Final section 355(e) plan regulations - the final chapter in the saga.

I. Background

In 1997, Congress enacted the Taxpayer Relief Act of 1997, (1) which added section 355(e) to the Internal Revenue Code. (2) Under section 355(e), the so-called anti-Morris Trust provision, (3) a distributing corporation will recognize gain if one or more persons acquire, directly or indirectly, 50 percent or more of the stock (measured by vote or value) of the distributing or any controlled corporation as "part of a plan (or series of related transactions)" (referred to herein as a "plan") that was in place at the time of the distribution. (4) Section 355(e) also creates a rebuttable presumption that any acquisition occurring two years before or after a section 355 distribution is part of such a plan "unless it is established that the distribution and the acquisition are not pursuant to a plan or series of related transactions." (5) Section 355(e) authorizes Treasury and the Internal Revenue Service to issue regulations "necessary to carry out the purposes" of the legislation. (6)

Section 355(e) was enacted in response to several high profile leveraged Morris Trust transactions occurring during 1996 and 1997 that more closely resembled sales, including Telecommunication, Inc.'s acquisition of Viacom's cable business, Raytheon's acquisition of General Motors' military electronics business, and Knight Ridder's acquisition of Disney's newspaper business. These transactions generally involved borrowing a large sum of cash and separating the proceeds of the debt from the obligation to repay the debt so that the corporation to be acquired retained the liability. Immediately after the distribution of Controlled, either Distributing or Controlled (holding the liability) would effectively be acquired. Significantly, these transactions involved prearranged acquisitions, the terms of which had been agreed upon between Distributing and/or Controlled and the acquirer before the distribution. The legislative history similarly points to the following "abuse" at which section 355(e) was aimed:

The Committee believes that section 355 was intended to permit the tax-free division of existing business arrangements among existing shareholders. In cases in which it is intended that new shareholders will acquire ownership of a business in connection with a spin off, the transaction more closely resembles a corporate level disposition of the portion of the business that is acquired. (7) The term "plan" as used in section 355(e) should be interpreted in light of this purpose.

The Treasury and IRS have been struggling to provide guidance on how to establish that a distribution and acquisition are not part of a plan. On April 19, 2005, after four previous attempts to issue guidance in this area, final plan regulations were issued. These regulations represent the final chapter in what had been an ongoing saga. Over the past six years, the Treasury and IRS have considered numerous comments from practitioners and have modified the regulations as appropriate. As a result, the plan regulations have evolved from an extremely rigid set of rules that defined plan broadly to include the intent of either party without regard to whether there had been any bilateral discussions or negotiations to a very administrable set of rules that reflect both the purpose of section 355(e) and business realities.

Following a summary of the first four sets of regulations...

If you are already a vLex customer, Access Here