IRS Withdrawing Spinoff Rule Plans Eases Some Corporate Burdens

The IRS’ Sept. 29 withdrawal of two proposed regulations that would have provided new and more stringent rules for corporate spinoffs and reorganizations returns the agency to its pre-2024 guidance and procedures for determining tax issues in these corporate transactions.

REG-112261-24 and REG-116085-23’s recission means taxpayers can plan spinoffs and reorganizations without the burden of complying with additional requirements. But they should continue keeping detailed records and documentation to prepare for possible IRS questions or examination.

The primary goal of the proposed rules was to reduce taxpayers’ reliance on the private letter ruling process by providing broad guidance on multiple aspects of these corporate transactions.

The Treasury Department and the IRS had issued the proposed regulations to address concerns raised in a 2019 Treasury Inspector General for Tax Administration report that recommended the IRS consider amending filing criteria and information required to develop useful compliance tools for mergers and acquisitions.

The proposed rules were designed to provide certainty to taxpayers and improve tax administration. However, critical public comments said their benefits didn’t outweigh the burden they would have imposed on all taxpayers wishing to engage in these transactions.

The IRS’s response to these critical comments—a full withdrawal—is generally good news for taxpayers. Returning to the former guidance and procedures for determining specific issues on a case-by-case basis means living with some uncertainty about certain complex issues that the proposed rules attempted to clarify.

However, taxpayers and their advisers won’t be burdened or hampered by the rigid requirements and administrative burden that the proposed rules would have imposed had they been finalized. For example, REG-112261-24 would have added significant technical requirements including:

• Rules to determine whether debt elimination in spinoffs would be respected or treated as taxable sales of controlled corporation stock
• Safe harbors required to rebut the presumption of a tax avoidance purpose for retaining controlled corporation stock in Section 355 spinoffs
• Detailed documentation required for a “plan of reorganization” more specific than the general standards provided in Treasury Regulation Section 1.368-2(g)

The degree to which the proposed regulations would have required taxpayers to determine future decisions—which may be undeterminable in the early stages of the proposed transactions—could have hindered their ability to move forward with legitimate business transactions with confidence.

For instance, the proposed regulations would have required that taxpayers commit in advance to a tax-free or taxable treatment for disposition of retained controlled stock known as “pick a lane” restrictions. The proposed regulations also would have required that taxpayers commit to the transaction steps in their plan of reorganization.

Additionally, REG-116085-23 would have added multi-year reporting requirements for Section 355 spinoffs over a five-year period after the transaction to enhance the IRS’s ability to administer and enforce the Section 355 requirements.

These more rigorous and burdensome requirements in the proposed rules were a continuation of IRS guidance issued last year (Rev. Proc. 2024-24 and Notice 2024-38) that announced the agency’s concerns about potential abuses in spinoff transactions—and the requirement for expanded representations and greater disclosure about proposed transactions for IRS ruling purposes.

At the same time the IRS withdrew the proposed regulations, it issued Rev. Proc. 2025-30 to supersede the 2024 guidance and reinstate prior revenue procedures for obtaining rulings under Section 355 that were issued in 2017 and 2018 (Rev. Proc. 2017-52 and Rev. Proc. 2018-53).

Since the IRS has reinstated its former ruling practice, tax advisers and their clients once again can rely on existing statutes, regulations, case law, and administrative guidance. Most taxpayers will be able to plan their spinoffs and reorganizations without the added pressure of attempting to comply with additional requirements and documentation.

Nevertheless, the withdrawal of the proposed regulations shouldn’t be viewed as a sign that the government has abandoned its efforts to try to require more stringent rules for certain issues in corporate spinoffs and reorganizations.

The IRS may still develop more rigorous requirements in the future through perhaps a more targeted approach. Although the proposed regulations and the 2024 guidance have been withdrawn, tax advisers may still find it worthwhile to be familiar with them to be aware of the IRS’s concerns regarding certain problem areas.

Taxpayers should continue to keep detailed records and documentation to show how their proposed spinoffs or reorganizations satisfy the agency’s concerns about certain issues to withstand any possible IRS questions or examination.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jean R. Broderick is a retired tax attorney who spent more than 20 years in the corporate tax division of the IRS Office of Associate Chief Counsel.

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