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Proposed Regulations on Nondevice & Active Business Requirements Under Code §355

Many jurisdictions have special provisions that apply when two businesses owned by a corporation or corporate group are divided and shares of group members are distributed to shareholders.  Sometimes referred to as a “demerger” in Europe and other times as a “butterfly” in Canada, in the U.S. these transactions are called Code §355 spin-offs, split-ups, and split-offs.  In the U.S., several hurdles must be overcome for the transaction to be free of tax at the level of the company making the distribution and the shareholder receiving the distribution.  The I.R.S. recently issued proposed regulations clarifying the application of two of these hurdles: the transaction must not be a “device” to distribute earnings, and companies conducting two or more active business must be involved.  The proposed regulations were motivated by a proposal by Yahoo! to distribute shares of Alibaba.  Rusudan Shervashidze and Andrew P. Mitchel analyze the proposed regulations and how they will apply to circumstances involving a spin-off of a corporation operating a small business but having a large investment asset.

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Required Taxable Inclusions from the Loss of §1248 Shareholder Status

Rusudan Shervashidze and Andrew P. Mitchel continue their examination of U.S. tax rules applicable to cross-border reorganizations, formations, and liquidations.  This month, they review the rules embodied in Code §1248, a provision that converts capital gain from the sale of shares in a C.F.C. into dividend income for certain shareholders.  Although for individuals, the tax rates for qualified dividends and gains are the same, the source of the income is changed in a way that may allow a benefit for unused foreign taxes.  If the dividend is not qualified, tax is imposed at a much greater rate.  For corporations that are shareholders, dividend income may bring along indirect foreign tax credits.  Code §1248 also defines the extent of a toll charge if a foreign corporation undergoes a tax-free reorganization that eliminates C.F.C. status.

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Inbound §332 Liquidations & Inbound Asset Reorganization

Rusudan Shervashidze and Andrew P. Mitchel continue their examination of U.S. tax rules applicable to cross-border reorganizations, formations, and liquidations.  This month, they review rules applicable to the liquidation of a wholly-owned domestic subsidiary corporation into its foreign parent corporation. Also discussed is the toll charge imposed on asset reorganizations that result in the domestication of a foreign subsidiary.

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Outbound Transfers of Stock in Code §351 “Tax-Free” Exchanges

The U.S. has extensive rules regarding tax-free reorganizations in a domestic context. When the transaction involves cross-border exchanges, these rules are supplemented by Code §367(a). Rusudan Shervashidze and Andrew P. Mitchel explain how the rules work when shares of a U.S. corporation are transferred to a foreign corporation in a §351 exchange.

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Tax 101: Corporate Reorganizations Part II – Types C, D, E, & F

Continuing their series on the basic rules that must be met for a transaction to be treated as tax-free reorganization under U.S. tax law, Rusudan Shervashidze and Andrew P. Mitchel discuss practical mergers, acquisitive D-reorganizations, recapitalizations, and changes to the identity, form, or place of organization of a single corporation.

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