Tax Free Spinoffs and the US Congress

  There is no better music to a tax lawyer’s ears than a business transaction being tax-free. And why not clients love it. A spinoff is a procedure whereby a corporation divides itself into at least two parts and then either sends one part to its old shareholders or creates a relationship of parent and subsidiary. If the rules are followed the new arrangement is tax free to all concerned. The House of Representatives had the nerve to recently consider legislation that would remove the tax free advantages of spinning off corporate real estate into a separate publicly traded real estate investment trust. According to the joint committee on taxation just this move would generate $1.9 billion in additional tax revenue over the next several years. Using spinoffs this way has been a way for companies to unlock cash by separating themselves from their real estate holdings. There have been 15 tax-free real estate spinoffs since 2010 that represented $21.6 billion. In September IRS had announced that it would no longer issue advanced private rulings on this type of tax free spinoff. Tax lawyers in this field are confident that no business would be willing to enter this type of corporate reorganization if the transaction was taxable. Before the ink was applied to the spinoff change however in rode the lobbyists to save the day and their clients at least a billion in potential additional taxes. Now congressmen being bought and paid for by many of the real estate players were quick to stick about 54 words in the 2000 page document to reverse the consequences of the potential taxable change. So the real estate spinoff lives on and another loophole remains in plain sight. Many congressmen in the past have come out and said they just don’t have the time to wade through volumes of tax legislation. Isn't that nice to know.