Bulletin No. 2025–10
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HIGHLIGHTS
OF THIS ISSUE
Bulletin No. 2025–10
March 3, 2025
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
EMPLOYEE PLANS
INCOME TAX
Notice 2025-14, page 980.
REG-112261-24, page 983.
This notice sets forth updates on the corporate bond
monthly yield curve, the corresponding spot segment rates
for January 2025 used under § 417(e)(3)(D), the 24-month
average segment rates applicable for February 2025, and
the 30-year Treasury rates, as reflected by the application of
§ 430(h)(2)(C)(iv).
Finding Lists begin on page ii.
These proposed regulations provide guidance regarding
certain matters relating to corporate separations, incorporations, and reorganizations qualifying, in whole or in part, for
nonrecognition of gain or loss. These matters include distributions and retentions of controlled corporation stock, assumptions of liabilities by controlled corporations, exchanges of
property between distributing corporations and controlled
corporations, and distributions and transfers of consideration to distributing corporation shareholders and creditors.
The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and
enforce the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
March 3, 2025
Bulletin No. 2025–10
Part III
Update for Weighted
Average Interest Rates,
Yield Curves, and Segment
Rates
Notice 2025-14
This notice provides guidance on the
corporate bond monthly yield curve, the
corresponding spot segment rates used
under § 417(e)(3), and the 24-month average segment rates under § 430(h)(2) of the
Internal Revenue Code. In addition, this
notice provides guidance as to the interest rate on 30-year Treasury securities
under § 417(e)(3)(A)(ii)(II) as in effect for
plan years beginning before 2008 and the
30-year Treasury weighted average rate
under § 431(c)(6)(E)(ii)(I).
YIELD CURVE AND SEGMENT
RATES
Section 430 specifies the minimum
funding requirements that apply to single-employer plans (except for CSEC
plans under § 414(y)) pursuant to § 412.
Applicable Month
February 2025
Section 430(h)(2) specifies the interest rates that must be used to determine
a plan’s target normal cost and funding
target. Under this provision, present
value is generally determined using three
24-month average interest rates (“segment rates”), each of which applies to
cash flows during specified periods. To
the extent provided under § 430(h)(2)(C)
(iv), these segment rates are adjusted by
the applicable percentage of the 25-year
average segment rates for the period ending September 30 of the year preceding
the calendar year in which the plan year
begins.1 However, an election may be
made under § 430(h)(2)(D)(ii) to use the
monthly yield curve in place of the segment rates.
Section 1.430(h)(2)-1(d) provides
rules for determining the monthly corporate bond yield curve,2 and § 1.430(h)
(2)-1(c) provides rules for determining
the 24-month average corporate bond
segment rates used to compute the target
normal cost and the funding target. Consistent with the methodology specified in
§ 1.430(h)(2)-1(d), the monthly corporate
bond yield curve derived from January
2025 data is in Table 2025-1 at the end
of this notice. The spot first, second, and
third segment rates for the month of January 2025 are, respectively, 4.74, 5.55, and
5.92.
The 24-month average segment rates
determined under § 430(h)(2)(C)(i)
through (iii) must be adjusted pursuant to
§ 430(h)(2)(C)(iv) to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates. Those percentages are
95% and 105% for plan years beginning
in 2024 and 2025. For this purpose, any
25-year average segment rate that is less
than 5% is deemed to be 5%. The 25-year
average segment rates for plan years
beginning in 2024 and 2025 were published in Notice 2023-66, 2023-40 I.R.B.
992 and Notice 2024-67, 2024-41 I.R.B.
726, respectively.
24-MONTH AVERAGE CORPORATE
BOND SEGMENT RATES
The three 24-month average corporate
bond segment rates applicable for February 2025 without adjustment for the
25-year average segment rate limits are as
follows:
24-Month Average Segment Rates Without 25-Year Average Adjustment
First Segment
Second Segment
Third Segment
5.00
5.29
5.44
The adjusted 24-month average segment rates set forth in the chart below
reflect § 430(h)(2)(C)(iv) of the Code. The
24-month averages applicable for February 2025, adjusted to be within the applicable minimum and maximum percent-
ages of the corresponding 25-year average
segment rates in accordance with § 430(h)
(2)(C)(iv) of the Code, are as follows:
Adjusted 24-Month Average Segment Rates
For Plan Years
Beginning In
Applicable Month
First Segment
Second Segment
Third Segment
2024
February 2025
5.00
5.29
5.59
2025
February 2025
5.00
5.29
5.50
Pursuant to § 433(h)(3)(A), the third segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount
of the full funding limitation under § 433(c)(7)(C)).
2
For months before February 2024, the monthly corporate bond yield curve was determined in accordance with Notice 2007-81, 2007-44 I.R.B. 899. Section 1.430(h)(2)-1(d) generally adopts
the methodology for determining the monthly corporate bond yield curve under Notice 2007-81 but includes two enhancements to take into account subsequent changes in the bond market.
Those enhancements are described in the preamble to TD 9986 (89 FR 2127).
1
March 3, 2025
980
Bulletin No. 2025–10
30-YEAR TREASURY SECURITIES
INTEREST RATES
Section 431 specifies the minimum funding requirements that apply
to multiemployer plans pursuant to §
412. Section 431(c)(6)(B) specifies a
minimum amount for the full-funding
limitation described in § 431(c)(6)(A),
based on the plan’s current liability.
Section 431(c)(6)(E)(ii)(I) provides
that the interest rate used to calculate
current liability for this purpose must
be no more than 5 percent above and
no more than 10 percent below the
weighted average of the rates of interest
on 30-year Treasury securities during
the four-year period ending on the last
day before the beginning of the plan
year. Notice 88-73, 1988-2 C.B. 383,
provides guidelines for determining the
weighted average interest rate. The rate
of interest on 30-year Treasury securities for January 2025 is 4.85 percent.
The Service determined this rate as
the average of the daily determinations
of yield on the 30-year Treasury bond
maturing in November 2054. For plan
years beginning in February 2025, the
weighted average of the rates of interest
on 30-year Treasury securities and the
permissible range of rates used to calculate current liability are as follows:
For Plan Years Beginning In
Treasury Weighted Average Rates
30-Year Treasury Weighted Average
Permissible Range 90% to 105%
February 2025
3.88
3.49 to 4.07
under § 417(e)(3)(D) are segment rates
computed without regard to a 24-month
average. Section 1.417(e)-1(d)(3) provides guidelines for determining the min-
imum present value segment rates. Pursuant to that section, the minimum present
value segment rates determined for January 2025 are as follows:
MINIMUM PRESENT VALUE
SEGMENT RATES
In general, the applicable interest rates
Month
January 2025
Minimum Present Value Segment Rates
First Segment
Second Segment
4.74
5.55
DRAFTING INFORMATION
The principal author of this notice is
Tom Morgan of the Office of Associ-
Bulletin No. 2025–10
ate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes). However, other personnel from
the IRS participated in the development
981
Third Segment
5.92
of this guidance. For further information
regarding this notice, contact Mr. Morgan
at 202-317-6700 or Tony Montanaro at
626-927-1475 (not toll-free calls).
March 3, 2025
Table 2025-1
Monthly Yield Curve for January 2025
Derived from January 2025 Data
Maturity
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
19.5
20.0
Yield
4.53
4.58
4.63
4.67
4.72
4.76
4.81
4.86
4.91
4.96
5.01
5.07
5.12
5.17
5.22
5.27
5.32
5.36
5.40
5.44
5.48
5.51
5.54
5.57
5.60
5.63
5.65
5.68
5.70
5.71
5.73
5.75
5.76
5.78
5.79
5.80
5.81
5.82
5.83
5.83
March 3, 2025
Maturity
20.5
21.0
21.5
22.0
22.5
23.0
23.5
24.0
24.5
25.0
25.5
26.0
26.5
27.0
27.5
28.0
28.5
29.0
29.5
30.0
30.5
31.0
31.5
32.0
32.5
33.0
33.5
34.0
34.5
35.0
35.5
36.0
36.5
37.0
37.5
38.0
38.5
39.0
39.5
40.0
Yield
5.84
5.84
5.85
5.85
5.85
5.86
5.86
5.86
5.86
5.86
5.86
5.86
5.86
5.87
5.87
5.87
5.87
5.87
5.88
5.88
5.88
5.89
5.89
5.89
5.90
5.90
5.90
5.90
5.91
5.91
5.91
5.91
5.92
5.92
5.92
5.92
5.93
5.93
5.93
5.93
Maturity
40.5
41.0
41.5
42.0
42.5
43.0
43.5
44.0
44.5
45.0
45.5
46.0
46.5
47.0
47.5
48.0
48.5
49.0
49.5
50.0
50.5
51.0
51.5
52.0
52.5
53.0
53.5
54.0
54.5
55.0
55.5
56.0
56.5
57.0
57.5
58.0
58.5
59.0
59.5
60.0
Yield
5.93
5.94
5.94
5.94
5.94
5.94
5.95
5.95
5.95
5.95
5.95
5.95
5.95
5.96
5.96
5.96
5.96
5.96
5.96
5.96
5.97
5.97
5.97
5.97
5.97
5.97
5.97
5.97
5.98
5.98
5.98
5.98
5.98
5.98
5.98
5.98
5.98
5.98
5.99
5.99
982
Maturity
60.5
61.0
61.5
62.0
62.5
63.0
63.5
64.0
64.5
65.0
65.5
66.0
66.5
67.0
67.5
68.0
68.5
69.0
69.5
70.0
70.5
71.0
71.5
72.0
72.5
73.0
73.5
74.0
74.5
75.0
75.5
76.0
76.5
77.0
77.5
78.0
78.5
79.0
79.5
80.0
Yield
5.99
5.99
5.99
5.99
5.99
5.99
5.99
5.99
5.99
5.99
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.01
6.01
6.01
6.01
6.01
6.01
6.01
6.01
6.01
6.01
6.01
6.01
6.01
6.01
6.01
Maturity
80.5
81.0
81.5
82.0
82.5
83.0
83.5
84.0
84.5
85.0
85.5
86.0
86.5
87.0
87.5
88.0
88.5
89.0
89.5
90.0
90.5
91.0
91.5
92.0
92.5
93.0
93.5
94.0
94.5
95.0
95.5
96.0
96.5
97.0
97.5
98.0
98.5
99.0
99.5
100.0
Yield
6.01
6.01
6.01
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.02
6.03
6.03
6.03
6.03
6.03
6.03
6.03
6.03
6.03
6.03
6.03
6.03
6.03
Bulletin No. 2025–10
Part IV
Notice of Proposed
Rulemaking
Guidance Regarding
Certain Matters Relating
to Nonrecognition
of Gain or Loss in
Corporate Separations,
Incorporations, and
Reorganizations
REG-112261-24
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations regarding certain
matters relating to corporate separations,
incorporations, and reorganizations qualifying, in whole or in part, for nonrecognition of gain or loss. These matters include
distributions and retentions of controlled
corporation stock, assumptions of liabilities by controlled corporations, exchanges
of property between distributing corporations and controlled corporations, and distributions and transfers of consideration to
distributing corporation shareholders and
creditors. The proposed regulations would
affect corporations and their shareholders
and security holders. Proposed regulations
modifying the reporting requirements for
corporate separations are published elsewhere in the Proposed Rules section of
this issue of the Federal Register.
