Spin-offs, split-offs and split-ups remain tax favored despite the Tax Reform Act of 1986

Article Abstract:

Despite the changes in tax rates enacted by the Tax Reform Act of 1986, non-recognition of gain or loss as defined by Section 355 is is still one of the best ways to reorganize an unwanted business. Section 355 states that a corporation must distribute 80 percent or more of the stock or securities of a corporation that is actively engaged in a qualified trade, and the transaction must not be a device to distribute the earnings of the distributing corporation, the controlled corporation, or both. The absence of device is one of the more important requirements of Section 355, and the distributing corporation must have a substantial business purpose beyond the shareholder purpose for the distribution of the stock.

Acquisitions and mergers, Corporate divestiture, Divestiture

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Common for preferred exchange not taxable

Article Abstract:

Ltr. Rul. 9508021 holds that an exchange of all the common stock of a corporation for voting preferred stock is classified as a tax-free recapitalization under Sec. 368(a)(1)(E). The section describes recapitalization as a rearrangement of a capital structure in the context of an existing corporation. Usually involved is a shifting of stock and bonds in terms of amount, income, or priority, or a change in the capitalization or debt of the corporation. As a result of the IRS decision, the exchange cannot be considered as a distribution which is taxable as a dividend. The implication of this ruling is that similar transactions can be conducted without being taxed if it is correctly performed.

Corporate taxes, Corporations, Preferred stocks

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Preferred stock attributes can jeopardize successful tax-free recapitalization

Article Abstract:

Recapitalization for estate planning can allow the client to cut his or her taxes, if the tax accountant knows the various Code provisions to use. Also, the accountant must know all of the options which may be associated with acquisitions of preferred stock.

Securities, Securities taxes, Market capitalization

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