IRS Eliminates No-Rule Policy for Business Purpose and Device Rule Issues

By Brian W. Reed, CPA, and Steve Fattman, J.D., Washington

Editor: Michael Dell, CPA

In Rev. Proc. 2016-45 (released Aug. 26, 2016), the IRS announced that it will entertain requests for private letter rulings with respect to Sec. 355 distributions addressing "significant issues" of whether a spinoff satisfies the business purpose requirement under Regs. Sec. 1.355-2(b) or is used principally as a device for the distribution of earnings and profits of the distributing or controlled corporation under Sec. 355(a)(1)(B) and Regs. Sec. 1.355-2(d).

New Ruling Policy and Effective Date

Rev. Proc. 2016-45 states that the IRS will issue letter rulings addressing significant issues under the business purpose requirement and the device rules, provided that the issues are not "inherently factual." (Generally, a significant issue is a legal issue, the resolution of which is not essentially free from doubt.) Rev. Proc. 2016-45, which modifies Rev. Proc. 2016-3, represents a change to the long-standing IRS policy against ruling on the business purpose requirement or device rules.

Rev. Proc. 2016-45 is effective for ruling requests that are postmarked or, if not mailed, received on or after Aug. 26, 2016, relating to distributions occurring after Aug. 26, 2016.

Analysis and Implications

The application of the business purpose and device rules of Regs. Sec. 1.355-2 often involves both legal and factual questions.

To conserve resources, in 2003, the IRS issued Rev. Proc. 2003-48, a "pilot program" of no-rule policies regarding business purpose and device issues in Sec. 355 transactions, in addition to imposing a no-rule policy regarding whether acquisitions of the distributing or controlled corporation are part of a plan under Sec. 355(e). As a result, the IRS has not explicitly ruled on business purpose or device issues in a letter ruling for 13 years. Rev. Proc. 2016-45 allows taxpayers to obtain more certainty on a host of questions that have not been recently addressed by a letter ruling. Moreover, because the IRS has more broadly adopted a single-issue format for its letter rulings, they may provide greater transparency of the IRS's thinking on particular issues than before.

With this latest revenue procedure coming on the heels of Rev. Proc. 2016-40, which eliminated the no-rule policy concerning satisfaction of the Sec. 355 control test where the distributing corporation acquires control of the controlled corporation through a pre-spinoff transaction (including a recapitalization), the IRS appears to be shedding its self-imposed per se limits on the ability to rule, in favor of a more discretionary, case-by-case policy. Rev. Proc. 2016-45 points out that the IRS reserves the right to not rule on the significant issues of business purpose and the device rules when it deems it appropriate in the interest of sound tax administration or on other grounds when warranted by the facts or circumstances of a particular case.

It is not clear why Rev. Proc. 2016-45 does not articulate a ruling policy with respect to legal issues presented under the Sec. 355(e) plan regulations (Regs. Sec. 1.355-7), the third no-rule area created by Rev. Proc. 2003-48. Since 2003, the IRS has already been willing to rule on non—fact-intensive legal issues under the plan regulations, and therefore perhaps the IRS did not believe it was necessary to formally clarify this no-rule policy.

Finally, Rev. Proc. 2016-45 does not hint at whether Rev. Proc. 96-30 will reprise its role as the instruction manual for submitting relevant information or as a general guideline/safe harbor on a number of substantive ruling positions with respect to the business purpose and device rules. Rev. Proc. 2003-48 deleted most of the applicable provisions of Rev. Proc. 96-30 on these matters.

Notwithstanding a few open questions, Rev. Proc. 2016-45 is a very welcome development in the IRS ruling program, as it offers taxpayers the opportunity to obtain more certainty on a number of questions under Sec. 355. Perhaps it is only the latest in what will become a trend of more-open ruling policies.


Michael Dell is a partner at Ernst & Young LLP in Washington.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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