DATES: Written or electronic comments
and requests for a public hearing must be
received by March 17, 2025.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically via the Federal eRulemaking Portal at https://www.regulations.gov
(indicate IRS and REG-112261-24) by
following the online instructions for submitting comments. Requests for a public
Bulletin No. 2025–10
hearing must be submitted as prescribed
in the “Comments and Requests for a
Public Hearing” section. Once submitted
to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury
Department) and the IRS will publish for
public availability any comments to the
IRS’s public docket. Send paper submissions to CC:PA:01:PR (REG-112261-24),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
Relating to the treatment of transfers to
creditors, the second sentence of section
361(b)(3) states that “[t]he Secretary may
prescribe such regulations as may be necessary to prevent avoidance of tax through
abuse of the preceding sentence or [section 361](c)(3).” Finally, section 7805(a)
authorizes the Secretary to “prescribe
all needful rules and regulations for the
enforcement of [the Code], including all
rules and regulations as may be necessary
by reason of any alteration of law in relation to internal revenue.”
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Justin R. Du Mouchel at
(202) 317-6975 (not a toll-free number);
concerning submissions of comments and
requests for a hearing, contact the Publications and Regulations branch at (202) 3176901 (not a toll-free number) or by email
to publichearings@irs.gov (preferred).
Background
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed regulations under sections 355, 357, 361, and
368 of the Internal Revenue Code (Code)
that would amend 26 CFR part 1 (Income
Tax Regulations) by providing guidance
regarding certain matters relating to corporate separations, reorganizations, and
incorporations qualifying, in whole or in
part, for nonrecognition of gain or loss.
The proposed additions and amendments
to the Income Tax Regulations are issued
pursuant to the express delegations of
authority to the Secretary of the Treasury
or her delegate (Secretary) provided under
sections 337(d), 361(b)(3), and 7805(a) of
the Code.
Section 337(d) states, in part, that “[t]
he Secretary shall prescribe such regulations as may be necessary or appropriate
to carry out the purposes of the amendments made by subtitle D of title VI of
the Tax Reform Act of 1986,” including
regulations “to ensure that such purposes
may not be circumvented through the use
of any provision of law or regulations
(including the consolidated return regulations and part III of this subchapter).”
983
I. Overview of Section 355
A. Section 355 transactions
1. In General
If a transaction satisfies the requirements of section 355 (section 355 transaction) and other relevant provisions of
the Code and Income Tax Regulations, the
transaction may occur without recognition
of any gain or loss to the distributing corporation (within the meaning of section
355(a)(1)(A)) and without recognition of
any gain or loss to, or the inclusion of any
amount in the income of, the shareholders or security holders of the distributing
corporation. A section 355 transaction
may take one of the following forms: (i) a
spin-off, which is a pro rata distribution of
stock of the controlled corporation (within
the meaning of section 355(a)(1)(A)) to
shareholders of the distributing corporation; (ii) a split-off, which is a distribution of stock of the controlled corporation
to some (but not all) shareholders of the
distributing corporation in exchange for
some or all of their stock of the distributing corporation; or (iii) a split-up, which
is a liquidating distribution in which the
distributing corporation distributes to its
shareholders, either pro rata or non-pro
rata, the stock of more than one controlled
corporation. As discussed in parts I.A.3
and I.A.4 of this Background, a section
355 transaction may occur either as a
“section 355(c) distribution” or as part of
a “divisive reorganization.”
March 3, 2025
2. General Utilities Repeal
3. Section 355(c) Distributions
In General Utilities & Operating
Co. v. Helvering, 296 U.S. 200 (1935),
the Supreme Court of the United States
(Supreme Court) held that corporations
generally could distribute appreciated
property to their shareholders without
the recognition of any corporate-level
gain (General Utilities doctrine). Congress repealed the General Utilities doctrine beginning with legislation in 1969
and culminating with the Tax Reform
Act of 1986 (Public Law 99-514,
100 Stat. 2085), which, among other
changes, amended sections 311, 336,
and 337 of the Code (originally enacted
in the Internal Revenue Code of 1954
(1954 Code) (Public Law 83-591, 68A
Stat. 3) to apply gain and loss recognition to non-liquidating and liquidating
distributions, respectively.
Notwithstanding the repeal of the
General Utilities doctrine, section 355
allows a distributing corporation to distribute the stock and securities of a subsidiary (that is, a controlled corporation)
to its shareholders without imposing a
corporate-level tax on the distribution.
Accordingly, as observed by the United
States Tax Court (Tax Court), “more
attention has been directed toward [s]
ection 355 today than was ever the case
in the past [because] it is one of the
few (some might say the only) viable
opportunity to escape the repeal of the
General Utilities doctrine.” McLaulin v.
Comm’r, 115 T.C. 255, 266 (2000).
In connection with the repeal of the
General Utilities doctrine, Congress
authorized the Treasury Department to
promulgate regulations to carry out the
purposes of that repeal, including by
preventing its avoidance. Specifically,
section 337(d) directs the Secretary to
prescribe regulations that are necessary
or appropriate to carry out the purposes
of General Utilities repeal, including
“regulations to ensure that such purposes may not be circumvented through
the use of any provision of law or regulations (including … part III of this
subchapter).” Section 355, among other
corporate organization and reorganization provisions, is included in part III of
subchapter C of chapter 1 of the Code
(subchapter C).
The general rule set forth in section
355(c)(1) provides that no gain or loss is
recognized to a distributing corporation
upon any distribution to which section
355 (or so much of section 356 of the
Code as relates to section 355) applies and
that is not made pursuant to a plan of reorganization (section 355(c) distribution).
However, if the distributing corporation
distributes any property other than stock
or securities of a controlled corporation
(that is, any property other than qualified
property, as defined in section 355(c)(2)
(B)) in a section 355(c) distribution, and
if the fair market value of that property
exceeds the distributing corporation’s
adjusted basis in that property, then section 355(c)(2)(A) requires the distributing
corporation to recognize gain as if the
property were sold to the distributee at its
fair market value. This Federal income tax
treatment reflects the status of section 355
as a narrow exception to General Utilities
repeal. Compare section 311(b).
Because a section 355(c) distribution is
not made pursuant to a plan of reorganization, a section 355(c) distribution (unlike
a divisive reorganization) does not permit the distributing corporation to satisfy
distributing corporation debt constituting
securities with property other than qualified property. In other words, because a
section 355(c) distribution does not qualify as a reorganization under the definitional provisions of section 368(a)(1), the
operative provision set forth in section
361(b)(3) is not applicable. Therefore, in
a section 355(c) distribution, a distributing corporation cannot transfer any property other than qualified property to its
creditors (including its security holders)
without recognizing gain or loss on that
transfer.
March 3, 2025
4. Divisive Reorganizations
A distributing corporation may carry
out a section 355 transaction as part of a
transaction that qualifies as a reorganization under section 368(a)(1)(D) or (G) and
to which section 354 of the Code (or so
much of section 356 as relates to section
354) does not apply (divisive reorganization). Section 368(a)(1)(D) provides, in
part, that a reorganization includes a trans-
984
fer by the distributing corporation of all or
a part of its assets to a controlled corporation if, immediately after the transfer, the
distributing corporation or one or more of
its shareholders (including persons who
were shareholders immediately before the
transfer) are in control (within the meaning of section 368(c)) of the controlled
corporation; but only if, pursuant to the
plan of reorganization, stock or securities
of the controlled corporation are distributed in a transaction that qualifies under
section 355 or 356.
Under section 368(a)(1)(G), a transfer
by a distributing corporation of all or a
part of its assets to a controlled corporation in a case under title 11 of the United
States Code or a similar case described in
section 368(a)(3)(A)(ii) (title 11 or similar case) also is a divisive reorganization
if, pursuant to the plan of reorganization,
stock or securities of the controlled corporation are distributed in a transaction that
qualifies under section 355 (or so much
of section 356 as relates to section 355).
Section 368(a)(3)(C) provides an ordering rule under which a transaction that
would qualify both under section 368(a)
(1)(G) and, among other provisions, under
section 368(a)(1)(D) or section 351 of the
Code, is treated as qualifying solely under
section 368(a)(1)(G) for all purposes of
subchapter C other than section 357(c)(1).
If a transaction satisfies the definitional requirements of section 368(a)(1)
(D) or (G), the distributing corporation
may qualify for nonrecognition treatment
for (i) its exchange of property with the
controlled corporation, (ii) its distribution
of certain property to its shareholders, and
(iii) its transfer of certain property to its
creditors. Under section 357(a), the controlled corporation generally may assume
distributing corporation liabilities without
the distributing corporation recognizing
gain or loss, except as provided in (i) section 357(b) (if the principal purpose for
the liability assumption is to avoid Federal
income tax or is not a bona fide business
purpose), and (ii) section 357(c) (if the
sum of the amount of liabilities assumed
by the controlled corporation is greater
than the total adjusted basis of assets
transferred in the exchange).
