Academic journal article Journal of Accountancy

Time Is Short for Spin-Offs

Academic journal article Journal of Accountancy

Time Is Short for Spin-Offs

Article excerpt

Although few U.S. corporations have spun off foreign subsidiaries (Fortune Brands' spin-off of Gallaher is a notable exception), realigning multinational corporate structures has many benefits. However, a proposed regulation--initially published in 1991 but never finalized--may put a conclusive end to such spin-offs.

Historically, when a domestic corporation sought to spin off a foreign subsidiary, Internal Revenue Code section 1248(f) provided the principal impediment. It says the distributing parent company must include in income (as a dividend) the amount by which the value of the distributed stock exceeds its basis (in the parent's hands) but only to the extent of the earnings and profits accumulated in years when the distributed entity was a controlled foreign corporation. In many cases, this extra income did not translate into a substantial incremental tax liability, because the dividend was accompanied by "deemed paid" foreign tax credits that offset the U.S. tax.

The proposed regulation, however, dramatically ups the ante. Proposed Treasury regulations section 1.367(b)5 provides that, in a distribution otherwise described in section 355, if the distributing corporation is domestic and the distributed entity is foreign, the distributing corporation will recognize gain if the distributee shareholder is an individual and not a U. …

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