- 18 -
service corporation, whose shareholders are licensed funeral
directors and embalmers, rather than a regular corporation.
Thus, respondent contends that various devices present here
clearly show that the transaction was used principally as a
device for the distribution of Homes' earnings and profits. In
addition, respondent asserts that the business objectives of
Homes could have been satisfied without a distribution to Mr.
Pulliam either by having Mr. Deckard purchase 49 percent of the
Chapel stock from Homes or by having Mr. Deckard purchase newly
issued Chapel stock from Chapel.
Device and Nondevice
At the outset it is important to note that, after a spin-
off, a shareholder can sell or exchange stock in either the spin-
off corporation or the distributing corporation in a transaction
qualifying for capital gains treatment. The shareholder will get
this favorable capital gains treatment even though he continues
to hold stock representing part of his investment. Therefore,
under certain circumstances, a spin-off can be used to avoid the
ordinary income tax treatment imposed on dividends to bail out
corporate earnings. Although the differences between the
treatment of capital gains and ordinary income have narrowed
since section 355 was first enacted, capital gains treatment
continues to be preferable in certain respects. Because of
continuing Congressional concern that a spin-off might be used to
avoid the tax on dividends, section 355(a)(1)(B) provides that a
Page: Previous 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 NextLast modified: May 25, 2011