- 19 -
spin-off cannot qualify as tax-free if it is used principally as
a "device" to distribute earnings and profits.
Whether the distribution in this case qualifies as tax-free
under section 355 turns upon the answer to the narrow question of
whether the device factors present in the transaction outweigh
the nondevice factors. If the device factors are predominant,
the spin-off cannot qualify as tax-free because it has been used
principally as a device for the distribution of earnings and
profits of the distributing corporation (Homes) or the controlled
corporation (Chapel) or both. On the other hand, if the
nondevice factors are strong enough to overcome the device
factors, the spin-off will qualify as tax-free. Sec. 1.355-
2(d)(2) and (3), Income Tax Regs. The determination must be
based on all the facts and circumstances. Sec. 1.355-2(d)(1),
Income Tax Regs.
Device Factors
A sale of stock after a spin-off is "evidence of device".
Sec. 1.355-2(d)(2)(iii)(A), Income Tax Regs. A subsequent sale
of stock pursuant to an arrangement negotiated or agreed upon
before the distribution is "substantial evidence of device".
Sec. 1.355-2(d)(2)(iii)(B), Income Tax Regs. In this case it was
clearly prearranged that, after the spin-off of stock in Chapel
to Mr. Pulliam, he would make an installment sale of 490 shares
of that stock to Mr. Deckard. Thus, there is substantial
evidence of device.
Page: Previous 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NextLast modified: May 25, 2011