In general, Regs. Sec. 1.355-2(b)(2) requires a corporate business purpose for a tax-free spinoff, stating that a shareholder purpose is not a corporate business purpose, but it may be so closely co-extensive to preclude any distinction between them. The ruling outlines two situations in which a distribution resulted in an increase in stock value of either the distributing or controlled corporation. The ruling held that in a distribution expected to increase the value of the controlled and distributing corporations stock after the distribution, the Sec. 355 and Regs. Sec. 1.355-2(b) corporate business purpose requirement for a tax-free reorganization was satisfied, even if the distribution benefited the distributing corporations shareholders.

Facts

Situation 1 described a distribution of a business segment intended to enhance the value of a businesss equity-based compensation plan. The separation of the two business activities was expected to increase stock value, thereby enhancing the value of the companys equity-based compensation, without diluting existing shareholders ownership interests.

Situation 2 described a distribution of a business segment intended to increase stock value to further effect future business acquisitions in a manner that preserved capital, while limiting dilution of the existing shareholders interests. The businesss overall strategic plan included expansion through acquisition to be effected, in whole or part, through use of its common stock. Thus, stock value was integral to implementation of the plan.

The Service ruled in both situations that the separation of business segments provided a real and substantial benefit to the company that was motivated by a real and substantial non-Federal tax purpose pertinent to the business, which could not have been effected by any other means. In addition, the shareholder benefit resulting from these distributions was so integral to the corporate benefit as to preclude any distinction between the two.

A distribution expected to cause an aggregate increase in the stock value of the distributing and controlled corporations over the distributing corporations pre-distribution stock value will satisfy Sec. 355s and Regs. Sec. 1.355-2(b)(2)s corporate business purpose requirement, if the increased value serves a corporate business purpose of either of those corporations. Shareholder benefits should not be a factor if they are integral to the corporate business purpose and cannot be easily distinguished. In addition, the business purpose should only be able to be accomplished through the distribution, as it is the most practical and least expensive method for achieving the intended business purpose.