Under section 361(a), the distributing
corporation recognizes no gain or loss if
it exchanges property pursuant to the plan
Bulletin No. 2025–10
of reorganization solely for stock and
securities in the controlled corporation.
Under section 361(b)(1)(A), if section
361(a) would apply to an exchange but
for the fact that the property received by
the distributing corporation also includes
money or other property, no gain will be
recognized by the distributing corporation
if it distributes the money or other property pursuant to the plan of reorganization.
Under section 361(b)(3), the distributing
corporation also generally may transfer
that money or other property in connection with the reorganization to its creditors in satisfaction of distributing corporation debt held by those creditors, without
recognition of gain or loss under section
361(b)(1)(A) to the extent the sum of the
money and the fair market value of the
other property transferred to such creditors does not exceed the adjusted bases
of such assets transferred (reduced by the
amount of liabilities assumed within the
meaning of section 357(c)).
Under section 361(c)(1), the distributing corporation recognizes neither gain
nor loss on its distribution of qualified
property to its shareholders pursuant to the
plan of reorganization. For this purpose,
section 361(c)(2)(B) defines “qualified
property” as any stock in, right to acquire
stock in, or obligation of (i) the distributing corporation, or (ii) another corporation that is a party to the reorganization
(for example, the controlled corporation)
if such stock, stock right, or obligation is
received by the distributing corporation in
the exchange. In connection with the reorganization, the distributing corporation
also generally may transfer that qualified
property to its creditors in satisfaction of
distributing corporation debt held by those
creditors, without recognition of gain or
loss under section 361(c).
For purposes of this preamble, the
term “section 361 consideration” means,
as described in section 361(a) and (b),
the consideration received by a target
corporation from an acquiring corporation in exchange for property transferred
by the target corporation to the acquiring
corporation pursuant to a plan of reorganization. Accordingly, in the context of a
divisive reorganization, the term “section
361 consideration” means, for purposes of
this preamble, the consideration received
by the distributing corporation from the
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controlled corporation in exchange for
property transferred by the distributing
corporation to the controlled corporation
pursuant to the plan of reorganization.
B. General Federal income tax
consequences to distributing corporation
shareholders
Section 355(a)(1) provides that, if a
distributing corporation distributes to its
shareholders with respect to its stock,
or distributes to its security holders in
exchange for their securities, solely stock
or securities of a controlled corporation,
and if certain other requirements are satisfied, then no gain or loss is recognized
by, and no amount is included in the
income of, the distributing corporation’s
shareholders or security holders upon the
receipt of stock or securities of the controlled corporation. However, if any property is received that is not permitted to
be received under section 355(a)(1), then
section 356 (and not section 355) applies
to the receipt of such property as provided
in sections 355(a)(4)(A) and 356.
C. General requirements for qualification
under section 355
To qualify as a section 355 transaction under section 355(a)(1), a transaction
must satisfy the following requirements.
First, under section 355(a)(1)(A), the distributing corporation must distribute stock
or securities of a controlled corporation to
a shareholder with respect to distributing
corporation stock, or to a security holder in
exchange for its securities. Second, under
section 355(a)(1)(B), the transaction may
not be used principally as a device for the
distribution of the earnings and profits of
the distributing corporation, the controlled
corporation, or both. Third, under section
355(a)(1)(C), the distributing corporation
and each controlled corporation must satisfy the active trade or business requirements of section 355(b).
With particular regard to these proposed
regulations, section 355(a)(1) imposes a
fourth requirement regarding distributions
of controlled corporation stock and securities. Specifically, section 355(a)(1)(D)
requires that, “as part of the distribution,”
the distributing corporation must distribute either (i) all stock and securities in the
985
controlled corporation held by the distributing corporation immediately before the
distribution, or (ii) an amount of stock
in the controlled corporation constituting
“control” within the meaning of section
368(c) (control distribution). In the case
of distributions of less than 100 percent of
stock in the controlled corporation, it must
be established to the satisfaction of the
Secretary that the retention by the distributing corporation of stock (or stock and
securities) of the controlled corporation
was not pursuant to a plan having as one
of its principal purposes the avoidance of
Federal income tax. For purposes of this
preamble, such a retention of controlled
corporation stock (or stock and securities)
by the distributing corporation is referred
to as a “retention,” and the requirements
in section 355(a)(1)(D) are referred to
collectively as the “distribution requirement.”
D. The distribution requirement and
retentions
1. Overview
As described in part I.C of this Background, the distribution requirement
consists of two alternative rules. Under
section 355(a)(1)(D)(i), the distributing
corporation will satisfy the distribution
requirement if it distributes all stock and
securities in the controlled corporation
held by the distributing corporation immediately before the distribution. Alternatively, under section 355(a)(1)(D)(ii),
the distributing corporation will satisfy
the distribution requirement if it satisfies
the following two discrete requirements:
(i) the distributing corporation distributes
an amount of controlled corporation stock
sufficient to qualify as a control distribution; and (ii) the distributing corporation
establishes to the satisfaction of the Secretary that the retention of any controlled
corporation stock or securities was not
pursuant to a plan having as one of its
principal purposes the avoidance of Federal income tax.
2. Requirements for Control Distribution;
Commissioner v. Gordon
Section 355(a)(1)(D) provides that, if a
distributing corporation does not distribute
March 3, 2025
all its stock and securities in the controlled
corporation, the distributing corporation
must make a control distribution as “part of
the distribution.” However, section 355(a)
(1)(D) does not expressly impose a temporal requirement for making a control distribution. Accordingly, section 355(a)(1)(D)
could be read as permitting a control distribution to occur over multiple taxable years
of the distributing corporation.
In Commissioner v. Gordon, 391 U.S.
83 (1968), the Supreme Court considered
the application of the distribution requirement to distributions by Pacific Telephone
and Telegraph Company (Pacific) of stock
of a newly formed, wholly owned subsidiary (Northwest) over multiple taxable years
of Pacific. American Telephone and Telegraph Company (AT&T), which owned
approximately 90 percent of the stock of
Pacific, decided to separate Pacific into
two separate companies and, to effectuate
that separation, caused Pacific to engage in
the following transactions. First, pursuant
to a plan of reorganization submitted to its
shareholders, Pacific issued to its shareholders (including the taxpayer) transferable rights to acquire approximately
57 percent of the stock of Northwest on
September 29, 1961. That plan of reorganization also provided that Pacific had an
“expectation” that the remaining 43 percent of Northwest stock would be offered
to Pacific’s shareholders. Among other reasons for not distributing 100 percent of its
Northwest stock, Pacific desired to achieve
an appropriate capital structure and avoid
potential State regulatory issues. On June
12, 1963, Pacific issued to its shareholders
transferable rights to acquire the remaining
43 percent of Northwest stock. The taxpayer contended that the 1961 and 1963
distributions collectively qualified under
section 355.
The Court concluded that neither distribution qualified under section 355,
notwithstanding Pacific’s “expectation”
regarding the second distribution and its
purposes for making multiple distributions.
Gordon, 391 U.S. at 98. In its analysis, the
Court expressed a general principle of Federal income tax that, “[a]bsent other specific directions from Congress, Code provisions must be interpreted so as to conform
to the basic premise of annual tax accounting.” Id. at 96. With regard to the distribution requirement, the Court noted that, if
March 3, 2025
an initial transfer of less than a controlling
interest in the controlled corporation is to
be treated for Federal income tax purposes
as a mere first step in the divestiture of
control, “it must at least be identifiable as
such at the time it is made.” Id. The Court
further stated that the requirement that the
character of a transaction be determinable
“does not mean that the entire divestiture
must necessarily occur within a single tax
year,” but it does mean that, if one transaction is to be characterized as a “first step,”
then “there must be a binding commitment
to take the later steps.” Id. Of particular
relevance to both the IRS’s administrative function and the objective of these
proposed regulations to provide increased
certainty (see part IV of this Background),
the Court expressed that it would be wholly
inconsistent with the annual accounting
premise to hold that the essential character
of a transaction, and its Federal income tax
impact, should remain “not only undeterminable but unfixed for an indefinite and
unlimited period in the future, awaiting
events that might or might not happen.” Id.
The Court found that the facts and circumstances of Pacific’s staggered distributions of Northwest stock, as reflected in
Pacific’s plan of reorganization, failed the
binding-commitment standard set forth by
the Court. Id. at 97. Although Pacific’s plan
of reorganization evidenced an expectation to distribute its remaining Northwest
stock within a three-year period following its initial 57-percent distribution, the
Court emphasized that “there is obviously
no promise to sell any particular amount
of stock, at any particular time, at any particular price” set forth in that document.
Id. Instead, Pacific’s plan of reorganization merely stated that such subsequent
distributions would occur “[a]t a time or
times related to its (Pacific’s) need for
new capital.” Id. Consequently, the Court
reasoned that, “[i]f the 1961 distribution
played a part in what later proved to be a
total divestiture of the Northwest stock, it
was not, in 1961, either a total divestiture
or a step in a plan of total divestiture.” Id.
at 97-98.
3. Retentions
Section 1.355-2(e), which reiterates the
distribution requirement, provides that the
corporate business purpose or purposes
986
for the distribution ordinarily will require
the distribution of all stock and securities of the controlled corporation. If the
distributing corporation retains any controlled corporation stock or securities, and
if it is not established to the satisfaction
of the Commissioner that the retention
was not pursuant to a plan having as one
of its principal purposes the avoidance of
Federal income tax, section 355 does not
apply to the entire distribution (that is, the
entire distribution fails to qualify as a section 355 transaction).
In Rev. Rul. 75-321, 1975-2 C.B. 123,
the IRS addressed whether the retention
by a widely held and publicly traded
corporation (Distributing) of stock in its
banking subsidiary (Controlled) complied with section 355(a)(1)(D)(ii) (that
is, whether the retention was pursuant to
a plan having as one of its principal purposes the avoidance of Federal income
tax). In this revenue ruling, Distributing
distributed 95 percent of the stock of
Controlled to Distributing’s shareholders
to comply with Federal banking laws in
a transaction that otherwise satisfied the
requirements of section 355. Distributing
retained 5 percent of Controlled’s stock
to meet collateral requirements for shortterm financing. The IRS concluded that
the retention was not pursuant to a plan
having as one of its principal purposes the
avoidance of Federal income tax, because
(i) a genuine separation of the corporate
entities was effectuated, (ii) retention of
a 5-percent stock interest in Controlled
would not enable Distributing to maintain
practical control over Controlled following the distribution, and (iii) a sufficient
corporate business purpose existed for
Distributing’s retention of the 5-percent
interest in Controlled. See also Rev. Rul.
