(a) Effective/applicability date of certain sections. Except as otherwise provided, this section and §§ 1.355-2 through 1.355-4 apply to transactions occurring after February 6, 1989. For transactions occurring on or before that date, see 26 CFR 1.355-1 through 1.355-4 (revised as of April 1, 1987). This section and §§ 1.355-2 through 1.355-4, other than § 1.355-2(g) and (i), do not reflect the amendments to section 355 made by the Revenue Act of 1987, the Technical and Miscellaneous Revenue Act of 1988, and the Tax Technical Corrections Act of 2007. For the applicability date of §§ 1.355-2(g), 1.355-5, 1.355-6, and 1.355-7, see §§ 1.355-2(i), 1.355-5(e), 1.355-6(g), and 1.355-7(k), respectively.
(b) Application of section. Section 355 provides for the separation, without recognition of gain or loss to (or the inclusion in income of) the shareholders and security holders, of one or more existing businesses formerly operated, directly or indirectly, by a single corporation (the “distributing corporation”). It applies only to the separation of existing businesses that have been in active operation for at least five years (or a business that has been in active operation for at least five years into separate businesses), and which, in general, have been owned, directly or indirectly, for at least five years by the distributing corporation. A separation is achieved through the distribution by the distributing corporation of stock, or stock and securities, of one or more subsidiaries (the “controlled corporations”) to its shareholders with respect to its stock or to its security holders in exchange for its securities. The controlled corporations may be preexisting or newly created subsidiaries. Throughout the regulations under section 355, the term distribution refers to a distribution by the distributing corporation of stock, or stock and securities, of one or more controlled corporations, unless the context indicates otherwise. Section 355 contemplates the continued operation of the business or businesses existing prior to the separation. See § 1.355-4 for types of distributions that may qualify under section 355, including pro rata distributions and non pro rata distributions.
(c) Stock rights. Except as provided in § 1.356-6, for purposes of section 355, the term securities includes rights issued by the distributing corporation or the controlled corporation to acquire the stock of that corporation. For purposes of this section and section 356(d)(2)(B), a right to acquire stock has no principal amount. For this purpose, rights to acquire stock has the same meaning as it does under sections 305 and 317(a). Other Internal Revenue Code provisions governing the treatment of rights to acquire stock may also apply to certain distributions occurring in connection with a transaction described in section 355. See, for example, sections 83 and 421 through 424 and the regulations thereunder. This paragraph (c) applies to distributions occurring on or after March 9, 1998.
(d) Nonqualified preferred stock. See § 1.356-7(a) and (b) for the treatment of nonqualified preferred stock (as defined in section 351(g)(2)) received in certain exchanges for (or in certain distributions with respect to) nonqualified preferred stock or preferred stock. See § 1.356-7(c) for the treatment of the receipt of preferred stock in certain exchanges for (or in certain distributions with respect to) common or preferred stock described in section 351(g)(2)(C)(i)(II).
[T.D. 8238, 54 FR 289, Jan. 5, 1989, as amended by T.D. 8752, 63 FR 410, Jan. 6, 1998; T.D. 8882, 65 FR 31078, May 16, 2000; T.D. 8904, 65 FR 58651, Oct. 2, 2000; T.D. 9435, 73 FR 75950, Dec. 15, 2008; 74 FR 3420, Jan. 21, 2009; T.D. 9548, 76 FR 65111, Oct. 20, 2011]
Notes of Decisions
Cited in
18
cases, 1959–1997 · leading case:
Coady v. Comm'r, 33 T.C. 771 (Tax Ct. 1960).
Coady v. Comm'r, 33 T.C. 771 (Tax Ct. 1960).
· cites it 10× “355-1 of the regulations that "[section] 355 does not apply to the division of a single business." It is, in my opinion, not advisable to restrict the consideration of whether the petitioner did not realize *241 taxable gain from the transaction to the suggested, confined…”
Burke v. Comm'r, 42 T.C. 1021 (Tax Ct. 1964).
· cites it 8× “He argues that the creation of a store *1028 and a warehouse in Grand Junction constituted the establishment of a separate business in 1954 and consequently that business had not been operated for 5 years at the time of distribution in 1957. We are unable to concur.”
Rafferty v. Comm'r, 55 T.C. 490 (Tax Ct. 1970).
· cites it 8× “Held , the distribution of the stock of corporation B by corporation A to petitioners in 1965 constitutes a taxable dividend since corporation B was not engaged in the active conduct of a trade or business for the 5-year period preceding such distribution.”
Appleby v. Comm'r, 35 T.C. 755 (Tax Ct. 1961).
· cites it 4× “On the other hand, it is obvious that at the time of the transaction the agency, the controlling and distributing corporation, had been engaged during the 5-year period in the conduct of an active trade or business, but was it engaged in the active business of property…”
Proctor v. Comm'r, 42 T.C.M. 725 (Tax Ct. 1981).
· cites it 2× “The term "active trade or business" connotes activities of such a nature and character as to qualitatively distinguish its operation from a mere passive investment.”
Elliott v. Comm'r, 32 T.C. 283 (Tax Ct. 1959).
· cites it 2× “, as consisting of a "specific existing group of activities being carried on for the purpose of earning income or profit from only *291 such group of activities, and the activities included in such group must include every operation which forms a part *195 of, or a step in, the…”
Badanes v. Comm'r, 39 T.C. 410 (Tax Ct. 1962).
· cites it 2× “Here, Barq-Portsmouth was incorporated for the specific purpose of carrying on the active business which had theretofore been carried on for more than 5 years as a division of Barq-Cincinnati; and the respondent's regulations indicate that in such circumstance, the new…”
Nielsen v. Comm'r, 61 T.C. 311 (Tax Ct. 1973).
· cites it 2× “The things which the hospitals had in common -- representation by the same attorneys and accountants and the use of the same insurance company and the same suppliers for some items -- might have been shared by any two totally dissimilar businesses owned by one person.”
Borgic v. Comm'r, 86 T.C. 643 (Tax Ct. 1986).
· cites it 2× “We find that petitioners' activities in connection with leasing this property were merely passive, and would not constitute an "active trade or business" under secs.”
Spheeris v. Comm'r, 54 T.C. 1353 (Tax Ct. 1970).
· cites it 4× “355-1(c) of the Income Tax Regulations provides that "a trade or business consists of a specific existing group of activities being carried on for the purpose of earning income or profit from only such group of activities.”
Krauskopf v. Comm'r, 48 T.C.M. 620 (Tax Ct. 1984).
· cites it 4× “For purposes of that subsection, a business "consists of a specific existing group of activities being carried on for the purpose of earning income or profit from only such group of activities, * * *.”
Massachusetts Med. Soc'y v. United States, 514 F.2d 153 (1st Cir. 1975).
“See also 26 C.F.R. § 1.355-1 (c) (1974) defining trade or business for purposes of the partial liquidation and spinoff provisions of the Code, §§ 346 and 355, as a “group of activities .”
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