Tax News

CCH (cch.taxgroup.com) reports:

The IRS has ruled that a distributing corporation is engaged in the active conduct of a trade or business for purposes of Code Sec. 355(b) where the corporation owns a "significant interest" in a limited liability company (LLC) classified as a partnership for federal tax purposes and the LLC performs the activities required for an active trade or business under Reg. §1355-3(b)(2). Under the facts presented, for more than five years the LLC has owned several office buildings that are leased to unrelated third parties. The LLC's employees perform all management and operational functions of the LLC's rental business. The distributing corporation has owned all of the stock of a subsidiary corporation and a membership interest in the LLC. Neither the corporation nor any other LLC member performs services with respect to the LLC's rental business. The distributing corporation wants to distribute all of the subsidiary corporation's stock pro rata to its shareholders in a tax-free distribution. These basic facts were applied to two scenarios: in one, the corporation owned a 33 1/3--percent interest in the LLC; in the other, the corporation owned a 20-percent interest.
For guidance, the Service considered Reg. §1.368-1(d), which addresses the continuity of business enterprise requirement for tax-free corporate reorganizations. Under those regulations, an issuing corporation is treated as conducting the business of a partnership if members of the qualified group, in the aggregate, own a significant interest in that partnership business. Further, a one-third interest in the partnership represents a significant interest and a corporation that owns such interest but does not perform active and substantial management functions for the partnership is treated as conducting the partnership's business.
Under the scenarios presented, the IRS determined that a 33 1/3-percent interest in the LLC was a significant interest, while a 20-percent interest was not a significant interest.
Rev. Rul. 92-17, 1992-1 CB 142, is modified to the extent it indicated that a partner must perform management functions in order for the partner to be treated as engaged in the active conduct of the partnership's trade or business.
Rev. Rul. 2007-42, 2007FED ¶46,521
Other References:
Code Sec. 355
CCH Reference - 2007FED ¶16,466.24
CCH Reference - 2007FED ¶16,466.545
Tax Research Consultant
CCH Reference - TRC REORG: 30,106.10