• New Proposed Regulations Provide Clarity and Rigidity to Tax-Free Spin-Off Rules
  • August 9, 2016 | Authors: Josh Prywes; Alejandro Ruiz
  • Law Firms: Greenberg Traurig, LLP - Dallas Office; Greenberg Traurig, LLP - San Francisco Office
  • If finalized, newly released proposed Treasury regulations may make spin-offs more difficult to accomplish despite providing important clarity. The proposed regulations tighten the standard for what constitutes an “active trade or business” to qualify for tax-free treatment in a spin-off transaction by raising the floor of required active business assets to 5 percent of total company assets. The proposed regulations also would prevent tax-free treatment if there exists a significant disparity in the relative size of nonbusiness assets between the distributing and spun-off companies. The issuance of these proposed Treasury regulations continue the trend of the federal taxing authorities adopting objective per se rules instead of facts and circumstances inquiries. Referred to as the “Hot Dog Stand guidance” by some commentators, the proposed regulations attempt to prevent the situation where operating a hot dog stand (or other insubstantial business) would be sufficient business activity to spin-off a large amount of cash tax-free to shareholders. Recently, a large public spin-off was derailed in part by the active trade or business requirement.