Debating the “Plain Meaning” of Section 355’s Active Business Requirement: McLaulin v. Commissioner
Laurelle C. Lo
In McLaulin v. Commissioner the Eleventh Circuit held that a distribution by an S corporation (“Parent”) of its ownership interest in a subsidiary corporation (“Subsidiary”) did not qualify for non-recognition treatment as a spin-off under sections 355(a)(1)(C) and (b)(2)(D)(ii). Affirming the Tax Court’s decision, the appellate court held that the distribution did not qualify under section 355 because the distribution took place on the same day that Parent acquired control of Subsidiary. Specifically, Parent did not qualify for non-recognition treatment under section 355(a)(1)(C) because it failed to satisfy the five-year active business requirement of section 355(b)(2)(D)(ii).This Note assesses the appellate court’s interpretation of the five-year active business requirement under section 355 and the denial of tax-free treatment for the distribution. Part I of this Note describes the statutory framework and the facts of the case, the Tax Court’s decision, and the parties’ arguments on appeal. Part II summarizes the holding of the Eleventh Circuit. Part III analyzes the appellate court’s reading of section 355 and the merits and weaknesses of the court’s “plain language” interpretive approach.