75-469, 1975-2 C.B. 126 (similar ruling
with respect to a distributing corporation’s
retention of controlled corporation securities to serve as collateral for a bank loan to
the distributing corporation).
Similarly, in G.C.M. 32136 (Oct. 23,
1961), the IRS considered whether the
retention by a distributing corporation
(Distributing) of stock in a newly formed
controlled corporation (Controlled) was
pursuant to a plan having as one of its
principal purposes the avoidance of Federal income tax. Under the facts described
in that memorandum, Distributing distrib-
Bulletin No. 2025–10
uted 80 percent of Controlled stock to Distributing’s shareholders to comply with
State banking laws in a transaction that
otherwise satisfied the requirements of
section 355, and Distributing retained 20
percent of Controlled stock. The avowed
purpose for the retention was to permit a
controlling group of Distributing’s shareholders to maintain effective control over
Controlled. In concluding that Distributing had a Federal income tax avoidance
purpose for the retention, the IRS determined that the requirement that a retention
be specially justified “seems most likely
to be intended to insure a genuine separation.” See also G.C.M. 32380 (Aug. 24,
1962) (reiterating that view).
II. Definitional and Operative Provisions
Regarding Reorganizations
A. Overview
Subchapter C generally includes (i)
definitional provisions, including under
section 368, and (ii) operative provisions,
including under sections 354, 356, 357,
and 361. See, for example, Microdot, Inc.
v. United States, 728 F.2d 593, 598 (2d
Cir. 1984) (“Section 368(a)(1) is a definitional section, wholly distinct from [section] 354.”). As described in greater detail
in part II.B of this Background, section
368(a)(1) defines the term “reorganization” as seven specifically described types
of transactions under subparagraphs (A)
through (G). Qualification of a transaction
(or series of transactions) for a definitional
provision under section 368(a)(1) is the
sole manner by which the application of
an operative provision relating to a reorganization can occur. This statutory structure
ensures that the tax-advantaged treatment
provided by such operative provisions
applies exclusively to those transactions
that satisfy all statutory, regulatory, and
judicial requirements for a particular
definitional provision (for example, the
continuity of interest and continuity of
business enterprise requirements). As discussed in greater detail in part III of this
Background, a primary purpose of the
“plan of reorganization” requirement is to
ensure that a transaction to which an operative provision is purported to apply is
sufficiently connected to a reorganization
defined in section 368(a)(1).
Bulletin No. 2025–10
B. Section 368: Definitions relating to
corporate reorganizations
Section 368(a)(1) is the primary definitional provision of subchapter C with
regard to reorganizations. For purposes of
parts I through III of subchapter C, section
368(a)(1) defines the term “reorganization” to mean any of the seven types of
transactions described in section 368(a)(1)
(A) through (G), including triangular reorganizations (as defined in §1.358-6(b)(2))
that are variants of such transactions and
divisive reorganizations described in section 368(a)(1)(D) and (G). Section 368(a)
(2) provides special rules that support the
definitional provisions set forth in section
368(a)(1), and section 368(a)(3) similarly
provides additional rules relating to title
11 or similar cases.
Section 368(b) and (c) also contains
definitional provisions. For purposes of
part III of subchapter C, section 368(b)
generally defines the term “a party to a
reorganization” to include (i) a corporation resulting from a reorganization, and
(ii) both corporations, in the case of a reorganization resulting from the acquisition
by one corporation of stock or properties
of another. Section 368(b) defines other
corporations as parties to a transaction
depending on the type of transaction. See
also §1.368-2(f).
For purposes of subchapter C (other
than sections 304 and 385 of the Code),
section 368(c) defines the term “control” to mean the ownership of (i) stock
possessing at least 80 percent of the total
combined voting power of all classes of
stock entitled to vote, and (ii) at least 80
percent of the total number of shares of
all other classes of stock of the corporation. See also Rev. Rul. 59-259, 1959-2
C.B. 115 (requiring ownership of (i) stock
possessing at least 80 percent of the total
combined voting power of all classes of
voting stock, and (ii) at least 80 percent of
the total number of shares of each class of
outstanding non-voting stock).
C. Section 357: Assumptions of liabilities
by transferee corporations
1. Overview
Section 357 is an operative provision
that facilitates exchanges involving the
987
assumption of liabilities by generally preventing such assumptions from (i) being
treated as the receipt of money or other
property in an exchange, and (ii) disqualifying the exchange for nonrecognition
treatment. See section 357(a); see also
the anti-abuse rule in section 357(b) and
the adjusted basis limitation in section
357(c). Section 357 reflects Congress’s
view that, “[i]n typical transactions changing the form or entity of a business it is
not customary to liquidate the liabilities
of the business and such liabilities are
almost invariably assumed by the corporation which continues the business,” but
that nonrecognition treatment in section
357 should be limited solely to “bona fide
transactions of this type.” H.R. Rep. No.
76-855, at 19 (1939) (Conf. Rep.).
2. Response to United States v. Hendler
The original predecessor to current section 357, section 112(k) of the
Internal Revenue Code of 1939 (1939
Code), was enacted by Congress as section 213(a) of the Revenue Act of 1939
(Public Law 76-155, 53 Stat. 862, 870)
to address the adverse consequences of
judicial and taxpayer interpretations of
the Supreme Court’s decision in United
States v. Hendler, 303 U.S. 564 (1938).
See S. Rep. No. 76-648, at 3 (1939) (referencing the Hendler opinion by name).
In Hendler, the Court examined the Federal income tax consequences of a transaction that qualified as a reorganization
under section 112 of the Revenue Act of
1928 (Public Law 70-562, 45 Stat. 791).
As part of the reorganization, the transferee corporation (Borden Company)
assumed and paid the indebtedness of
the transferor (Hendler Company). The
Court regarded the assumption and payment in substance as though the Borden
Company had made the payment directly
to the Hendler Company. Hendler, 303
U.S. at 566. Based on that treatment, the
Court viewed the Hendler Company in
substance as receiving money or other
property that it failed to distribute to its
shareholders (because that payment was
made to a Hendler Company creditor,
albeit in form by the Borden Company).
Id. Accordingly, the Court held that the
Hendler Company recognized gain in the
amount of that payment. Id. at 567.
March 3, 2025
Following the Hendler decision, Congress observed that the Court’s analysis
had “been broadly interpreted to require
that, if a taxpayer’s liabilities are assumed
by another party in what is otherwise a
tax-free reorganization, gain is recognized
to the extent of the assumption.” H.R. Rep.
No. 76-855, at 19 (emphasis added). In
other words, as successfully argued by the
IRS in cases following Hendler, a transferee corporation’s lack of payment of the
liabilities was immaterial for the Hendler
analysis to apply to treat the transferee corporation’s assumption of a transferor’s liabilities as a cash payment to the transferor.
See Haass v. Comm’r, 37 B.T.A. 948, 955
(1938). The IRS advocated for this broad
interpretation in response to an aggressive position taken by taxpayers, who
relied on the Hendler decision to argue
that the basis of stock they had received
in prior exchanges should be increased
by the amount of gain that should have
been recognized and taxed by reason of
the transferee corporation’s assumption of
liabilities, even though that gain had not
actually been taxed by the IRS (and that
tax had not been paid).
However, this broad interpretation
jeopardized the nonrecognition treatment
of bona fide assumptions carried out as
part of reorganizations that Congress originally had intended to facilitate through
the enactment of the reorganization provisions. See H.R. Rep. No. 76-855, at 19
(“Your committee therefore believes that
such a broad interpretation as is indicated
above will largely nullify the provisions of
existing law which postpone the recognition of gain in such cases.”).
3. Enactment of Section 357(a) and (b)
Congress enacted section 112(k) of the
1939 Code to balance (i) the need to facilitate the bona fide assumption of liabilities
in transactions that satisfy the definitional
requirements of a reorganization, with (ii)
the need to minimize abusive tax planning through such assumptions (including
through transitory transactions). Accordingly, section 112(k) of the 1939 Code
provided for both (i) the general nonrecognition treatment adopted by section
357(a) of the 1954 Code and set forth in
current section 357(a), and (ii) a supporting anti-abuse provision adopted by sec-
March 3, 2025
tion 357(b) of the 1954 Code and set forth
in current section 357(b).
Under section 357(b)(1), the total
amount of liabilities assumed in an
assumption described in section 357(a)
is treated for purposes of section 351 or
361 (as applicable) as money received by
the transferor in the exchange if it appears
that the principal purpose of the transferor
with respect to the assumption was (i) to
avoid Federal income tax on the exchange,
or (ii) not a bona fide business purpose. In
effect, section 357(b) can apply to a transaction to preserve the treatment required
by Hendler for such abusive assumptions.
In making the determination required
by section 357(b)(1), the nature of the
liabilities and the circumstances under
which the arrangement for the assumption was made are taken into account. In
addition, section 357(b)(2) provides that,
in any suit or proceeding in which the burden is on the transferor to prove that the
liability assumption should not be treated
as money received in the exchange, the
transferor must meet that burden by a
clear preponderance of the evidence.
4. Application of Section 357(b) to
Divisive Reorganizations
In Rev. Rul. 79-258, 1979-2 C.B.
143, the IRS considered the application
of section 357(b) to the assumption by
a newly formed transferee corporation
(Controlled) of a liability incurred by the
transferor (Distributing) in close temporal proximity to, and in anticipation of,
a transaction that qualified as a divisive
reorganization under sections 355 and
368(a)(1)(D). One of the Distributing
liabilities that Distributing desired Controlled to assume was a $4,000x portion
of a $25,000x long-term debt owed to an
insurance company that Distributing had
incurred in connection with the business
transferred to Controlled, and that had
been outstanding for several years before
the divisive reorganization (historical
Distributing debt). However, Distributing
could not apportion the historical Distributing debt between it and Controlled
because the insurance company refused to
relieve Distributing of its primary liability
for repayment.
