SECTION 1. BACKGROUND

Section 355 sets forth the requirements of a tax-free distribution by a corporation of stock of a controlled subsidiary. Section 355(b) conditions the tax-free status of the distribution on the trade or business activities of the relevant corporations and the manner in which those activities were acquired. Generally, § 355(b)(2)(A) provides that a corporation shall be treated as engaged in the active conduct of a trade or business if and only if it is engaged in the active conduct of a trade or business. Section 355(b)(2)(B) requires that the trade or business have been actively conducted throughout the five-year period ending on the date of the distribution (predistribution period). Section 355(b)(2)(C) provides that the trade or business must not have been acquired in a transaction in which gain or loss was recognized, in whole or in part, within the pre-distribution period. Section 355(b)(2)(D) provides that control (as defined in § 368(c)) of a corporation which (at the time of acquisition of control) was conducting the trade or business must not have been directly or indirectly acquired by any distributee corporation or by the distributing corporation during the pre-distribution period in a transaction in which gain or loss was recognized, in whole or in part.