The IRS is considering a shift that would make it easier for pharmaceutical, technology and other companies to spin off high-risk units without tax consequences—and raising the prospect of further changes to the tax rules governing spinoff deals.
As The Wall Street Journal reports, the move would allow operations that don’t yet generate revenue to be spun off tax-free, letting companies shift research expenses off their own books and give shareholders a discrete stake in future projects with potential for growth.
The Internal Revenue Service announced this week that it’s considering reversing a longstanding position that, to qualify as a tax-free spinoff, companies must have both generated revenue and incurred expenses for five years.
The IRS said it was studying the issue, asked for input from companies and indicated it would consider providing private letter rulings passing judgment on this aspect of specific transactions.
Robert Willens, a New York tax analyst, says the statement suggests the agency has all but decided to act.
“It’s pretty much just filling in the blanks,” Willens says of the request for feedback. “They’ve crossed the Rubicon as far as allowing an activity that hasn’t reached commercial viability to nevertheless be considered an active trade or business.”
