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United States: IRS approves section 355 spinoff of A REIT formed by a partnership

30 September 2014   (0 Comments)
Posted by: Author: Mel Schwarz
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Authors: Mel Schwarz, Dustin Stamper and Shamik Trivedi (Grant Thornton LLP)

In private letter ruling (PLR) 201436033, the IRS considered a transaction that involved the back-to-back distributions of a real estate investment trust (REIT). In the first distribution under the facts of the ruling, a partnership distributed a newly formed REIT (Controlled) to the partnership's partners, one of which was another REIT (Distributing). In a second distribution, Distributing distributed its stock in Controlled to Distributing's shareholders pro-rata. The IRS ruled that Distributing's distribution of Controlled qualified as a tax-free spinoff under Section 355.

Distributing was the sole general partner in the partnership. To separate the business lines of the partnership, the partnership contributed certain assets and liabilities to Controlled. The partnership then distributed all the outstanding stock of Controlled pro-rata to its partners, which included Distributing and various limited partners.

The IRS ruled that the second distribution, mentioned above, was a tax-free spinoff under Section 355. Generally, to qualify as a tax-free spinoff under Section 355, the distributing corporation must control the controlled corporation "immediately before" the spinoff and must not acquire such control in a taxable acquisition during the five-year period preceding the distribution.   

Though not specifically stated in the PLR, Distributing presumably owned at least 80% of the combined voting power and 80% of the total number of shares of Controlled, constituting control as defined by Section 368(c), immediately before the second distribution. In addition, the PLR indicates that Distributing's acquisition of newly formed Controlled from the partnership does not violate Section 355's control test.

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Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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