A corporate separation is an arrangement whereby the shareholders of a single corporation split up their investment among several corporate shells through a spin-off, split-off, or split-up. The tax treatment of a corporate separation is governed by Section 355 of the Internal Revenue Code of 1954, which allows the separation of two or more existing businesses to be tax-free provided certain requirements are met.

This thesis discusses and analyzes Section 355 and its related regulations in light of the various subsequent developments in order to expound the current tax treatment of corporate separations. Also, the historical development of the tax treatment of corporate separations up to 1954 is presented as background material.

Basically, Section 355 desires to encourage, through tax deferment, those corporate separations which are motivated by valid business reasons, while at the same time imposing ordinary income tax on the shareholders in the case of those corporate separations which are merely being utilized as a device to distribute corporate earnings and profits at capital gain rates.

Due to the possible use of a corporate separation for tax avoidance purposes, Section 355 was made very restrictive and has usually been strictly interpreted by the Internal Revenue Service and the courts. This general restrictive trend will probably continue to persist in the future. However, there appeals to be an underlying trend developing to further consider the economic results of otherwise valid corporate separations in cases where an unnecessary restrictive technicality blocks their tax-free status.