Divisive Foreign Corporate Reorganizations

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Corporate reorganizations are valued tools to the practitioner. They provide the opportunity to defer taxable events by virtue of non-recognition treatment. They are characterized as acquisitive, reformative, and divisive transactions. Currently they are relevant as timely transactions as publicly traded security prices have soared while revenue growth has slowed. Companies can grow by shrinking, selling off under performing assets and putting the cash to work. (See Jack Hough, Buy the Asset Sellers, Barron’s Magazine, Saturday, December 7, 2013)

In a previous writing (Tax Connections/Foreign Corporate Acquisitive Reorganizations) the effects of Section 367 of the Code upon corporate reorganizations was illustrated pertaining to a Type B acquisitive reorganization in the context of a foreign corporate entity purchasing a United States shareholder owned entity. In this writing the effects of Section 367 upon divisive reorganizations is discussed.


These transactions are characterized as Type D or Section 355 reorganizations that are divisive since in some manner it separates entities or shareholders. The Type D reorganization is basically a transfer by one domestic corporation of substantially all of its assets to a controlled corporation, and subsequent to the transfer, there is a complete liquidation of the transferor corporation. (1)

Section 355 of the Code addresses divisive reorganizations that generally provide for separation without the recognition of gain or loss. The nonrecognition treatment is accorded one or more existing businesses formerly operated directly or indirectly by a single corporation. It is applicable to the separation of an existing business. A distributing corporation of one or more subsidiaries in exchange for its securities accomplishes this separation through the distribution of stock to its shareholders. The controlled corporation may be pre-existing or a newly created subsidiary. (2) Those are the basic divisive reorganizations.

The scheme of these domestic reorganization sections and nonrecognition treatment is the result of the combination of sections 354, 355, 356, and 361 in conjunction with Section 368 of the Code. Section 368 defines the term reorganization and the six transactions it embraces. The other statutory sections coordinate what the transactional consequences will be as a result of the exchanges that occur in carrying out a particular plan of reorganization.

The so-called divisive or split-up reorganizations are the opposite of acquisitive reorganizations. An acquisitive reorganization as stated in the previous writing referenced herein, is a contraction of a diverse group of shareholders. In a divisive reorganization, it is characterized by an expansion of the corporate structure and a division of stockholders.

Divisive reorganizations in a sense are not reorganizations, yet they are treated as if they were, with similar consequences of tax treatment. (3) This is because reorganization seems by connotation to infer something is being done within the corporate framework and being more or less the same afterwards. The divisive reorganization is developed from casting off a part of a corporate entity, but without having to account for it as a taxable distribution of some sort.

Conceptually, the divisive reorganization embraces sheltered distributions. These corporate transformations contemplate spin-off’s, split-off’s, and split-up’s. A spin-off is a distribution by one corporation of the stock of a subsidiary corporation and is viewed in the context of a nonrecognition transaction as opposed to dividend treatment.

A split-off is the same as a spin-off with the exception that the shareholder of the parent company surrenders a part of his parent corporation stock in exchange for the stock of a subsidiary. In the scheme of nonrecognition of gain  provided by the shelter of reorganization, it circumvents a taxable corporate redemption. A split-up, the third type of divisive reorganization, is a transaction in which the parent corporation distributes its stock in two or more subsidiaries in a complete liquidation. This circumvents a taxable liquidation and provides nonrecognition treatment in carrying out a business purpose. (4)

Effects of Section 367 Upon Nonrecognition Treatment Outbound

Divisive reorganizations are directly impacted by Section 367 in the context of a transnational use. The domestic Type D reorganization is basically a transfer of all or part of the assets from one corporation to another. It requires that, subsequent to transfer, the transferor corporation or its shareholders, control the transferee corporation and the stock or securities of the transferee are distributed pursuant to section 354, 355, or 356 of the Code.

There are two basic transnational transactions that occur in the Type D reorganization. One is a transfer by one corporation of its assets to a foreign corporation, followed by a complete liquidation of the transferor corporation. In the domestic setting, the transaction is provided nonrecognition shelter in Section 354 and 356 of the Code. The other scenario of a Type D reorganization in a foreign setting is grounded in Section 355 as a spin-off, split-off, or split-up. (5) Section 367 denies nonrecognition treatment to these reorganizations as a general proposition.

