IRS Eyes Tax-Free Corporate Spinoffs


The Internal Revenue Service has issued new guidance on taxation of corporate spinoffs in light of a number of announced spinoffs of investment or real estate assets by publicly traded companies in order to unlock shareholder value.

The guidance indicates that the tax authority has concern about these spinoffs. The deal is tax-free when it follows IRS rules, but it must include an “active trade or business.” Real estate and investment assets generally don’t qualify as an active business, so companies have been including a small business unit along with it to make it tax free. For retailers and restaurants spinning off property to investors, the IRS is concerned the transaction is nevertheless more like a dividend payment than it is a splitting of two businesses. The size of the business unit in some examples is dwarfed by the investment asset. The IRS plans to stop pre-approving deals while it considers the best way to handle these transactions for tax purposes.

Earlier this month, the IRS refused to give advance approval to Yahoo’s spinoff of Alibaba. Yahoo asked the IRS to indicate whether the web company would be required to pay taxes on the spinoff. The IRS did not issue an adverse ruling, but did not declare that the company would not be charged a multibillion-dollar tax bill if it proceeded with the spinoff. Yahoo was not mentioned specifically in the new IRS guidance.

A company that proceeds with a transaction in spite of the tax consequences and does not pay taxes on the event could be reported through the IRS whistleblower program, which pays 15 to 30 percent of the tax proceeds collected by the agency as a result of the information, subject to eligibility and other rules developed for the program.  If you have questions about this, or have evidence of corporate wrongdoing, feel free to contact one of our IRS whistleblower attorneys via our contact form or by calling 1-800-590-4116.

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