On March 21, the IRS announced that it is reviewing its approach to the active trade or business requirement that must be met for a five-year period for a business to qualify for a tax-free spinoff under Sec. 355 and, as a result, is suspending two revenue rulings, Rev. Ruls. 57-464 and 57-492, in which it previously ruled on the topic (Rev. Rul. 2019-09). The suspended rulings addressed the active trade or business requirement under Secs. 355(a)(1)(C) and 355(b).
Rev. Rul. 57-464 involved a corporation's separation of a manufacturing business from a group of real estate assets including an old factory building the corporation used for storage and four residences, used by employees and the owner's relative. Because the rental activities produced negligible net income and the properties were acquired as investment or for the convenience of employees of the manufacturing business, the IRS ruled that the separation would not satisfy the active trade or business requirement.
Rev. Rul. 57-492 involved a corporation engaged in refining, transporting, and marketing petroleum products, which began a separate operation to find and produce oil. The separate operation to produce oil did not include any income-producing activity or source of income until less than five years before its separation from the primary refining, transportation, and marketing operation, so the IRS ruled that the exploration and production operation did not satisfy the active trade or business requirement.
The IRS is conducting a study to determine, for purposes of Sec. 355, "whether a business can qualify as an [active trade or business] if entrepreneurial activities, as opposed to investment or other non-business activities, take place with the purpose of earning income in the future, but no income has yet been collected." The IRS stated that the active trade or business analysis underlying the holdings in the two revenue rulings relies significantly on the lack of income generated by the activities under consideration, and, consequently, these rulings could be interpreted as requiring income generation for a business to qualify as an active trade or business. Thus, it is suspending the revenue rulings until the completion of the study.