Detroit Breakdown: IRS Denies Spin-off Treatment

In what appears to be a case about a Ford Motor Co. tax-free spin-off, the IRS says payments "originating" as a result of the transaction should be included in gross income.

In summary, the IRS concluded that CarCo “has failed to show that the reimbursements are part and parcel of the tax-free spin-off” and, therefore, CarCo must include the reimbursements in its gross income.

Repudiation Denied
In the tax-sharing agreement, CarCo and PartsSupplier expressly agreed that CarCo would recognize the reimbursements as income. CarCo now seeks to repudiate that portion of the tax-sharing agreement. The IRS would not permit it to do so.

When a party seeks to undo the tax consequences of an agreement, courts frequently limit the challenge because the taxpayer freely entered into the contract and, therefore, should be held to its bargain.

If a tax-sharing agreement misstates or improperly applies the law in allocating the parties’ tax burdens and benefits, the IRS is not bound by the agreement’s terms. Here, however, having determined that the reimbursements are not excluded from CarCo’s income, the IRS is simply attempting to hold the company to its agreement. We can think of no situation in which CarCo would be allowed to repudiate the agreement, observed the IRS. Regardless, it continued, the law clearly requires that the reimbursement be included in income. As a result, CarCo’s arguments were all found wanting, and the refund it sought was denied.

Contributor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for

1 See FAA 20100301F, May 15, 2009.
2 If the reimbursements were treated as received simultaneously with the spin-off, they would not, ipso facto, be excluded from X’s gross income. Instead, the reimbursements would be treated as “other property or money” received in a reorganization and, in order to avoid tax consequences with respect to such “boot,” the money would have to be distributed by CarCo to its shareholders (and its creditors) “in pursuance of the plan of reorganization.” See Section 361(b).




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