IRS will rule on leveraged spinoffs again

The IRS will once again issue letter rulings on leveraged spinoff transactions, the agency announced, reversing a 2013 decision that put the transactions on its “no-ruling” list (Rev. Proc. 2017-38). The IRS will therefore once again issue private letter rulings on whether Sec. 355 or Sec. 361 applies to a distributing corporation’s distribution of stock or securities of a controlled corporation in exchange for, and in retirement of, any putative debt of the distributing corporation if the distributing corporation debt is issued in anticipation of the distribution.

The revenue procedure, which modifies Rev. Proc. 2017-3 (the current-year no-ruling list) by deleting Section 5.01(4) of that revenue procedure, was effective May 9, 2017. The IRS has not issued rulings in this area since 2013, and, although it says it is still studying matters concerning issues in this area, it has decided that resuming issuing private letter rulings or determination letters in this area is in the interest of sound tax administration.

Before it stopped issuing rulings in this area, the IRS regularly issued rulings under Sec. 361(c) that, if certain conditions were met, a distributing corporation would not recognize gain or loss when it transferred controlled stock or securities in exchange for the distributing corporation’s debt. These rulings originally involved old debt but later involved debt that was issued more recently.