"A spinoff that meets the federal requirements for tax-free treatment will generally be treated as tax free for state purposes as well," writes Peter L. Faber, a partner with McDermott, Will & Emery LLP. "There are some areas of nonconformity, however, and although it can be time consuming, a survey of the laws of all the states is often in order for businesses considering spinoffs."
In his piece, "State and Local Tax Aspects of Corporate Spinoffs," Faber explains, "[I]n a state that does not base its definition of taxable income on federal taxable income, the risk that a spinoff may be taxable may be . . . serious.
In California, for instance, "each corporation must be engaged in an ATOB [active trade or business] for a spinoff to be tax free . . . even though that is not required for the spinoff to be tax free for federal tax purposes."
State Tax Notes is published by the nonprofit Tax Analysts.
Read Faber's article.
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