ExpertMedium1 markMultiple Choice
CPA · Question 52 · Area 3: Entity Tax Compliance
A C Corporation distributes stock of a subsidiary to its shareholders in a spin-off. To qualify as tax-free under Section 355, which requirement must be met?
A C Corporation distributes stock of a subsidiary to its shareholders in a spin-off. To qualify as tax-free under Section 355, which requirement must be met?
Answer options:
A.
The subsidiary must be newly formed.
B.
Both corporations must be engaged in an active trade or business for 5 years prior.
C.
The distribution must be pro-rata.
D.
The parent must distribute less than 50% of stock.
How to approach this question
1. Identify Section 355 Spin-off.<br/>2. Key Requirements: <br/> - Control (distribute >80%).<br/> - Active Trade or Business (ATB) (both corps, 5 year history).<br/> - Business Purpose.<br/> - No Device.<br/>3. Select Option B.
Full Answer
B.Both corporations must be engaged in an active trade or business for 5 years prior.✓ Correct
B
Section 355 requires that both the distributing corporation and the controlled corporation be engaged in the active conduct of a trade or business immediately after the distribution, and that business must have been actively conducted for the 5-year period ending on the date of distribution.
Common mistakes
Thinking the subsidiary must be new or that distribution must be pro-rata.
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