- 23 -
the Court of Appeals assumed that a spin-off must satisfy an
independent business purpose test. However, both courts reached
the same practical result; i.e., a spin-off with a strong bailout
potential will qualify under section 355 only if compelling
business purposes for the spin-off can be shown.
In this case, as we have previously indicated, independent
corporate business purposes existed for the transaction. The
protection against competition and the retention of a key
employee are both strong and compelling business purposes, not
only for Homes but also for Mr. Pulliam, its sole shareholder.
Respondent stresses that there must be a business purpose
not only for dividing the business into separate corporations,
but also for direct ownership of the corporations by the
shareholders. See Estate of Parshelsky v. Commissioner, 303 F.2d
at 20; Bonsall v. Commissioner, 317 F.2d 61, 65 (2d Cir. 1963),
affg. T.C. Memo. 1962-151. Petitioners assert that they believed
Illinois law required Chapel's shareholders to be individuals,
who were licensed funeral directors and embalmers, rather than a
corporation, and therefore it was necessary to create Chapel as a
professional service corporation with Mr. Pulliam owning its
stock before the installment sale of 490 shares to Mr. Deckard.
Respondent disputes this assertion as being incorrect and
misleading. It is argued that Illinois law did not require Homes
to distribute Chapel's stock to Mr. Pulliam, but it could have
held the stock in Chapel and sold 490 shares directly to Mr.
Page: Previous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 NextLast modified: May 25, 2011