Ey Is “Discussing” Split-off Restructurings With the IRS

After quickly requesting clarification about the new 15% minimum tax on large, profitable firms such as Corporate Alternative Minimum Tax (CAMT), often known as the Inflation Reduction Act, an EY spokesman indicated in an email response to concerns that the firm is currently speaking with IRS authorities.

The Big Four accounting firm sent a letter to the U.S. Treasury Department asking for prompt clarification regarding how to handle so-called divided restructurings in accordance with the new rule just days after President Biden signed the IRA package into law in August. It claims that because it has an impact on ongoing negotiations, the problem is time sensitive. A copy of the letter that EY sent on September 15 was given to CFO Dive.

Despite not receiving a formal reply to its letters, EY has been engaging with the IRS to “help educate on the accounting rules,” according to Karen Gilbreath Sowell, global transaction advisory leader at EY.

“It is an ongoing dialogue, and they are working hard to figure out how to resolve [it]. EY is working with the government to try to help with the transactional issues raised by the CAMT.”

Karen Gilbreath Sowell

In an email, a representative for the IRS stated that he was unable to confirm any conversations with stakeholders.

“But in general, we have regular contact with a variety of stakeholders, including many in the tax professional community, and we welcome, value, and take seriously their input.”

A representative for IRS.

Although the IRS has provided some information regarding the IRA’s inclusion of the electric car tax issue, the spokeswoman claimed that no official advice has been provided regarding the 15% corporation minimum tax. According to him, it may take months or longer to provide guidance on new tax laws like the IRA. Meanwhile, the IRS published six notices on Wednesday requesting feedback from the public regarding energy tax advantages in IRAs.

The split-off problem is becoming a heated topic as financial report filers and accountants struggle with the effects of the increased company tax. In contrast to a spin-off, when the subsidiary’s stock is transferred on a pro-rata basis, it is a type of divestment in which the parent sole proprietor can maintain their current shares or exchange them. According to Internal Revenue Code Section 355, both operations are tax-free, but only the split-off is disclosed as a profit in financial statements prepared in accordance with GAAP.

In its initial letter to the IRS, EY essentially requested assistance in the form of an exception so that, for the purposes of the new corporate income tax, so-called split-off transactions would not lead to a financial reporting benefit, indicating that they would not potentially raise a company’s share income well above limit that would subordinate it to the tax hike. Companies having book income of $1 billion or more will be subject to the tax.

According to a copy provided to CFO Dive, on September 15, the company sent another letter to the Office of Tax Policy at the Department of Treasury and the IRS admitting that the new company minimum tax raises numerous issues for both organizations and requesting that they focus solely on the matter of transactions.

“We request that the Treasury Department and the Internal Revenue Service issue immediate guidance that excludes book income from Section 355 Separations (as well as other acquisitive and restructuring transactions that Congress intended to treat as tax-free) from [adjusted financial statement income] AFSI, while the broader issues raised by the CAMT continue to be studied and addressed over time.”

Official Letter Statement

Information from CFODIVE

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