Rev Proc 96-30: Ruling Request Requirements Explained

Revenue Procedure 96-30 provides guidance from the Internal Revenue Service (IRS) for corporations seeking a private letter ruling (PLR) on a corporate separation. A PLR offers advance assurance from the IRS that a transaction, such as a spin-off or split-off, will be treated as tax-free under Internal Revenue Code Section 355. A Section 355 transaction involves a parent corporation distributing the stock of a subsidiary to its shareholders and must meet several requirements, including having a valid corporate business purpose.

While Revenue Procedure 96-30 provides historical context, its procedural requirements have been largely superseded by later guidance. Taxpayers must now primarily follow the frameworks outlined in Revenue Procedure 2017-52 and Revenue Procedure 2024-24. These newer procedures provide the current requirements for ruling requests, with Rev. Proc. 2024-24 further modifying these requirements for requests after May 31, 2024, particularly for transactions involving debt exchanges.

Required Information for a Ruling Request

A ruling request demands a comprehensive compilation of factual and financial data. The submission must include the official names, Employer Identification Numbers (EINs), and the place and date of incorporation for both the distributing and the controlled entities.

A thorough description of the proposed transaction is necessary. This narrative must explain the mechanics of the separation, detailing how the stock of the controlled corporation will be distributed to the shareholders of the distributing corporation. The submission should clarify the type of separation, whether it is a spin-off, split-off, or split-up, and provide a step-by-step account of the events.

The request must also include specific details regarding the ownership of both corporations. This involves a description of the outstanding stock and securities for both the distributing and controlled entities, including the different classes of stock and their respective rights. Information on principal shareholders is also required, which for publicly traded companies means identifying any person or entity owning five percent or more of any class of stock.

The taxpayer must provide complete financial statements for both the distributing and controlled corporations for the preceding five years. This includes balance sheets and profit and loss statements, which help substantiate that both entities have been engaged in the active conduct of a trade or business for the required five-year period.

The ruling request must disclose any collateral agreements and related transactions. This includes any agreements between the parties, such as transitional service agreements, and any other transactions that are economically related to the separation. The purpose of this requirement is to provide the IRS with a complete picture of the overall plan.

Establishing a Corporate Business Purpose

A tax-free corporate separation requires a non-federal tax corporate business purpose, motivated by business needs rather than shareholder objectives. The IRS no longer issues a ruling on whether a valid business purpose exists. Instead, the taxpayer must formally represent that the transaction is motivated by one or more corporate business purposes. The business purposes detailed in Rev. Proc. 96-30 remain relevant examples for this representation.

One recognized purpose is to provide an equity interest to a key employee. If a corporation argues that the separation is necessary to hire or retain an employee who wants a direct ownership stake in the business they manage, the taxpayer must be prepared to substantiate this claim. This includes identifying the employee, explaining why they are important to the business, and detailing why an equity interest in the current corporate structure is not a viable alternative.

A separation to facilitate a stock offering is another valid purpose. This applies when a corporation needs to raise capital through an equity offering, and investment bankers advise that the offering will be more successful if the businesses are separated. To support this representation, the taxpayer would obtain a letter from an investment banker detailing the reasons why the separation is beneficial.

The need to facilitate borrowing may also serve as a business purpose. If a corporation can secure better credit terms or access more capital by separating its businesses, this can justify a tax-free distribution. Substantiation requires analysis from a lender or financial advisor that explains why the combined structure is problematic for borrowing purposes.

Cost savings can be a valid business purpose if the savings are significant and persistent. The taxpayer must be able to demonstrate that the separation will produce substantial operational or administrative cost reductions that are not merely temporary. This requires a detailed analysis quantifying the expected savings and explaining why they could not be achieved within the existing corporate structure.

The “fit and focus” purpose is used when separating distinct businesses allows management to concentrate on the unique needs of each operation. This is particularly relevant when the two businesses serve different markets or require different strategic approaches. Documentation for this purpose would describe the specific problems caused by operating the businesses together and explain how the separation will resolve these issues.

Required Representations

A ruling request must include a series of mandatory representations, which are formal statements the taxpayer makes to the IRS regarding specific legal requirements. These representations are a part of the IRS’s review process, as they serve as formal attestations that the transaction complies with the underlying legal doctrines.

These required statements cover the core elements of a Section 355 transaction. For example, the taxpayer must represent that the transaction is motivated by a corporate business purpose and that both the distributing and controlled corporations will continue the active conduct of their respective businesses following the separation.

The representations function to streamline the ruling process by addressing key legal issues upfront. If a taxpayer cannot make one of the standard representations, they must provide a detailed explanation for the deviation, which can complicate and delay the request.