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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 2605
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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A family Sub-Chapter 'S' ranch Corporation in Montana would

Customer Question

A family Sub-Chapter 'S' ranch Corporation in Montana would like to do an IRS Section 355 'Split-Off' for a tax free exchange of 22% of the total property of the ranch with two of the family stockholders. The two stockholders each own approx 11% of the Corporate stock for a total of approx. 22%. Let's call the entire ranch property 'A', the 'Split-Off' amount as property 'B' and the remaining 78% of the original main ranch 'A", property 'C'.
Property 'B' and property 'C' are both being leased for cattle grazing to two different ranching neighbors for a for profit fair market grazing price. The corporation would like to, for estate planning purposes, Split-Off property 'B' in exchange for two stockholders combined 22% of the corporate stock on a tax free exchange. When completed the two stockholders would own 100% of property 'B' and the corporation would be holding the stock as treasury stock? Would this be a qualified IRS Section 355 tax free transaction?
When I ran this by the corporate CPA he questioned that leasing the land to a third party may not fulfill the "Active Trade or Business" requirement of Section 355. From what I can see the conditions that need to be met in Section 355 is that the "corporate activities and trade needs to include the collection of income and payment of expenses for the purpose of making a profit".
Submitted: 1 year ago.
Category: Finance
Expert:  Tax-Scholar replied 1 year ago.

Hello Dean - It sounds like you are getting good advice. IRC 355(b)(1) provides that the corporation must be "engaged in the active conduct of a trade or business" and a passive rental business might not meet this requirement. The regulations require that for real property leasing the business must perform significant services with respect to the operation and management of the property.