SERVICE ADDS TO PREREQUISITES FOR RULINGS UNDER SECTION 355.

Rev. Proc. 89-28

SECTION 1. PURPOSE

The purpose of this revenue procedure is to amplify Rev. Proc. 86-41, 1986-2 C.B. 716, which sets forth the information that must be included in a request for a ruling under section 355 of the Internal Revenue Code.

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 the distributing corporation (Distributing) of stock in the controlled corporation (Controlled) was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax. This revenue procedure amplifies Rev. Proc. 86-41 by adding to section 4.02 4. guidelines which the Service uses in making a determination under section 355(a)(1)(D)(ii) of the Code and section 1.355-2(e) of the Regulations (formerly section 1.355-2(d)).

SEC. 3. PROCEDURE

Rev. Proc. 86-41 is amplified by adding after section 4.02 4.(a)(3) the following:

The Service will issue favorable rulings regarding the application of section 355(a)(1)(D)(ii), relating to the retention by Distributing of stock in Controlled, to transactions involving a widely held corporation that are not covered by Rev. Rul. 75-321, 1975-2 C.B. 123, if:

(1) a sufficient business purpose exists for the stock retention;

(2) none of Distributing's directors or officers will serve as a director or officer of Controlled as long as Distributing continues to hold Controlled stock;

(3) the retained stock will be disposed of as soon as a disposition is warranted consistent with the business purpose in (1) above but in no event later than 5 years after the distribution and;

(4) Distributing votes the retained stock in proportion to the votes cast by Controlled's other shareholders. For example, if subsequent to the distribution the other shareholders of Controlled vote 70 per cent in favor of a matter and 30 per cent against, then Distributing would be required to vote the retained stock 70 per cent in favor and 30 per cent against the matter.

SEC. 4. COMMENTS OR INQUIRIES

Comments or inquiries regarding this revenue procedure should be addressed to the Assistant Chief Counsel (Corporate), Internal Revenue Service, 1111 Constitution Ave., N.W., Washington, D.C. 20224.

SEC. 5 EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 86-41 is amplified.

SEC. 6. EFFECTIVE DATE

This revenue procedure will apply to all ruling requests on hand in the National Office on April 10, 1989, 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 Peter G. Lynard of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue procedure, contact Richard F. McManus on (202) 566-3422 (not a toll-free call).