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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, September 26, 2018

IRS Weighs Easing Tax-Free Spinoff Rules In Boon to Tech, Pharma

Bloomberg, IRS Weighs Easing Tax-Free Spinoff Rules in Boon to Tech, Pharma:

The Internal Revenue Service is considering relaxing the rules for companies to qualify for tax-free spinoffs — a shift that could benefit drugmakers and tech firms with promising early-stage products.

The agency said Tuesday it’s looking into whether units should still be required to generate revenue before a spinoff from a larger company can be deemed tax-free. Current rules generally require units to have been engaged in a trade or business involving income collection and payment of expenses for at least five years. The change could be a way for the U.S. government to promote research and development within the country by giving companies a tax break on the spinoff transaction.

The IRS “has observed a significant rise in entrepreneurial ventures” where the development can be subject to regulatory review “that can span multiple years and cost millions of dollars,” the agency said in a statement announcing it would be studying the issue.

“It seems to me that this is intended to foster more innovation in the U.S. by making it more profitable to investors,” said Andrew Silverman, an analyst with Bloomberg Intelligence.

Allowing companies that aren’t yet generating revenue to qualify for tax-free spinoffs would be a boon for startups, typically backed by private equity and venture capital funds. Those investors tend to prefer spinoffs and initial public offerings as a way to recoup their money. Large tech and pharmaceutical companies, such as Alphabet’s Google and Johnson & Johnson that have internal incubators, could also benefit.

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