Therefore, in exchange for $4,000x in
loan proceeds, Distributing issued a new
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long-term note for which Distributing was
primarily liable to a bank (new Distributing
debt). Distributing then caused Controlled
to assume the new Distributing debt in the
divisive reorganization, and Distributing
was relieved of its primary repayment liability (Controlled assumption). The proceeds of the new Distributing debt were
used by Distributing to pay off $4,000x of
the historical Distributing debt. Distributing then distributed the Controlled stock to
Distributing’s shareholders.
From Distributing’s standpoint, having
Controlled assume the new Distributing
debt was desirable because, absent Controlled’s assumption of this debt, Distributing’s assets would be reduced by the
value of the Controlled stock (which was
distributed to Distributing’s shareholders),
but Distributing’s liabilities would not be
reduced by the $4,000x liability attributable
to the business transferred to Controlled.
As a result, Distributing’s ability to borrow (and its ability to pay off the portion of
the historical Distributing debt attributable
to the business transferred to Controlled)
could be adversely affected if Controlled
did not assume the new Distributing debt.
To determine the potential application of section 357(b), the IRS engaged
in a detailed analysis of the facts and circumstances relating to the issuance of the
new Distributing debt and the Controlled
assumption. First, the IRS observed that
Distributing used the proceeds of the new
Distributing debt to satisfy $4,000x of the
historical Distributing debt, thereby placing Distributing and Controlled in the same
net economic position after the Controlled
assumption as each corporation would
have been in had Controlled been able
to assume $4,000x of the historical Distributing debt. Second, the IRS observed
that the incurrence of the new Distributing
debt and the Controlled assumption not
only were necessary to effectuate the divisive reorganization, but also were a normal adjunct to the divisive reorganization
given the non-assumable nature of part of
the historical Distributing debt. Third, the
IRS observed that Distributing’s incurrence of the new Distributing debt and
the Controlled assumption merely were
in substitution for Controlled’s assumption of a pro rata portion of the historical
Distributing debt that Controlled could
not assume. In that regard, because the
Bulletin No. 2025–10
divisive reorganization resulted in Controlled assuming a liability in an amount
that properly related to its business operations and would be satisfied from earnings
generated by those operations, the IRS
viewed the incurrence of the new Distributing debt and the Controlled assumption
as consistent with sound business practice. Accordingly, the IRS concluded that
tax avoidance was not a principal purpose
of the transaction and, therefore, that section 357(b) did not apply to the Controlled
assumption.
Additionally, the IRS determined that
the acquisition of the new Distributing
debt and the Controlled assumption would
not be viewed for Federal income tax purposes as if Controlled had obtained the
new Distributing debt and transferred the
proceeds to Distributing. In this regard,
the IRS found it immaterial that Distributing and Controlled may have been able
to arrange their affairs in another manner,
because the taxpayer satisfied its burden
of proof as required under section 357(b).
See Simpson v. Comm’r, 43 T.C. 900, 916
(1965) (stating that the application of
section 357(b) is limited to transactions
“arranged primarily so that the assumption of the [transferor]’s liability in the
transaction itself results in tax avoidance
for the transferor, or has no bona fide business purpose,” and that section 357(b)
was not intended to require recognition of
gain on bona fide transactions designed to
rearrange one’s business affairs in such a
manner as to minimize taxes in the future,
consistent with existing provisions of the
law); ISC Industries, Inc. v. Comm’r, T.C.
Memo. 1971-283 (concluding that petitioner’s principal purpose in having a new
subsidiary assume liabilities placed upon
the assets transferred to the subsidiary was
not to avoid Federal income taxes on the
transfer, but rather was to protect lines of
credit for petitioner’s finance business,
and finding it immaterial that petitioner
may have been able to arrange its affairs
in another manner, or in a manner that
produced more tax revenue, because section 357(b) clearly looks to the taxpayer’s
motives for doing what actually occurred).
5. Application of Section 357(c)
In the case of an exchange to which section 351 applies (section 351 exchange) or
Bulletin No. 2025–10
to which section 361 applies by reason
of a divisive reorganization that qualifies
under sections 355 and 368(a)(1)(D), section 357(c)(1) generally provides that, if
the sum of the amount of the transferor’s
liabilities assumed by the transferee corporation exceeds the total adjusted basis of
the assets transferred by the transferor to
the transferee corporation in the exchange,
then such excess is considered as a gain
from the sale or exchange of a capital
asset or of property that is not a capital
asset, as the case may be. See also section
368(a)(3)(C) (providing that a reorganization that would qualify under both section
368(a)(1)(D) and (G) is treated as qualifying under section 368(a)(1)(D) for purposes of section 357(c)(1)).
However, section 357(c)(2) provides
that the general rule in section 357(c)
(1) does not apply to any exchange (i) to
which section 357(b) applies, or (ii) that
is pursuant to a plan of reorganization
within the meaning of section 368(a)
(1)(G) in which no former shareholder
of the transferor receives any consideration for its stock. Rev. Rul. 2007-8,
2007-1 C.B. 469, holds that the general
rule in section 357(c)(1) does not apply
to a section 351 exchange if that transaction also qualifies as a reorganization
described in section 368(a)(1)(A), (C),
(D) (provided the requirements of section 354(b)(1) are satisfied), or (G) (provided the requirements of section 354(b)
(1) are satisfied).
Furthermore, under section 357(c)(3),
if the transferor transfers in a section 351
exchange (including a divisive reorganization that overlaps with a section 351
exchange; see section 357(c)(3) (referencing an exchange to which section 357(c)
(1) applies)) a liability the payment of
which either would give rise to a deduction or would be described in section
736(a) of the Code (concerning payments
made in liquidation of the partnership
interest of a retiring or deceased partner),
the amount of such liability is excluded
in determining the amount of liabilities
assumed under section 357(c)(1) unless
the incurrence of the liability resulted in
the creation of (or an increase in) the basis
of any property. In addition, liabilities
the payment of which would give rise to
a capital expenditure are not included for
purposes of section 357(c)(1) unless the
989
incurrence of the liability resulted in the
creation of (or an increase in) the basis of
any property. See Rev. Rul. 95-74, 1995-2
C.B. 36.
D. Section 361: Distributions to
shareholders of target corporation
1. Overview
Section 361 is an operative provision
applicable to certain exchanges and distributions of property in a transaction that
satisfies the definitional requirements for
qualification as a reorganization under
section 368(a)(1). Section 361(a) and (b)
provides the Federal income tax consequences to a target corporation (such as a
distributing corporation in a divisive reorganization) that (i) is a party to a reorganization, and (ii) pursuant to the plan of
reorganization, exchanges property with
an acquiring corporation (such as a controlled corporation in a divisive reorganization) that also is a party to the reorganization. Section 361(c) provides the
Federal income tax consequences to the
target corporation (such as a distributing
corporation in a divisive reorganization)
of the distribution by the target corporation to its shareholders, or transfer to its
creditors, of certain property in pursuance
of or in connection with the plan of reorganization that includes the exchange of
property with an acquiring corporation
(such as a controlled corporation in a divisive reorganization) that also is a party to
the reorganization. See the discussion in
part III.A of this Background (noting that
the phrases “in pursuance of” and “in connection with” in section 361 convey the
same meaning).
2. Enactment of Section 361(a): Purely
Paper Transactions
The original predecessor to current
section 361(a) was enacted by Congress
as part of section 202(b) of the Revenue
Act of 1918 (Public Law 65-254, 40 Stat.
1057, 1060 (1919)). The applicable part
of section 202(b) of the Revenue Act of
1918 was subsequently incorporated in
section 112 of the 1939 Code before being
adopted as section 361(a) of the 1954
Code and thereafter as current section
361(a).
March 3, 2025
Congress enacted the applicable part
of section 202(b) of the Revenue Act of
1918 “to establish the rule for determining
taxable gains in the case of exchanges of
property and to negate the assertion of tax
in the case of certain purely paper transactions.” S. Rep. No. 65-617, at 5 (1918).
As stated in the legislative history, the
substance of the original predecessor to
section 361(a) is that (i) when property is
exchanged for other property, the property
received in the exchange should be treated
as the equivalent of cash in the amount of
its fair market value, but (ii) when, in connection with the reorganization or consolidation of a corporation, a person receives,
in place of stock or securities, new stock
or securities of no greater aggregate par
value, or when a person receives, in place
of property, stock of a corporation formed
to take over such property, no gain or
loss should be deemed to occur from the
exchange. See id. at 5-6.
More than a century after the enactment
of its original predecessor, section 361(a)
continues to provide generally that a corporation (that is, the target corporation)
that is a party to a reorganization (such as
the distributing corporation in a divisive
reorganization) recognizes no gain or loss
if it exchanges property pursuant to the
plan of reorganization solely for stock and
securities in another corporation (that is,
the acquiring corporation) that is a party
to the reorganization (such as a controlled
corporation in a divisive reorganization).
(ii) if the corporation “retains the entire
amount of proceeds with the result that the
transaction is in substance a real sale, then
the gain shall be recognized.” S. Rep. No.
68-398, at 16 (1924). This stated policy is
reflected in current section 361(b)(1).
Section 361(b)(1)(A) provides that, if
section 361(a) would apply to an exchange
but for the fact that the property received
by the target corporation also includes
money or other property, no gain will be
recognized by the target corporation if it
distributes the money or other property
pursuant to the plan of reorganization.
Congress has enacted no limitation on
the aggregate amount of cash and the fair
market value of other property that a target corporation can distribute to its shareholders (as opposed to creditors) under
section 361(b)(1)(A) (although section
368 limits the amount of money or other
property that may be received in certain
corporate reorganizations).
Section 361(b)(1)(B), which reflects
congressional intent with respect to a
target corporation’s failure to act solely
as a conduit in distributing the sale proceeds (that is, money or other property)
to its shareholders, provides that the target corporation (such as the distributing
corporation in a divisive reorganization)
recognizes gain in an amount that does
not exceed the sum of the money and fair
market value of the other property that the
corporation fails to distribute pursuant to
the plan of reorganization.
