Guidance Provides Safe Harbors For Recapitalizing Into Control To Effect A Section 355 Spinoff

In a recent revenue procedure (Rev. Proc. 2016-40), the IRS provided two safe harbors for determining if a distributing corporation has control, within the meaning of Section 368(c), of a controlled corporation immediately prior to bring about an otherwise qualifying Section 355 spinoff.

Prior to this guidance, it was uncertain whether a taxpayer could recapitalize into a structure that met the statutory definition of control, but then unwound the equity structure after the spinoff. For example, if the distributing corporation owned only 70% of the controlled corporation but then recapitalized into two classes of stock — high vote and low vote — to achieve control under Section 368(c), the question remained regarding the point at which the distribution corporation could undo that structure of high-vote and low-vote stock.