IRS Issues Proposed Regulations On Device And Active Trade Or Business Requirements Under Section 355

The IRS issued proposed regulations (REG-134016-15) that provide guidance under Treas. Reg. Secs. 1.355-2 and -9 to address concerns regarding the spinoff of too many nonbusiness assets relative to business assets, as well as when the active trade or business is too small compared with the other assets being spun off.

A spinoff may not be a device for the distribution of earnings and profits. Existing regulations provide several device and nondevice factors. The proposed regulations would modify the “use of assets device factor” to provide some bright-line rules when the amount of nonbusiness assets is evidence of a device.

The proposed regulations would modify the business purpose device factor to provide that to overcome evidence of a device due to nonbusiness assets, then the company must prove an exigent need to invest or otherwise have such nonbusiness assets. The proposed regulations also add a per se device standard whereby if certain thresholds of