IRS MODIFIES GUIDELINES FOR SPIN-OFF RULING REQUESTS.

Rev. Proc. 91-62

SECTION 1. PURPOSE

This revenue procedure modifies Rev. Proc. 86-41, 1986-2 C.B. 716, and supersedes Rev. Proc. 89-28, 1989-1 C.B. 893, regarding the application of section 355(a)(1)(D)(ii) of the Internal Revenue Code to a transaction under section 355 in which the distributing corporation (Distributing) retains stock in the controlled corporation (Controlled).

SEC. 2. BACKGROUND

Section 355(a)(1)(D)(ii) of the Code requires that it be established to the satisfaction of the Secretary that a retention by Distributing of stock in Controlled was not in pursuance of a plan having as one of its principal purposes the avoidance of federal income tax.

Rev. Proc. 86-41 sets forth the information that must be included in a request for a ruling under section 355 of the Code. Rev. Proc. 89-28 contains guidelines which, if satisfied, will result in the issuance by the Service of a favorable ruling regarding the application of section 355(a)(1)(D)(ii) to a transaction involving the retention by Distributing of stock in Controlled.

This revenue procedure provides guidelines regarding whether Distributing's retention of options (including warrants, stock rights, or other similar interests) to acquire stock in Controlled was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax within the meaning of section 355(a)(1)(D)(ii) of the Code. In addition, this revenue procedure clarifies that in some cases a favorable ruling will be issued when Distributing retains stock in Controlled and the corporations have overlapping directors or officers.

SEC. 3. PROCEDURE

Section 4.024(a) of Rev. Proc. 86-41 is modified to read as follows:

(a) Interests in Controlled held by Distributing.

(1) Retention of stock, securities, or options. -- State the number of shares of each class of stock in, or the principal amount of each series of securities of, Controlled held by Distributing subsequent to the distribution, and the length of time Distributing will hold this interest. Describe any options to acquire stock in Controlled held by Distributing subsequent to the distribution, and the length of time Distributing will hold these interests.

(2) Issuance of debt. -- State whether Controlled intends to issue debt instruments to Distributing after the distribution. If so, submit copies of the instruments or, if copies are not available, provide full particulars as to the principal amounts, terms, and reasons for the issuance.

(3) Purpose for Distributing holding stock, securities, or options in Controlled. -- If subsequent to the distribution, Distributing will hold stock securities, or options in Controlled, submit a detailed explanation of the purpose and why this should not be viewed as in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax. See section 1.355-2(e) of the regulations.

(4) Favorable rulings. -- The Service will issue favorable rulings regarding the application of section 355(a)(1)(D)(ii) of the Code, relating to the retention by Distributing of stock or options in Controlled, to transactions when Controlled stock is widely held if:

(A) the transaction is covered by Rev. Rul. 75-321, 1975-2 C.B. 123; or

(B)(i) a sufficient business purpose exists for the retention of the stock, options, and any stock acquired on the exercise of the options;

(ii) none of Distributing's directors or officers will serve as directors or officers of Controlled as long as Distributing retains the stock, options, or any stock acquired on the exercise of the options. Under appropriate facts and circumstances, the Service may issue a favorable ruling in cases in which the directors or officers of Distributing will serve as directors or officers of Controlled;

(iii) the retained stock, options, and any stock acquired on exercise of the options will be disposed of as soon as a disposition is warranted consistent with the business purpose in (A) above, but in no event later than 5 years after the distribution; and

(iv) Distributing votes the retained stock and any stock acquired on exercise of the options proportion to the votes cast by Controlled's other shareholders. For example, if subsequent to the distribution the other shareholders of Controlled vote 70 percent in favor of a matter and 30 percent against, Distributing would be required to vote the stock 70 percent in favor and 30 percent against the matter.

SEC. 4. COMMENTS OR INQUIRIES

Comments or inquiries regarding this revenue procedure should be addressed to the Commissioner of Internal Revenue, ATTN: CC:CORP, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.

SEC. 5. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 86-41 is modified. Rev. Proc. 89-28 is superseded.

SEC. 6. EFFECTIVE DATE

This revenue procedure will apply to all ruling requests on hand in the National Office on December 9, 1991, the date of publication of this revenue procedure in the Internal Revenue Bulletin, as well as to requests received thereafter.

DRAFTING INFORMATION

The principal author of this revenue procedure is John F. Tarrant of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue procedure, contact Mr. Tarrant on (202) 566-6212 (not a toll-free call).