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The Basics of a Tax-Free Spin-Off Transaction

In an Accounting Today published on August 20, 2020, James Standard provides insight on the basics of a tax-free spin-off transaction, which occurs where one corporation (i.e., a parent) distributes stock of a controlled corporation (i.e. a subsidiary) to its shareholders, generally on a pro rata basis.

Standard explains that a split-off occurs where the parent distributes stock of the controlled corporation to some of its shareholders in exchange for their stock in the distributing parent. A split-up occurs where the parent distributes stock of two (or more) controlled corporations in complete liquidation.

Standard outlines the requirements that must be met in order for a spin-off to qualify under Section 355. “These requirements derive from not only the statute itself, but also from regulatory and common law principles,” said Standard.

Section 355 of the Internal Revenue Code provides a powerful tool in corporate restructurings.

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