Key takeaways

• The IRS issued Proposed Regulations to curtail the use of tax-free spin-offs to allow companies to distribute subsidiaries holding large amounts of passive assets relative to business assets.
• The Proposed Regulations are likely a response to certain recent proposed transactions involving a spin-off of highly-appreciated financial assets and a relatively small active business on a tax-free basis, but the new rules have broad application beyond these transactions and may present an additional hurdle for spin-off structures commonly used in anticipation of IPOs or M&A transactions.
• The Proposed Regulations include several new requirements, including a requirement that a 5-year active business constitute at least 5% of the value of each of the distributing and distributed company’s gross value.
• The IRS also issued a Revenue Procedure that provides safe harbors for permissible post-spin recapitalizations of high-vote/low-vote share structures of distributed companies.