Temporary and Proposed Regulations Provide Guidance On Predecessors, Successors and Limitation on Gain Recognition Under Code Sec. 355(e) and (f) (T.D. 9805; NPRM REG-140328-15)

CCH Tax Day Report

The IRS has issued temporary regulations that provide guidance in determining a predecessor or successor of the distributing or controlled corporation for purposes of Code Sec. 355(e), and provide certain limitations on the recognition of gain in certain cases involving a predecessor of a distributing corporation. The temporary regulations also provide rules on the application of the Code Sec. 336(e) election to certain distributions of controlled stock to which Code Sec. 355(e) applies, and the extent to which Code Sec. 355(f) precludes the application of Code Sec. 355 to certain distributions and exchanges between affiliated group members (Temporary Reg. §1.355-8T). The temporary regulations adopt, with significant modifications, previously issued proposed regulations (NPRM REG-145535-02).

Generally, under Code Sec. 355(e), a distributing corporation in a Code Sec. 355 distribution will recognize gain on the distribution of stock or securities of a controlled corporation that is part of a plan pursuant to which one or more persons acquire directly or indirectly stock representing a 50-percent or greater interest the distributing or controlled corporation (a planned 50-percent acquisition).

General Rule

The temporary regulations provide a general rule under which, in applying Code Sec. 355(e), any references in the regulations to the distributing and controlled corporations also include a predecessor of the distributing corporation (POD), predecessor of the controlled corporation (POC), or successor of the distributing or controlled corporation, as the case may be. A distribution also includes a distribution and other related pre-distribution transactions that together effect a division of the assets of a POD. In determining whether a 50-percent acquisition of a POD occurs as part of plan, any agreement, understanding, arrangement, or substantial negotiations with regard to the acquisition of the POD is analyzed by taking into account the actions of officers, directors or controlling shareholders of the distributing or controlled corporation, or persons acting with the permission of one of those parties.

Definition of a Predecessor of the Distributing Corporation (POD)

The temporary regulations have both broadened and limited the scope of the POD definition provided in the proposed regulations to more effectively apply Code Sec. 355(e) to synthetic spin-offs (involving a tax-free separation of the assets that the POD transferred to the distributing corporation that are further transferred to the controlled corporation).

Specifically, the temporary regulations eliminate the formalistic requirements of a combining transfer followed by a separating transfer and generally identify as a POD any corporation whose assets are divided as part of a plan as a result of some but not all of those assets being transferred to the controlled corporation without the recognition of all of the built-in gain in the transferred assets before the distribution. No specific transactional form is required with regard to the transfer of assets to the controlled corporation, but the transfers must be made as part of a plan. Thus, the distributing corporation may recognize Code Sec. 355(e) gain on a distribution of the controlled corporation stock if the controlled corporation acquired assets of any corporation identified as a POD, and the POD experiences a planned 50-percent acquisition of its stock.

The temporary regulations focus on the division of property of a potential predecessor, which is any corporation other than distributing or controlled corporation, as part of a plan. Relevant property of a potential predecessor that is held directly or indirectly at any point during the plan period is required to be tracked for the purpose of determining whether a division of the potential predecessor’s property has occurred. Only direct or indirect transfers of relevant property (including controlled corporation stock) by a potential predecessor to the distributing corporation (or to a POD) that occur as part of a plan are relevant in determining whether a potential predecessor is treated as a POD or a predecessor of a POD. The definition of a POD also requires the satisfaction of certain pre-distribution and post-distribution requirements.

Special Gain Limitation Rules

Similar to the proposed regulations, the temporary regulations take the approach that the limitation on the Code Sec. 355(e) gain be equal to the gain in the stock of a hypothetical controlled corporation following a transfer of the POD assets. The temporary regulations modify the first and second gain limitation rules in the proposed regulations to result in Code Sec. 355(e) gain that would have been present in the hypothetical controlled corporation stock, had the distributing corporation transferred assets to a hypothetical controlled corporation and distributed its stock in a hypothetical “D” reorganization under Code Sec. 355(e), rather than a Code Sec. 351 exchange followed by a hypothetical sale.

Only assets transferred as part of a plan are relevant for the application of the gain limitation rules. To avoid the burden of tracking assets, the distributing corporation may choose not to apply the first or second gain limitation rules to a distribution, and instead may recognize the full amount of the Code Sec. 355(e) gain (the statutory recognition amount).

Code Sec. 336(e) Election

The temporary regulations clarify that the distributing corporation may elect to apply the Code Sec. 336(e) regulations to a distribution of the controlled corporation stock to which the temporary regulations apply, provided that (i) the transaction otherwise satisfies the requirements of the Code Sec. 336(e) election regulations, and (ii) the distributing corporation would otherwise be required under the temporary regulations to recognize the statutory recognition amount with respect to the distributed controlled corporation stock.


The temporary regulations treat as a successor for Code Sec. 355(e) purposes only a transferee to which the distributing or controlled corporation transferred its assets in a Code Sec. 381 transaction after a distribution.

Application of Code Sec. 355(f)

Generally, Code Sec. 355(e) does not apply to distributions between affiliated group members pursuant to a plan, if immediately after the completion of the plan, the distributing and controlled corporations are members of the same affiliated group. Code Sec. 355(f) prevents Code Sec. 355 from applying to an internal distribution between affiliated group members if Code Sec. 355(e) would otherwise apply (that is, if after the plan, the controlled or a lower-tier distributing corporation is not a member of the affiliated group as a result of an external distribution).

Under the temporary regulations, Code Sec. 355(f) applies if there is a planned 50-percent acquisition of the stock of a predecessor of a lower-tier distributing corporation but not of the stock of the lower-tier distributing or controlled corporation. As a result, Code Sec. 355(f), including the first and second gain limitation rules in the temporary regulations, apply to the internal distribution. However, a lower-tier distributing corporation may choose to apply Code Sec. 355(f) to an internal distribution without any limitation on the gain recognized, but only if each member of the affiliated group reports the tax consequences consistent with the application of Code Sec. 355(f).

Applicability Dates

The temporary regulations apply generally to distributions that occur after January 18, 2017, subject to certain transition rules. However, the distributing corporation and any affiliated group of which it is a member may consistently apply these regulations in their entirety to any distributions occurring after November 22, 2004, that are part of the same plan.

Comments Requested

The text of the temporary regulations serves as the text of the proposed regulations. Comments and requests for a public hearing must be received by March 17, 2017. Submissions should be mailed to: CC:PA:LPD:PR (REG-140328-15), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-140328-15), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224, or sent electronically, via the Federal eRulemaking Portal at http://www.regulations.gov/ (REG- 140328-15).

T.D. 9805, 2016FED ¶47,067

Proposed Regulations, NPRM REG-140328-15, 2016FED ¶49,728

Other References:

Code Sec. 355

CCH Reference – 2016FED ¶16,461

CCH Reference – 2016FED ¶16,465K

Tax Research Consultant

CCH Reference – TRC REORG: 30,112

CCH Reference – TRC REORG: 30,112.05



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