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Feb. 22 — Government officials are pushing to release guidance in the “near term” addressing the business purposes of spinoffs, active business size, and whether a spinoff is being used as a device to distribute earnings and profits to shareholders, a Treasury Department official said.
“This is a project that I can tell you all sorts of folks are interested in moving forward and getting rid of the recent no-rule areas,” Krishna P. Vallabhaneni, deputy tax legislative counsel at Treasury, said Feb. 22 at a Practising Law Institute consolidated tax return seminar. Internal Revenue Service and Treasury officials think it is valuable for companies to come in for rulings so “discussions happen before the transaction takes place rather than after the transaction when it is too late to do anything about it.”
The IRS began in September to study situations where the active trade or business is relatively small or there is a large proportion of investment assets, after what some officials have called an uptick in aggressive transactions. The agency won't rule on this issues while they are under review.
Notice 2015-59, which announced the IRS's intent to look into a variety of tax code Section 355 spinoff issues, also addressed real estate investment trust and regulated investment company spinoffs, though a December tax bill—the Protecting Americans From Tax Hikes (PATH) Act (Division Q of Pub. L. No. 114-113), greatly restricted the ability for corporations to separate property by forming a REIT and mostly addressed the area under study .
Government officials are evaluating if there needs to be any guidance around that legislation, Vallabhaneni said. REIT spinoffs, rather than RICs, were viewed as a higher priority area of focus for the IRS when the no-rule was announced, though the agency had received some ruling requests from companies seeking to spin off a RIC.
“The inclusion of RICs was not necessarily the more significant focus by anyone,” Vallabhaneni said. “Our understanding is that it would be a very uncommon type of fact pattern. The thought there is, ‘why not address is?' ”
Requests from taxpayers for private letter rulings, such as the RIC spinoff requests, are driving guidance priorities in the IRS’s Office of Chief Counsel, he said, because the agency’s ability to do the amount of work it used to is “disappearing” because of budget cuts.
The IRS’s Priority Guidance Plan isn't based on “preconceived notions” within the government about what the agenda should be, but rather what types of frequently asked questions could be resolved with regulations, he said.
The agency’s push to define what types of natural resource production income qualify for publicly traded partnership status is one example of a regulatory project that stems from an abundance of PLR requests, he said. The agency received a $290 million budget increase for fiscal year 2016, though the funds were earmarked for taxpayer services and technology upgrades, not regulatory efforts.
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