IRS Suspends Two Active Trade or Business Rulings Under §355 Pending the Results of a Study

The IRS announced that it is taking the relatively rare step of suspending two prior revenue rulings in Revenue Ruling 2019-09.  The ruling being suspended are Revenue Rulings 57-464 and 57-492 which relate to the active trade or business requirement of IRC §355.

Internal Revenue Manual Section (08-11-2004) defines what suspended status is for a Revenue Ruling:

9. Suspended is used only in rare situations to show that previously published guidance will not be applied pending some future action, such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study.

Thus, suspension is not a revocation of the rulings.  Presumably this leaves the door open for the IRS to determine that one or both rulings will be put back in force unchanged at the end of the study.  But, more likely, the agency doesn’t want to imply that both of the situations describe cases where it will be held there clearly is an active trade or business once the study is complete.

In this case the rulings are being suspended pending the results of study of active trade or business (ATB) requirements under IRC §355(a)(1)(C) and (b).  The study is being conducted by the Department of Treasury and the Internal Revenue Service.

IRC §355 relates to the tax treatment of a corporation distributing to its shareholders stock and securities of a controlled corporation.  If properly structured, no gain or loss is recognized by the shareholder on the receipt of the stock.[1]

One of the key requirements, found at IRC §355(a)(1)(C), to obtain this preferable treatment is the requirement that both the distributed corporation and the distributing corporation must have conducted and continue to conduct an active trade or business.  The requirements for an active trade or business are found at IRC §355(b).

The two rulings dealt with situations where the IRS determined that the activities in question did not meet the requirements of IRC §355(b).  The current ruling notes:

In Rev. Rul. 57-464, the Service considered the section 355 qualification of a corporation’s separation of a manufacturing business from a group of real estate assets consisting of an old factory building used for storage and four other buildings: a duplex apartment building rented to employees of the corporation, a small office building rented to a single tenant, and two houses, one of which was occupied by a sister-in-law of the president of the corporation. The use of the old factory building for storage “was not in itself the active operation of a business as defined in the regulations.” The rental activities “produced only a nominal rental” and “negligible” net income, and the properties “were acquired either as an investment or as a convenience to employees of the manufacturing business.” The Service held that the separation did not satisfy the ATB requirement.

In Rev. Rul. 57-492, a corporation engaged in refining, transporting, and marketing petroleum products began a separate operation to explore for and produce oil. The exploration and production operation incurred substantial expenditures but “did not include any income producing activity or any source of income” until less than five years preceding its separation from the primary refining, transportation, and marketing operation. The Service held that the exploration and production operation failed to qualify as an ATB because, “[b]efore oil was discovered in commercial quantities …, the venture … did not include any income producing activity or any source of income.”

The IRS explains in the ruling why the agency felt it was necessary to suspend those two rulings pending the outcome of this study:

The Treasury Department and the Service are conducting a study to determine, for purposes of section 355, “whether a business can qualify as an ATB if entrepreneurial activities, as opposed to investment or other non-business activities, take place with the purpose of earning income in the future, but no income has yet been collected.” See IRS statement regarding the active trade or business requirement for section 355 distributions, dated September 25, 2018, available at The ATB analysis underlying the holdings in Rev. Rul. 57-464 and Rev. Rul. 57-492 focuses, in significant part, on the lack of income generated by the activities under consideration. Consequently, these rulings could be interpreted as requiring income generation for a business to qualify as an ATB.

[1] IRC §355(a)(1)