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.