A domestic corporation making a distribution of stock or securities of a domestic corporation or a foreign corporation to a person who is not a qualified United States person is required to recognize gain upon the distribution. The distributing corporation is required to recognize the gain to a foreign distributee. This is with respect to an otherwise qualifying nonrecognition section 355 distribution. A loss is not recognized. The distributee however is not required to recognize gain. (6)

If the distribution is a qualifying Section 355 transaction each distributee is considered to have received stock or securities pursuant to nonrecognition  treatment of Section 355. This is the case even though the distributing corporation recognizes gain on the distribution. The distribution receives nonrecognition treatment to the distributee where it might otherwise be regarded as a dividend or redemption. This treatment of Section 355 exiting transactions is specific and has priority in lieu of general Section 367 treatment. (7)


1. IRC Section 368 (a) (1) (D) (1986). This Code section describes a Type D reorganization as a transfer by one corporation of assets to another corporation where subsequent to the transfer, the transferor corporation (or its shareholders) is in control of the transferee corporation as long as it is in pursuance of a plan whereby stock of the transferee corporation is distributed in a transaction qualified under Section 354, 355, or 356.
2. Treas. Reg. Section 1.355-1 (b) (1986).
3. IRC Section 368 (a) (1) (D) (1986). A “D” reorganization is a hybrid kind because it is tied into the
divisive reorganization provisions because a “Type D” reorganization described in Section 368 (a) (1) (D) is often conceived in a Section 355 transaction. Section 355 basically speaks to divisive reorganizations.
4. IRC Section 355 (1986).
5. IRC Section 368 (a) (1) (D) (1986).
6. Treas. Reg. Section 1.367 (e) – 1 (b) (1) of the IRC of 1986 and as thereafter amended. Gain recognized under paragraph (b)(1) of this section shall be equal to the excess of the fair market value of the stock or securities distributed to persons who are not qualified U.S. persons (determined as of the time of the distribution) over the distributing corporation’s adjusted basis in the stock or securities distributed to such distributees. For purposes of the preceding sentence, the distributing corporation’s adjusted basis in each unit of each class of stock or securities distributed to a distributee shall be equal to the distributing corporation’s total adjusted basis in all of the units of the respective class of stock or securities owned immediately before the distribution, divided by the total number of units of the class of stock or securities owned immediately before the distribution. A qualified U.S. person is (A) A citizen or resident of the United States; or (B) A domestic corporation.
7. Treas. Reg. Section 1.367 (e) – 1 (b) (4) of the IRC of 1986 and as thereafter amended. If the distribution otherwise qualifies for nonrecognition under section 355, each distributee shall be considered to have received stock or securities in a distribution qualifying for nonrecognition under section 355, even though the distributing corporation may recognize gain on the distribution under this section. Thus, the distributee shall not be considered to have received a distribution described in section 301 or a distribution in an exchange described in section 302(b) upon the receipt of the stock or securities of the controlled corporation, and the domestic distributing corporation shall have no withholding responsibilities under section 1441. Except where section 897(e)(1) and the regulations thereunder cause gain to be recognized by the distributee, the basis of the distributed domestic or foreign corporation stock in the hands of the foreign distributee shall be the basis of the distributed stock determined under section 358 without any increase for any gain recognized by the domestic corporation on the distribution.

In accordance with Circular 230 Disclosure

William Richards is a Sole Practitioner in Orlando, Florida, USA 32626. Attorney at Law, Legal Advisor. 1978 – Present

PUBLICATIONS: International Financial Centers, Adell Financial Series, AD Adell Publishing, Copyright 2012, 378 pages. The Handbook of Offshore Financial Centers, Adell Financial Series, AD Adell Publishing, Copyright 2004, 266 pages; Offshore Financial Centers and Tax Havens, Archives of Tulane Law Library, Tulane Law School, Tulane University, New Orleans, Louisiana, Copyright, 1996, 512 Pages.

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