A critical consideration in the disposition of any business is
the tax cost. If properly structured, a disposition
structured as a spin-off can be tax free to both the distributing
corporation and its stockholders, while at the same time permitting
the distributing corporation to pay down debt or buy back its
stock, which otherwise would utilize the company's cash.
In contrast, federal and state corporate tax in excess of 40
percent (depending on the state) is imposed on a more
straightforward sale by a corporation of a business unit. The
stockholders also are subject to tax if the corporation distributes
the proceeds as a dividend or in redemption of some of its
stock. Numerous requirements must be satisfied to obtain the
tax-advantaged treatment of a spin-off at both the corporate and
stockholder level. This article sets forth some of the more
critical tax considerations associated with a spin-off
transaction. Of particular note, the Internal Revenue
