IRS Publishes Revenue Ruling On ‘North-South' Spinoffs

In Situation 1 of the Rev. Rul., Parent owns all the stock of Distributing, which owns all the stock of Controlled. On Date 1, Parent purports to contribute $25x of property of Controlled in a Section 351 exchange. On Date 2, Distributing spins off the stock of Controlled worth $100x to the Parent.

The IRS provided a taxpayer-favorable ruling to not integrate the transactions and respect the Section 351 transfer and Section 355 spinoff as separate transactions. If the transactions had been integrated, there would be a Section 1001 exchange of $25x of property for $25x of stock and then a taxable distribution of the remaining $75x of stock (as Distributing is no longer distributing Section 368(c) control).