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No Income, No Problem for Spinoffs

As promised, the IRS issued its first private letter ruling approving a tax-deferred spinoff of a non-income collecting trade or business.  PLR 202009002 was long anticipated, as the IRS had expressed a desire to move in this direction with Revenue Ruling 2019-9, which revoked two prior revenue rulings that required income collection for a spinoff and followed the IRS’s September 2018 statement that it was studying whether significant research and development activities could obviate the need for income collection prior to spinoffs.

As mentioned in the prior Brass Tax article on Revenue Ruling 2019-9, this expansion of spinoffs is likely to be particularly helpful to highly regulated businesses with long research and development processes that precede income collection, including pharmaceutical and biotechnology businesses.  Indeed, the taxpayer in PLR 202009002 appears to operate two pharmaceutical research businesses:  the first entailed developing products for licensing to third parties to be commercialized, which had yielded income for several years, and the second involved developing a specific separate product with the aim of forming a partnership with a third party to commercialize the product, which had not yet yielded income. 

The ruling's sensible recognition that an active trade or business can exist without producing income is a welcome expansion of the spinoff rules that should permit research and development pharmaceutical and technology companies to separate into pure play companies much sooner.

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