Flexibility Created For Pre-Spin-Off Taxable Corporate Acquisitions

US Treasury regulations that were finalized on October 19 ("Regulations") allow a tax-free spin-off of an affiliated group subsidiary even when the stock of the subsidiary was acquired in a taxable transaction within the prior five year period. The affiliated subsidiary can be acquired from a third party or another affiliated group member, as long as the subsidiary is in the same affiliated group as the distributing corporation at the time of the spin-off. Publication of the Regulations, which adopt the rules in prior Temporary Treasury regulations, gives businesses confirmation that the so-called "hot stock" rules will not be applied to spin-offs of affiliated group members, even though such stock was acquired in a taxable transaction. Taxpayers now have substantial flexibility in structuring a tax-free spin-off.