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.
