1. Develop a legal entity step plan.
- Mitigates potential business, operational, financial and tax impediments and costs
- Legal entities with commingled operations, multiple non-US jurisdictions, and legal or regulatory restrictions on transferability of assets drive transaction complexity
- Legal and/or regulatory restrictions may limit asset/stock transfers
2. Determine tax basis, earnings and profits (E&P) and fair market value (FMV).
- Appreciation (i.e., excess FMV over tax basis) of the existing businesses may drive the decision regarding the identity of RemainCo and SpinCo
- RemainCo can generally “monetize” its investment in SpinCo to the extent of the tax basis in SpinCo stock
- The FMVs govern allocation of tax basis and E&P (required for a dividend distribution)
3. Refine the proposed capital structure to optimize tax efficiencies.
- Allocating existing debt may result in an inefficient capital structure
- Companies may need to issue new debt to avoid tax costs of assuming existing debt
4. Resolve intercompany agreements and settle accounts to prepare for legal separation.
- Necessary in order to achieve a complete separation
- Impacts tax basis, value and debt capacity, and may influence the legal step plan
5. Develop scope and duration of Transitional Services Agreements (TSAs), a tax-sharing agreement and other arrangements.
- Companies may not be able to operate completely independently immediately following the spin-off
- Continuing relationships between RemainCo and SpinCo must be of limited scope and duration and generally must be priced at arm’s length
6. Prepare supporting documentation for a tax-free treatment.
- Contemporaneous support is generally required for tax-free treatment and future audits
- A tax opinion is necessary in nearly all circumstances – the IRS does not generally issue private letter rulings (PLRs) pertaining to spin-off matters
- If a company requests a PLR, the tax opinion may address only those matters not covered by the PLR
7. Prepare public documentation and related disclosures (e.g., tax return disclosures, IRS Form 8937).