Florida Tax Attorney Blog

In general, a shareholder purpose does not satisfy the business purpose requirement imposed in the corporate reorganization context, at least not in the 355 context. Treas. Reg. § 1.355-2(b)(2). However, in some cases, a shareholder purpose may be "so nearly coextensive" with a corporate business purpose as to preclude any distinction between them. In this spirit, enhancement of shareholder value is often a valid business purpose insofar as the corporation benefits by reason of the enhanced shareholder value. Namely, enhanced shareholder value provides a more valuable currency to the corporation for purposes of post-spin acquisitions and equity compensation programs. Increased share value means that less shares are needed to fund equity compensation programs and potential future acquisitions.

Significantly, all of this and more was acknowledged by the IRS in Revenue Ruling 2004-23. Spin-offs more often than not result in enhanced share value because the market for the shares becomes much larger when a controlling corporate shareholder is eliminated. Thus, this ruling opens the flood gates for satisfying the corporate business purpose requirement with a shareholder purpose. Thus, after Revenue Ruling 2004-23, the business purpose requirement can almost always be satisfied.

One word of caution: while Revenue Ruling 2004-23 provides substantial leeway in the business purpose department, it is not carte blanche. For instance, the logic and theory of the revenue ruling is really only relevant in the public company context. Private companies typically do not diversify equity ownership or provide equity-based employee compensation. As a result, citing a more valuable currency for use in equity compensation programs and future acquisitions would probably be an impermissible shareholder purpose. Even in the public company context, a company with no substantial equity compensation program and/or no history of acquisitions and no legitimate plans of acquisition would probably be a poor candidate for a 2004-23 type business purpose.