3. Enactment of Section 361(b): Conduit
for Distribution to Shareholders
4. Section 361(c): Distributions
of Appreciated Property to Target
Corporation Shareholders
The original predecessor to current
section 361(b) was enacted by Congress
as section 203(e) of the Revenue Act of
1924 (Public Law 68-176, 43 Stat. 253,
256). Section 203(e) of the Revenue Act
of 1924 was subsequently incorporated
in section 112 of the 1939 Code before
being adopted as section 361(b) of the
1954 Code and thereafter as current section 361(b).
Congress enacted section 203(e) of
the Revenue Act of 1924 to provide that
(i) if the corporation that sells its assets in
connection with the reorganization “acts
merely as a conduit” in passing the sale
proceeds on to its shareholders, no gain
to the corporation is to be recognized, but
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Section 361(c) originally was enacted
by Congress as section 1804(g)(1) of the
Tax Reform Act of 1986. As part of a
wholesale rewrite of section 361, Congress amended section 361(c) by enacting
section 1018(d)(5)(A) of the Technical and
Miscellaneous Revenue Act of 1988 (Public Law 100-647, 102 Stat. 3342, 3578) so
that the statute “conforms the treatment of
distributions of property by a corporation
to its shareholders in pursuance of a plan
of reorganization to the treatment of nonliquidating distributions (under section
311).” S. Rep. No. 100-445, at 393 (1988).
Section 311(a) generally provides that,
except as provided in section 311(b) (con-
990
cerning distributions of appreciated property), no gain or loss is recognized by a
corporation on the distribution (not in
complete liquidation) with respect to its
stock of (i) its stock (or rights to acquire
its stock), or (ii) property. Accordingly,
section 361(c)(1) generally provides that,
except as provided in section 361(c)(2)
(concerning distributions of appreciated
property), no gain or loss is recognized
by a target corporation that is a party to
a reorganization upon a distribution of
property to its shareholders pursuant to a
plan of reorganization.
Consistent with section 311(b), section
361(c)(2)(A) provides that, if the target
corporation distributes property other
than qualified property in a distribution
described in section 361(c)(1), and if the
fair market value of that other property
exceeds the corporation’s adjusted basis
in that other property, then gain is recognized by the target corporation as if the
property were sold to the distributee at
its fair market value. The term “qualified
property” is defined in section 361(c)(2)
(B) to mean (i) any stock, right to acquire
stock, or obligation (including a security)
of the corporation, and (ii) any stock, right
to acquire stock, or obligation (including
a security) of another corporation that is a
party to the reorganization received by the
target corporation in the exchange.
Therefore, although a target corporation would recognize no gain on an
exchange described in section 361(a) (section 361(a) exchange) if that corporation
received appreciated non-qualified property and distributed that property to its
shareholders pursuant to section 361(b)(1)
(A), that corporation nonetheless would
recognize gain on the distribution to its
shareholders under section 361(c)(2)(A).
If any such property is subject to a liability, or if the shareholder assumes a liability of the target corporation in connection
with the distribution, section 361(c)(2)
(C) provides that the fair market value of
that property is treated as not less than the
amount of that liability for purposes of
section 361(c)(2)(A).
5. Safe Harbors for Transfers to
Creditors of the Distributing Corporation
Congress added section 361(b)(3) and
(c)(3) as part of the wholesale rewrite of
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section 361 in the Technical and Miscellaneous Revenue Act of 1988. Section
361(b)(3) provides that, for purposes
of section 361(b)(1), any transfer of the
money or other property received in the
exchange by the target corporation to its
creditors in connection with the reorganization is treated as a distribution pursuant
to the plan of reorganization. Similarly,
section 361(c)(3) provides that, for purposes of section 361(c), any transfer of
qualified property by the target corporation to its creditors in connection with the
reorganization is treated as a distribution
to its shareholders pursuant to the plan of
reorganization.
6. Response to Supreme Court’s Decision
in Minnesota Tea Company
In Minnesota Tea Co. v. Helvering, 302
U.S. 609 (1938), the Supreme Court held
that a distribution by a target corporation
to its shareholders of cash received from
an acquiring corporation in a reorganization was not a qualifying “distribution”
for purposes of the predecessor to section
361(b)(1)(A), because the shareholders
immediately used that distributed cash to
pay the target corporation’s creditors as
part of a prearranged plan. Citing Gregory
v. Helvering, 293 U.S. 465, 469 (1935),
as providing the “controlling principle”
for its decision, the Court determined that
the payment of indebtedness, and not the
distribution of dividends, “was, from the
beginning, the aim of the understanding
with the stockholders and was the end
accomplished by carrying that understanding into effect.” Minnesota Tea, 302
U.S. at 613-14. Because the Minnesota
Tea Company “received the same benefit as though it had retained that amount
from [the] distribution and applied it to the
payment of such indebtedness,” the Court
concluded that the company failed to satisfy the predecessor to section 361(b)(1)
(A). See id. at 613 (emphasis added).
In describing the rationale for enacting
section 361(b)(3) and (c)(3), the legislative
history explains that each provision “overrules the holding in Minnesota Tea Company v. Helvering.” S. Rep. No. 100-445,
at 393 n.102 (1988); see also H.R. Rep.
100-795, at 372 (1988). The legislative
history described the substance of the safe
harbor in section 361(b)(3) as providing
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that “transfers of property to creditors in
satisfaction of the corporation’s indebtedness in connection with the reorganization
are treated as distributions pursuant to the
plan of reorganization for this purpose.” S.
Rep. No. 100-445, at 393 (1988) (emphasis added). Likewise, the legislative history described the corresponding safe harbor in section 361(c)(3) as providing that
“the transfer of qualified property by a
corporation to its creditors in satisfaction
of indebtedness is treated as a distribution
pursuant to the plan of reorganization.” Id.
(emphasis added). By treating transfers
of property to creditors in satisfaction of
indebtedness as distributions pursuant to
the plan of reorganization, Congress balanced the dual policy objectives of (i) preserving consistency with the fundamental
requirement of section 361 that property
be distributed, and (ii) enacting a provision to address transfers to creditors in
satisfaction of indebtedness that overruled
the holding in Minnesota Tea.
7. Adjusted Basis Limitation for Purposes
of Section 361(b)(3)
In the case of a divisive reorganization
described in sections 355 and 368(a)(1)
(D), the third sentence in section 361(b)
(3) (adjusted basis limitation) limits the
extent to which a transfer of money or
other property to a creditor is treated as a
distribution pursuant to the plan of reorganization for the purposes of section 361.
Specifically, section 361(b)(3) applies
solely to the extent the sum of the money
and the fair market value of the other
property transferred to creditors of the
distributing corporation does not exceed
the aggregate adjusted bases of the assets
transferred to the controlled corporation
in the section 361(a) exchange, reduced
by the amount of the distributing corporation’s liabilities that the controlled corporation actually assumes within the meaning of section 357(c).
Congress enacted the adjusted basis
limitation in section 361(b)(3) as part of
the American Jobs Creation Act of 2004
(Public Law 108-357, 118 Stat. 1418)
based on the concern stated in the legislative history that taxpayers had developed
tax-planning strategies to circumvent the
adjusted basis limitation in section 357(c)
on actual assumptions by controlled cor-
991
porations in divisive reorganizations. See
S. Rep. No. 108-192, at 185 (2003). Specifically, the committee report observed
that a distributing corporation (i) could
cause the controlled corporation to borrow money from a financial institution
and transfer that money to the distributing corporation in the section 361(a)
exchange, and then (ii) could use that
money to pay its creditors. Id. The committee report concluded that, although this
series of transactions does not involve an
actual assumption by the controlled corporation within the meaning of section
357, it is “economically similar to the
actual assumption” because, at the end of
the series of transactions, the distributing
corporation has reduced its indebtedness
to its creditor and the controlled corporation has become indebted to a creditor
(albeit a different creditor) for an equal
amount. See id. Accordingly, “because
section 361(b) [did] not contain a limitation on the amount that can be distributed
to creditors,” Congress limited the scope
of the section 361(b)(3) safe harbor to “the
amount of the basis of the assets contributed to a controlled corporation in a divisive reorganization.” Id.
8. Express Grant of Authority
As stated previously in the Authority
section of this preamble, the second sentence of section 361(b)(3) provides the
Secretary with an express grant of authority to prescribe such regulations as may be
necessary to prevent avoidance of Federal
income tax through abuse of the safe harbors in section 361(b)(3) and (c)(3). Congress included this grant of authority in
section 361(b)(3) when Congress enacted
both provisions as part of the Technical
and Miscellaneous Revenue Act of 1988.
III. Plan of Reorganization; Party to a
Reorganization
A. Overview
For more than a century, the “plan of
reorganization” requirement has served
to limit the application of the operative
provisions in subchapter C solely to those
transactions with a sufficiently proximate
relationship to transactions that satisfy the
definitional requirements in subchapter C
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for a reorganization (proximate relationship requirement). For example, see section 202(b) of the Revenue Act of 1918
(providing that an exchange did not qualify for nonrecognition treatment unless
the transaction was “in connection with” a
reorganization). In other words, Congress
has long viewed the proximate relationship requirement as an integral tool for
preventing the nonrecognition provisions
in subchapter C from applying to transactions to which general gain or loss provisions of the Code (for example, section
1001 of the Code) should apply.
This long-standing congressional purpose is illustrated by the evolution of section 202(c)(1) of the Revenue Act of 1921
(Public Law 67-98, 42 Stat. 227). That
provision originally provided nonrecognition treatment for an exchange of property
held for investment or for productive use in
a trade or business, with no exception for
stock or securities, and with no proximate
relationship requirement. Tax advisors took
advantage of this provision by structuring
exchanges of portfolio investment securities for other securities in transactions
that resulted in no recognition of Federal
income tax. After receiving a request from
the Treasury Department to address this
abuse, Congress amended section 202(c)
(1) by removing exchanges of stock and
securities from nonrecognition treatment
except for exchanges occurring in the
context of a reorganization. See An Act to
Amend the Revenue Act of 1921 in Respect
to Exchanges of Property, Public Law
67-545, 42 Stat. 1560 (1923); J. Seidman,
Legislative History of Federal Income Tax
Laws: 1938-1861, at 798 (1938); see also
Letter from A. W. Mellon, Secretary of
the Treasury, to Congressman William R.
