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Because we agree with respondent’s first ground, we do not
address respondent’s second ground.
II. Active Business Requirement
A. Pertinent Provisions of the Internal Revenue Code
One of the specific requirements for section 355
nonrecognition treatment on the pro rata distribution of the
shares of a controlled corporation (a so-called spinoff) is that
"the requirements of subsection (b) [of section 355] (relating to
active businesses) are satisfied". Sec. 355(a)(1)(C). Section
355(b)(1)(A) provides that both the distributing and the
controlled corporation must be "engaged immediately after the
distribution in the active conduct of a trade or business".
Section 355(b)(2) defines the circumstances under which "a
corporation shall be treated as engaged in the active conduct of
a trade or business". Section 355(b)(2)(B) provides that the
trade or business must have been "actively conducted throughout
the 5-year period ending on the date of the distribution" (the
5-year period). Section 355(b)(2)(D) provides, in pertinent
part, that control6 of the corporation engaged in the active
conduct of a trade or business on the date of acquisition of
control must not have been acquired within the 5-year period or,
if acquired within such period, it must have been acquired "only
6 For purposes of sec. 355, control is defined in terms
of 80 percent of both voting control and share ownership. See
sec. 368(c).
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