Taxation-Federal Income Taxation-Examination of Certain Problems Under Section 335
Stock and securities of controlled corporations may be distributed to shareholders, tax free, in cases of corporate separations which qualify under section 355 of the Internal Revenue Code of 1954. A corporate separation is effected by the transfer of part of a corporation’s assets to a subsidiary, the stock of which is distributed to the parent’s stockholders. Such distributions are generally classified into three categories: spin-off, split-off, and split-up. A spin-off occurs when corporation A forms corporation B to which A transfers certain assets, receiving in exchange, the stock of corporation B. A then distributes the stock of B to its shareholders in the form of a simple dividend of stock. A modified version of this would be a case in which A merely distributes the stock of a controlled subsidiary. A split-off differs only in that the stock of B is distributed to A‘s stockholders in exchange for some of their stock in A. A split-up takes place when A forms two (or more) corporations- B and C-to which A transfers all of its assets, in exchange for all the stock of B and C, which stock is then distributed to A‘s stockholders in complete liquidation of A. An alternative method for classifying these distributions would divide them into only two groups-those which are in the form of an exchange of stock (split-up and split-off) and those which are in the form of a simple dividend of stock (spin-off).