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Safe harbors for acquisitions of control, section 355(a)(1)(A)

Safe harbors for acquisitions of control

The IRS today released an advance version of Rev. Proc. 2016-40 that provides fact patterns (safe harbors) in which the IRS will not assert that a distributing corporation lacks control of another corporation within the meaning of section 355(a)(1)(A), even though the corporations engage in a transaction described in the revenue procedure.


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Rev. Proc. 2016-40 [PDF 26 KB] explains that the IRS and Treasury Department recognize that determining whether an acquisition of control has substance for federal tax purposes can be difficult and fact-intensive. The IRS has been concerned that, in some instances, taxpayers may not be able to determine whether such an acquisition has substance with sufficient certainty to proceed with transactions that otherwise satisfy the requirements of section 355. To resolve this uncertainty, Rev. Proc. 2016-40 describes transactions in which the IRS will not assert that an acquisition of control lacks substance. 

Safe harbors

Rev. Proc. 2016-40 applies to transactions in which—

  • Distributing corporation (D) owns another corporation (C) stock not constituting control of C;
  • C issues shares of one or more classes of stock to D and/or to other shareholders of C (the issuance), as a result of which D owns C stock possessing at least 80% of the total combined voting power of all classes of C stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of C;
  • D distributes its C stock in a transaction that otherwise qualifies under section 355 (the distribution); and 
  • C subsequently engages in a transaction that, actually or in effect, substantially restores (1) C’s shareholders to the relative interests, direct or indirect, they would have held in C (or a successor to C) had the issuance not occurred; and/or (2) the relative voting rights and value of the C classes of stock that were present prior to the issuance (an unwind).

Rev. Proc. 2016-40 provides the IRS will not assert that a transaction lacks substance, and that D lacked control of C immediately before the distribution, within the meaning of section 355(a)(1)(A), if the transaction is also described under one of these safe harbors (which are described in the revenue procedure): 

  • No action is taken within 24 months.
  • There is an unanticipated third-party transaction.

Rev. Proc. 2016-40 is effective with respect to distributions that occur on or after August 1, 2016. However, taxpayers may apply this revenue procedure with respect to a distribution that occurs before August 1, 2016.

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