Green, Acting Chairman of the Committee
on Ways and Means (Jan. 13, 1923).
Since first establishing the proximate
relationship requirement, Congress has
implemented that requirement through
various linguistic formulations over time.
However, Congress has indicated that such
variations in language were not intended to
reflect substantive differences. For example, Congress replaced “in connection
with” in section 202(b) of the Revenue
Act of 1918 with “in the reorganization” in
section 202(c) of the Revenue Act of 1921.
When describing section 202(c) of the Revenue Act of 1921, a congressional commit-
March 3, 2025
tee print explicitly referred to the proximate
relationship under that section as requiring
an “in connection with” relationship. See S.
Comm. on Finance, 68th Cong., Statement
of the Changes Made in the Revenue Act of
1921 by H.R. 6715 and the Reasons Therefor, at 5‑6 (Comm. Print 1924).
In section 203(c) of the Revenue Act
of 1924, Congress restated the proximate
relationship requirement as requiring an
“in pursuance of a plan of reorganization”
relationship. This requirement, like the “in
connection with” requirement, exists in
the current definitional and operative provisions of subchapter C. The legislative
history underlying section 203 of the Revenue Act of 1924 explicitly refers to the “in
pursuance of the plan of reorganization”
formulation in several instances as “in
connection with the reorganization.” See
H.R. Rep. No. 68-179, at 13-16 (1924). In
particular, at one point, the Committee on
Ways and Means described the change in
formulation of the proximate relationship
requirement as a result of “minor changes
in phraseology.” See id. at 13.
B. Definition of “plan of reorganization”
The term “plan of reorganization” is
not defined in subchapter C. Instead, the
sole authoritative guidance defining this
term is set forth in the Income Tax Regulations. Specifically, §1.368-2(g) provides
that the term “plan of reorganization”
refers to a “consummated transaction
specifically defined as a reorganization
under section 368(a),” and that “[s]ection
368(a) contemplates genuine corporate
reorganizations which are designed to
effect a readjustment of continuing interests under modified corporate forms.”
Section 1.368-2(g) further provides that
the term “plan of reorganization” “is not
to be construed as broadening the definition of reorganization as set forth in section 368(a),” but rather “is to be taken as
limiting the nonrecognition of gain or loss
to such exchanges or distributions as are
directly a part of the transaction specifically described as a reorganization in section 368(a).” Section 1.368-2(g) further
provides that the transaction (or series of
transactions) “embraced in a plan of reorganization must not only come within the
specific language of section 368(a),” but
also that “the readjustments involved in
992
the exchanges or distributions effected in
the consummation [of the plan of reorganization] must be undertaken for reasons
germane to the continuance of the business of a corporation a party to the reorganization.”
However, significant uncertainty and
confusion have arisen regarding the scope,
purpose, and application of §1.368-2(g).
As expressed by the Tax Court in an
observation often referenced by courts
and commentators, “the above definition
is imbued with qualities of flexibility and
vagueness, with the result that it does
not present precise self-executing guidelines.” Int’l Telephone & Telegraph Corp.
v. Comm’r, 77 T.C. 60, 75 (1981); see also
J.E. Seagram Corp. v. Comm’r, 104 T.C.
75, 96 (1995) (relying on the quote in
Int’l Telephone in observing that §1.3682(g) provides “substantial elasticity”). As
a result, §1.368-2(g) (including its proximate relationship requirement) has created significant uncertainty and confusion
for taxpayers and the IRS in determining
the scope of transactions that properly
should be taken into account for purposes
of applying the definitional and operative
provisions of subchapter C.
Section 1.368-1(c) further describes
the “plan of reorganization” concept and
provides important context regarding the
application of this concept and its embedded proximate relationship requirement.
Specifically, §1.368-1(c) provides, in part,
that “[t]he provisions of [part III of subchapter C] referred to in this paragraph are
inapplicable unless there is a plan of reorganization” (emphasis added). Section
1.368-1(c) further provides that “[a] plan
of reorganization must contemplate the
bona fide execution of one of the transactions specifically described as a reorganization in section 368(a) and for the bona
fide consummation of each of the requisite
acts under which nonrecognition of gain
is claimed.” That transaction, and those
acts, must be an “ordinary and necessary
incident of the conduct of the enterprise
and must provide for a continuation of the
enterprise.” Id. Finally, §1.368-1(c) provides that a scheme involving “an abrupt
departure from normal reorganization procedure in connection with a transaction on
which the imposition of tax is imminent,
such as a mere device that puts on the form
of a corporate reorganization as a disguise
Bulletin No. 2025–10
for concealing its real character, and the
object and accomplishment of which is
the consummation of a preconceived plan
having no business or corporate purpose,
is not a plan of reorganization.”
Consistent with the discussion in part
III.A of this Background, §1.368-1(c)
reflects the function of the “plan of reorganization” concept and its embedded proximate relationship requirement—namely,
to limit the application of the definitional
and operative provisions of subchapter C
to those transactions included in the plan
of reorganization. Section 1.368-1(c) also
requires all transactions properly included
in the plan of reorganization to be consistent with, and to facilitate satisfaction
of, a principal requirement for nonrecognition treatment under the reorganization
provisions of subchapter C (that is, the
continuation of an enterprise). Finally,
§1.368-1(c) reflects that devices and sham
transactions cannot properly be included
in a plan of reorganization.
C. Party to a reorganization
Section 368(b) generally provides that
the term “a party to a reorganization”
includes (i) a corporation resulting from a
reorganization, and (ii) both corporations,
in the case of a reorganization resulting
from the acquisition by one corporation of
stock or properties of another. Consistent
with section 368(b), §1.368-2(f) defines
the term “party to a reorganization” as
including “a corporation resulting from a
reorganization, and both corporations in a
transaction qualifying as a reorganization
where one corporation acquires stock or
properties of another corporation.” Section 1.368-2(f) further articulates which
entities are parties to a reorganization in
various types of reorganizations defined
in section 368(a)(1). However, the uncertainty regarding the meaning of “plan of
reorganization,” described in part III.B of
this Background, has resulted in confusion regarding the proper identification of
parties to a reorganization.
D. Reporting and recordkeeping
requirements for corporate
reorganizations
Section 1.368-3 sets forth reporting
and recordkeeping requirements for cor-
Bulletin No. 2025–10
porate reorganizations. Section 1.3683(a) requires a plan of reorganization
to be adopted by each corporation that
is a party to the reorganization, and it
requires each such corporation to include
a statement with its Federal income tax
return that includes certain limited information about the reorganization. However, §1.368-3(a) provides no additional
detail on the manner in which the plan
of reorganization must be adopted, and it
does not require the plan of reorganization to be reflected in any documentation
or records of the parties to the reorganization.
Current §1.368-3(a) contrasts starkly
with a prior version of §1.368-3(a), which
provided that the plan of reorganization
“must be adopted by each of the corporations parties thereto; and the adoption
must be shown by the acts of its duly constituted responsible officers, and appear
upon the official records of the corporation.” See §1.368-3(a) (effective from
November 26, 1960, to May 29, 2006)
(prior §1.368-3(a)).
Prior §1.368-3(a) also imposed additional requirements to facilitate the IRS’s
administration of the reorganization provisions in part III of subchapter C. In
particular, prior §1.368-3(a) required the
parties to a reorganization to file with the
IRS a “copy of the plan of reorganization, together with a statement, executed
under the penalties of perjury, showing in
full the purposes thereof and in detail all
transactions incident to, or pursuant to,
the plan.” In contrast, taxpayers currently
are not required by §1.368-3 to provide as
part of their Federal income tax return a
plan of reorganization that describes the
transactions to which taxpayers intend to
apply the nonrecognition provisions of
subchapter C.
In addition, prior §1.368-3(a) required
taxpayers to file with the IRS “a complete
statement of all facts pertinent to the nonrecognition of gain or loss in connection
with the reorganization.” Current §1.3683(a) contains no such requirement. Therefore, the IRS currently does not receive
as part of a taxpayer’s Federal income
tax return a statement of facts necessary
to determine the proper application of the
nonrecognition provisions of subchapter
C to the transactions comprising a corporate reorganization.
993
Instead, current §1.368-3(a) merely
requires each corporate party to a reorganization to include a statement, on or
with its return for the taxable year of the
exchange, that includes: (i) the names and
employer identification numbers (if any)
of all such parties; (ii) the date of the reorganization; (iii) the value and basis of the
assets, stock, or securities of the target
corporation transferred in the transaction,
determined immediately before the transfer in the manner described in §1.3683(a); and (iv) the date and control number
of any one or more private letter rulings
issued by the IRS in connection with
the reorganization. Current §1.368-3(b)
imposes similar requirements on significant holders of stock or securities of the
target corporation.
Like prior §1.368-3(c), current §1.3683(d) requires taxpayers to retain their permanent records with respect to a corporate
reorganization.
IV. TIGTA Report to Improve
Enforcement of Corporate M&A
Transactions
In 2019, the Treasury Inspector General for Tax Administration (TIGTA) published a report titled “A Strategy Is Needed
to Assess the Compliance of Corporate
Mergers and Acquisitions With Federal
Tax Requirements,” Ref. No. 2019-30050 (Sept. 5, 2019) (TIGTA Report). In
that report, TIGTA considered the scope
of information required to be provided
under §1.368-3(a) and expressed that “the
forms previously detailed represent only a
small portion of the information that may
be filed, and certain forms used to report
merger and acquisition (M&A) transactions may not be providing sufficient
information to identify noncompliance.”
Id. at 14-15.
Accordingly, TIGTA recommended
that, if the IRS finds that the current forms
do not contain information sufficient for
identifying potential noncompliance in
M&A transactions, the IRS “should consider amending the filing criteria and
information required in the forms to
develop useful compliance tools.” Id. at
14. The IRS agreed with this recommendation, stating that it will continue to consider how to use M&A transaction information in its compliance efforts.
