In Revenue Procedure 2016-45 (released August 26, 2016), IRS and Treasury announced that the IRS will entertain requests for private letter rulings (PLRs) addressing "significant issues" under Treas. Reg. Section 1.355-2(b) (the business purpose requirement) and under Section 355(a)(1)(B) and Treas. Reg. Section 1.355-2(d) (the device rules) with respect to Section 355 distributions.

New ruling policy and effective date

Revenue Procedure 2016-45 states that the Service will issue PLRs addressing significant issues under the business purpose requirement and the device rules, provided that the issues are not "inherently factual." (Generally, a "significant issue" is a "legal" issue whose resolution is not essentially free from doubt.) Revenue Procedure 2016-45, which modifies Revenue Procedure 2016-3, represents a change to the long-standing IRS policy against ruling on whether a spin-off satisfies the business purpose requirement or is used principally as a device for the distribution of earnings and profits of either the distributing or controlled corporation.

Revenue Procedure 2016-45 is effective for ruling requests that are postmarked or, if not mailed, received on or after August 26, 2016, relating to distributions occurring after August 26, 2016.

Analysis and Implications

The application of the business purpose and device rules of Treas. Reg. Section 1.355-2 often involves both legal and factual questions.

In order to conserve resources, in 2003, the IRS issued Revenue Procedure 2003-48, a "pilot program" of no-rule policies regarding business purpose and device issues in Section 355 transactions, in addition to imposing a no-rule policy regarding whether acquisitions of the distributing or controlled corporation are part of a plan under Section 355(e)). As a result, the IRS has not explicitly ruled on business purpose or device issues in a PLR for 13 years. New Revenue Procedure 2016-45 offers taxpayers the possibility of obtaining more certainty on a host of questions that have not been recently addressed by PLR. Moreover, because the IRS has more broadly adopted a "single issue" format for its PLRs, there is a possibility that PLRs will provide greater transparency as to the IRS's thinking on particular issues.

Coming on the heels of Revenue Procedure 2016-40, which eliminated the no-rule policy concerning satisfaction of the Section 355 "control" test for pre-spin recapitalizations of the controlled corporation, the IRS appears to be shedding its self-imposed per se limits on its ability to rule in favor of a more discretionary, case-by-case ruling policy. Revenue Procedure 2016-45 points out that IRS reserves the right not to rule in the interest of sound tax administration or where, as noted above, the question presented is inherently factual.

It is not clear why Revenue Procedure 2016-45 does not articulate a ruling policy with respect to legal issues presented under the Section 355(e) plan regulations (Treas. Reg. Section 1.355-7), the third no-rule area created by Revenue Procedure 2003-48. Since 2003, the IRS has already been willing to rule on non-fact-intensive legal issues under the plan regulations and, therefore, perhaps the IRS did not believe it was necessary to formally clarify this no-rule.

Finally, Revenue Procedure 2016-45 does not hint at whether Revenue Procedure 96-30 will reprise its role as the instruction manual for submitting relevant information or as a general guideline / safe harbor on a number of substantive ruling positions with respect to the business purpose and device rules. Revenue Procedure 2003-48 "deleted" most of the applicable provisions of Revenue Procedure 96-30 on these matters.

Notwithstanding a few open questions, Revenue Procedure 2016-45 is a very welcome development in the IRS ruling program, as it offers taxpayers the opportunity to obtain more certainty on a number of questions under Section 355. Perhaps it is only the latest in a trend of more open ruling policies.

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