off and subsequently merges this SpinCo with an acquirer. This is relevant in the cross-border space, as many US companies distribute US SpinCos, which are subsequently merged with foreign companies. This raises all the usual spin-off issues and also must consider the anti-inversion rules, making them difficult to execute.