In July the Treasury proposed regulations reinterpreting Section 355 in cases where one of the corporations involved in the spinoff has more investment assets than the other or very little five-year active trade or business assets. If finalized, they will mean that certain minimum thresholds must be met, although a safe harbor is also provided.

Current Reg. Section 1.355-2(d) divides the world of assets into five year active trade or business assets (ATB) and all others. A lot of other assets or a difference in the ratios of such assets between the two corporations is a so-called “device factor.” This means that absent some “nondevice factors,” the IRS could find the spinoff to have been used as a device to distribute earnings and profits to the shareholders, and thus tax it.