Deductions & credits

the bookkeeping entry is a debit to treasury stock. 

for a qualified 355 transaction

  • ExistingCo must be in “control” of NewCo prior to the distribution of NewCo stock.
  • ExistingCo must distribute enough of NewCo stock to the departing shareholders so as to constitute “control” to the departing shareholders.
  • Both ExistingCo and NewCo must be engaged in the “active conduct of a trade or business” immediately after the distribution and for a 5-year period preceding the transaction.
  • ExistingCo’s distribution of NewCo stock must not have been used principally as a “device” for the distribution of the earnings and profits of any of ExistingCo or NewCo.

Additionally, non-statutory limitations generally require the following:

  • The split off must be carried out for an “independent corporate business purpose.”
  • ExistingCo’s shareholders (as of prior to the split off) must maintain adequate “continuity of interest” in each of ExistingCo and NewCo after the transaction.
  • The “continuity of business enterprise” test must be met with respect to ExistingCo and NewCo after the transaction
  • there are other rules and caveats 

 Section 355 is a complex provision with a number of landmines and nuances that provide for various exceptions, limitations and qualifications to the general requirements summarized above. Thus, parties should seek the advice of a tax advisors in order to ensure a favorable tax treatment. 

 

 

your statement raises a red flag in that it seems the activity of these new corporations is primarily rental real estate.

see the line in bold above,  especially the words “active conduct of a trade or business” 

both iRS reg 1.355-3 states

 The active conduct of a trade or business does not include -

(B) The ownership and operation (including leasing) of real or personal property used in a trade or business, unless the owner performs significant services with respect to the operation and management of the property.

 

I agree with @Critter-3 see a pro to review the transactions.