Caveat: recent letter ruling raises issue of whether sec. 304 applies in domestic spin-off transaction.

In a recently issued favorable Sec. 355 letter ruling, the IRS declined to rule on whether Sec. 351, 368(a)(1)(D) or 304, or Regs. Sec. 1.1502-80(b), applied to an asset transfer that preceded a spin-off transaction. The transaction involved a transfer of assets (including stock of a subsidiary) by a distributing corporation (Distributing) to a controlled corporation (Controlled) for the latter's stock and cash, followed by a distribution of the Controlled stock to Distributing's public shareholders. The cash received by Distributing was used to satisfy debt.

The ruling, which will be released to the public shortly, is noteworthy for several reasons. First, by declining to rule on the asset transfer, the Service appears to be considering whether it will apply Sec. 304 to a transaction that qualifies as a divisive Sec. 368(a)(1)(D) reorganization. Although it is clear under Sec. 304(b)(3)(A) that Sec. 304 supersedes Sec. 351 when both sections apply, it generally has been assumed to be equally clear that Sec. 304 does not apply to a Sec. 368(a)(1)(D)/361 reorganization.

Second, even assuming that, pursuant to a bifurcated transaction analysis, the reorganization may be properly viewed as two transactions (a Sec. 368(a)(1)(D)/355 transaction and a Sec. 304 transaction), a question arises as to why Regs. Sec. 1.1502-80(b) does not resolve the matter. Under this section, Sec. 304 will not apply to an intercompany transaction--a transaction during a consolidated return year between corporations that are members of the same group immediately after such transaction. Query: Is the Service possibly asserting that Regs. Sec. 1.1502-80(b) does not apply because the spin-off results in Distributing and Controlled not being members of the same group "immediately after such transaction?"