IRS Takes Rare Step to Suspend Old Guidance on ATB Requirement

Suspends Rev. Rul. 57-464 and Rev. Rul. 57-492

Section 355. — Distributions of Stock and Securities of a Controlled Corporation

26 CFR 1.355-3: Active conduct of a trade or business.

This revenue ruling suspends Rev. Rul. 57-464, 1957-2 C.B. 244, and Rev. Rul. 57-492, 1957-2 C.B. 247, pending the completion of a study by the Department of the Treasury (Treasury Department) and the Internal Revenue Service (Service) regarding the active trade or business (ATB) requirement under sections 355(a)(1)(C) and (b) of the Internal Revenue Code.

REVENUE RULINGS

In Rev. Rul. 57-464, the Service considered the section 355 qualification of a corporation’s separation of a manufacturing business from a group of real estate assets consisting of an old factory building used for storage and four other buildings: a duplex apartment building rented to employees of the corporation, a small office building rented to a single tenant, and two houses, one of which was occupied by a sister-in-law of the president of the corporation. The use of the old factory building for storage “was not in itself the active operation of a business as defined in the regulations.” The rental activities “produced only a nominal rental” and “negligible” net income, and the properties “were acquired either as an investment or as a convenience to employees of the manufacturing business.” The Service held that the separation did not satisfy the ATB requirement.

In Rev. Rul. 57-492, a corporation engaged in refining, transporting, and marketing petroleum products began a separate operation to explore for and produce oil. The exploration and production operation incurred substantial expenditures but “did not include any income producing activity or any source of income” until less than five years preceding its separation from the primary refining, transportation, and marketing operation. The Service held that the exploration and production operation failed to qualify as an ATB because, “[b]efore oil was discovered in commercial quantities . . ., the venture . . . did not include any income producing activity or any source of income.”

LAW

Section 355(a)(1) provides that, if certain requirements are met, a corporation may distribute stock and securities of a controlled corporation to its shareholders and security holders without recognition of gain or loss or income to the recipient shareholders or security holders. Among those requirements, both the distributing corporation and the controlled corporation must be engaged in an ATB immediately after the distribution. Sections 355(a)(1)(C) and (b), and §1.355-3(a)(1)(i). Each trade or business must have been actively conducted throughout the five-year period ending on the date of the distribution. Section 355(b)(2)(B) and §1.355-3(b)(3).

Section 1.355-3(b)(2)(ii) describes a “trade or business” as “a specific group of activities [that] are being carried on by the corporation for the purpose of earning income or profit, and the activities included in such group include every operation that forms a part of, or a step in, the process of earning income or profit.” In particular, “[s]uch group of activities ordinarily must include the collection of income and the payment of expenses.” Section 1.355-3(b)(2)(ii).

ANALYSIS

The Treasury Department and the Service are conducting a study to determine, for purposes of section 355, “whether a business can qualify as an ATB if entrepreneurial activities, as opposed to investment or other non-business activities, take place with the purpose of earning income in the future, but no income has yet been collected.” See IRS statement regarding the active trade or business requirement for section 355 distributions, dated September 25, 2018, available at http://www.irs.gov/newsroom/statements-from-office-of-the-chief-counsel. The ATB analysis underlying the holdings in Rev. Rul. 57-464 and Rev. Rul. 57-492 focuses, in significant part, on the lack of income generated by the activities under consideration. Consequently, these rulings could be interpreted as requiring income generation for a business to qualify as an ATB.

Accordingly, Rev. Rul. 57-464 and Rev. Rul. 57-492 are suspended pending completion of the study. See IRM 32.2.2.8.1, para. 9 (Aug. 11, 2004) (providing that a revenue ruling can be suspended “only in rare situations to show that previously published guidance will not be applied pending some future action, such as . . . the outcome of a Service study”).

EFFECT ON OTHER REVENUE RULINGS 

Rev. Rul. 57-464 and Rev. Rul. 57-492 are suspended.

DRAFTING INFORMATION 

The principal author of this revenue ruling is Lola L. Johnson of the Office of Chief Counsel (Corporate). For further information regarding this revenue ruling, please contact Ms. Johnson at (202) 317-5024.