Treasury and the IRS on December 18 issued Final Regulations under Section 355(e) (T.D. 9888), which provide guidance on determining whether a corporation is a predecessor or successor of a distributing corporation (‘Distributing’) or controlled corporation (‘Controlled’) for purposes of the Section 355(e) exception to the nonrecognition treatment afforded to qualifying distributions. The Final Regulations also provide limitations on the recognition of gain in certain cases involving a ‘Predecessor of a Distributing’ corporation (POD). In addition, the Final Regulations provide related guidance under Sections 336(e) and 355(f).
The Final Regulations generally follow the premise of the temporary regulations issued in 2016 that they are replacing but include some clarifications and modifications. The discussion below highlights certain modifications the Final Regulations make to the Temporary Regulations.
As indicated above, the Final Regulations generally adopt the approach taken in the Temporary Regulations, but include welcome clarifications and adjustments. The Final Regulations also narrow the scope of a POD by limiting the definition of a Potential Predecessor. The narrower scope should avoid the application of Section 355(e) to transactions that do not resemble sales and continue to allow tax-free divisions of existing business arrangements among existing shareholders.
The Temporary Regulations were widely viewed as complicated and difficult to understand. The Final Regulations contain helpful revisions to make these rules easier to understand by adding defined terms and subdividing certain paragraphs in the Temporary Regulations that were long and contained multiple distinct rules. For example, the gain limitation rules were clarified to make them easier to understand and apply.
Partner, M&A Tax, PwC US