IRS May Be Open to Issuing Rulings on Spinoff Legal Issues

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March 3 — The IRS may be open to issuing private letter rulings on legal issues for spinoffs, after having backed away from such rulings because of staff shortages and fact patterns that have made it uneasy.

Robert H. Wellen, Internal Revenue Service associate chief counsel (Corporate), said he has been getting requests for rulings on legal issues that take less time and manpower to evaluate. These are reasonable requests, he said, but the IRS would likely shy away from resuming issuing PLRs on factual issues or legal questions that require detailed analysis, he said.

“We don't have time to do the things we like to do, much less the things we don't want to do, such as reading 300-page investment banker reports,” Wellen said March 4 at the Federal Bar Association Tax Law Conference.

Questions at Hand

Such rulings could answer questions about the prohibition on using a spinoff as a device for distributing earnings and profits to shareholders, such as if a certain business constitutes a secondary business or answering questions about device and non-device factors in the regulations. Another legal issue could involve the business purpose of a spinoff as opposed to doing a tax-free liquidation or an upstream or downstream merger, Wellen said.

The IRS would like to know more about the legal questions corporate taxpayers have, so it can determine if it's best to address the questions through rulings; if many taxpayers have the same questions, the agency may consider drafting regulations in that area.

Wellen has said repeatedly that he hopes to shorten the list of “no-rules” as well as issue guidance that will ease taxpayers' reliance on PLRs. The list grew most recently in September when the government added three new areas: instances of small active trades or businesses in relation to the size of the spin; where there is a large proportion of investment assets; and for regulated investment companies. The additions were a response to what government officials have said are increasingly aggressive transactions(178 DTR G-3, 9/15/15).

Group Continuity Questions

The IRS is working to reduce the need for private letter rulings by working on a narrow regulatory project to address a whipsaw problem, which arises when taxpayers request reverse acquisition treatment for the continuation of a consolidated group when the regulations don't literally apply, said Russell G. Jones, senior counsel in the IRS Office of Chief Counsel (Corporate) (235 DTR G-1, 12/8/15).

The project is seeking to “regify” Revenue Ruling 82-152 under Treasury Regulations Sections 1.1502-75(d)(2) and 1.1502-75(d)(3), Jones said.

“On the (d)(3) side,” he said, the guidance seeks to “clarify the treatment of certain transactions for which the regulations don't literally apply, but for which taxpayers periodically come in for private letter rulings seeking reverse acquisition treatment nonetheless.” A principles-based approach is unlikely to give taxpayers the specificity they need, so the government will consider other strategies, such as including permissible fact patterns in the regulations, he said.

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