March 3, 2025
V. Reporting Requirements for Section
355 Transactions
In a notice of proposed rulemaking
(REG-116085-23) published elsewhere
in the Proposed Rules section of this
issue of the Federal Register, the Treasury Department and the IRS are issuing
proposed regulations to revise current
§1.355-5 (proposed §1.355-5) to enhance
the IRS’s ability to administer and enforce
the requirements of section 355. Similar
to current §1.368-3 (previously discussed
in part III.D of this Background), current
§1.355-5 requires the distributing corporation and each significant distributee
(as defined in current §1.355-5(c)(1)) to
include a statement with its tax return that
includes certain limited information about
the section 355 transaction. To implement
the recommendation in the TIGTA Report
described in part IV of this Background,
proposed §1.355-5 would require taxpayers to submit new IRS Form 7216, MultiYear Reporting Related to Section 355
Transactions (or any successor form), to
provide the IRS with additional information to help the IRS identify potential noncompliance in section 355 transactions.
VI. Revenue Procedure 2024-24 and
Notice 2024-38
On May 2, 2024, the Treasury Department and the IRS released Rev. Proc.
2024-24, 2024-21 I.R.B. 1214, to provide
procedures for requesting private letter
rulings from the IRS regarding certain
matters relating to section 355 transactions. Rev. Proc. 2024-24 superseded Rev.
Proc. 2018-53, 2018-43 I.R.B. 667, and
made several significant changes to the
requirements of that revenue procedure
and to Rev. Proc. 2017-52, 2017-41 I.R.B.
283.
Also on May 2, 2024, the Treasury
Department and the IRS released Notice
2024-38, 2024-21 I.R.B. 1211, to describe
their views and concerns relating to certain matters addressed in Rev. Proc. 202424, and to solicit feedback on the provisions set forth in Rev. Proc 2024-24. In
section 2.01 of Notice 2024-38, the Treasury Department and the IRS requested
that such feedback take into account the
following three objectives for potential
future guidance: (i) the guidance will be
March 3, 2025
consistent with all relevant provisions of
the Code (compliance objective); (ii) the
guidance will provide certainty to taxpayers and the IRS regarding the application of all relevant provisions of the
Code to purported section 355 transactions (increased certainty objective); and
(iii) the guidance will be responsive to the
manner in which section 355 transactions
are engaged in by taxpayers and reflect
current market practices and preferences
(transaction facilitation objective), to the
extent that such approach does not conflict
with the first two objectives.
Explanation of Provisions
The purpose of these proposed regulations is to establish a comprehensive
set of rules to implement certain core
definitional and operative provisions of
subchapter C that address corporate separations, incorporations, and reorganizations. The current regulatory framework
underlying these provisions is incomplete,
outdated, and not reflective of their importance to the Federal corporate income tax
system, given the trillions of dollars of
corporate transactions governed by these
statutory provisions. Due to the lack of
up-to-date regulatory guidance, taxpayers
and the IRS must rely on a patchwork of
caselaw, IRS revenue rulings and revenue
procedures, and non-authoritative IRS
documents to discern the current state of
the law with respect to these core provisions of subchapter C.
Accordingly, providing comprehensive regulatory guidance to facilitate the
implementation of these core definitional
and operative provisions of subchapter
C would promote taxpayer certainty and
sound tax administration. Although Notice
2024-38 focused on Federal income tax
issues regarding section 355 transactions,
these core definitional and operative provisions also address incorporations and
acquisitive reorganizations. Therefore, the
proposed regulations would implement
those statutory provisions for all corporate M&A transactions, in a manner that
reflects the three objectives described in
section 2.01 of Notice 2024-38 (that is, the
compliance objective, the increased certainty objective, and the transaction facilitation objective) in accordance with their
respective priorities as set forth therein.
994
A principal objective of the Treasury
Department and the IRS in issuing these
proposed regulations is to significantly
improve horizonal equities among taxpayers and tax advisors. In other words,
based on feedback from tax advisors, the
lack of authoritative guidance in this area
effectively has transformed a taxpayer’s
option to request a private letter ruling on
the application of certain definitional and
operative provisions into a requirement.
Indeed, tax advisors have directly reached
out to the Treasury Department and the
IRS to emphasize the mandatory nature
of private letter rulings on certain topics
in this area because, based on the current
state of authoritative guidance, those tax
advisors could not provide tax opinions at
a sufficient level of comfort in the absence
of a private letter ruling. Therefore, these
tax advisors have stressed the importance
of engaging in bar association panels and
other professional speaking engagements
to access the perspectives of Treasury
Department and IRS officials regarding
the government’s current views on certain
fundamental corporate tax issues.
These proposed regulations would provide, through publicly accessible authoritative guidance, core definitional and
operative provisions. This guidance is
intended to facilitate the ability for taxpayers to achieve increased comfort on
the Federal income tax treatment of their
corporate M&A transactions without the
need for a private letter ruling. Just as
importantly, this guidance is intended to
encourage the submission of private letter ruling requests and facilitate the IRS
private letter ruling process. In particular,
these proposed regulations are intended
to help direct the focus of tax advisors
to those issues that raise significant Federal income tax compliance concerns, and
consequently improve the organization
and focus of their private letter ruling submissions. Similarly, these proposed regulations are intended to increase the efficiency of the private letter ruling program
by allowing submission reviewers to focus
primarily on such significant issues, rather
than those issues that would be addressed
directly by this guidance.
In explaining the provisions of these
proposed regulations, this Explanation of
Provisions discusses issues described in
Notice 2024-38 and the feedback received
Bulletin No. 2025–10
in response to Notice 2024-38. Such feedback has informed the development of
these proposed regulations. This Explanation of Provisions also references proposed regulations, published elsewhere in
the Proposed Rules section of this issue of
the Federal Register, that would implement enhanced reporting requirements for
section 355 transactions. Those enhanced
reporting requirements are integral to the
proposed substantive guidance set forth in
these proposed regulations. Specifically,
as described further in this Explanation
of Provisions, this proposed substantive
guidance reflects the long-standing reality
that corporate transactions typically are
carried out over multiple taxable years.
The increased transactional flexibility that
would be provided by these proposed regulations is conditioned on the IRS’s ability to track the execution of these transactions throughout their lifecycle, and the
enhanced reporting requirements for section 355 transactions would facilitate the
IRS’s ability to carry out its administrative
function with respect to these transactions.
I. Distinction Between Delayed
Distributions and Retentions; Rules for
Qualifying Retentions
A. Notice 2024-38
Section 2.02(1) of Notice 2024-38
stated the view of the Treasury Department and the IRS that the Code provides
separate and distinct treatment for three
instances in which a distributing corporation temporarily continues to hold controlled corporation stock or securities following the date on which the distributing
corporation has distributed an amount of
controlled corporation stock constituting
control (within the meaning of section
368(c)) (control distribution date). These
three instances are: (i) a delayed distribution of controlled corporation stock or
securities that is “part of the distribution”
(within the meaning of section 355(a)(1)
(D)); (ii) a delayed distribution of controlled corporation stock or securities that
is “in pursuance of the plan of reorganization” (within the meaning of section 361);
and (iii) a retention of controlled corporation stock or securities.
Section 2.02(2) of Notice 2024-38
stated the view of the Treasury Depart-
Bulletin No. 2025–10
ment and the IRS that section 355(a)(1)
(D) effectively creates a rebuttable presumption that any retention evidences
a plan to achieve a Federal income tax
avoidance purpose. Section 2.02(2) of
Notice 2024-38 also stated that the Treasury Department and the IRS are considering the degree to which connections
between the distributing corporation and
the controlled corporation (and, as appropriate, the DSAG and the CSAG) after the
control distribution date would prevent a
transaction from qualifying under section
355. (The terms “DSAG” and “CSAG”
mean the separate affiliated group (as
defined in section 355(b)(3)(B)) of which
the distributing corporation or the controlled corporation, respectively, is the
common parent.)
Section 2.02(2) of Notice 2024-38 also
stated the view of the Treasury Department and the IRS that overlapping directors, officers, or key employees and the
existence of continuing contractual agreements between the distributing corporation (and other members of the DSAG)
and the controlled corporation (and other
members of the CSAG) that include provisions that are not arm’s-length weigh
against a determination of qualification
under section 355.
B. Stakeholder input
1. Existence of Rebuttable Presumption
under Section 355(a)(1)(D)(ii)
As an initial matter, some stakeholders
have contended that section 355(a)(1)(D)
(ii) does not create a rebuttable presumption that a retention evidences a plan with
a principal purpose of avoiding Federal
income tax, notwithstanding the explicit
statutory requirement that the Secretary
must be satisfied that such a purpose
does not exist. Instead, these stakeholders have asserted that Congress’s intent in
including the “no tax avoidance purpose”
language in section 355(a)(1)(D)(ii) is
unclear, and that the legislative history of
section 355 does not give further details
about the meaning of this language.
Accordingly, these stakeholders have
suggested that, rather than include a rebuttable presumption, the proposed regulations should place greater emphasis on
(i) an examination of the corporate busi-
995
ness purpose for the section 355 transaction, and (ii) a determination of whether
the retained controlled corporation stock
is disposed of as “part of the distribution”
(see section 355(a)(1)(D)) or “in pursuance
of the plan of reorganization” (see section
361(c)). These stakeholders contend that
their view is supported by sections 354,
355, and 361, as well as by §1.368-2(g),
which requires readjustments involved in
the exchanges or distributions effected in
consummating a plan of reorganization to
be “undertaken for reasons germane to the
continuance of the business of a corporation a party to the reorganization.”
2. Application of Plan of Reorganization
with Regard to Section 355(a)(1)(D)(ii)
Stakeholders also have requested clarification in the proposed regulations that
all delayed distributions, whether before
or after the control distribution date, are
treated as part of the distribution (within
the meaning of section 355(a)(1)(D)) if
they are effectuated pursuant to the plan
of reorganization. Relatedly, stakeholders
have recommended that the proposed regulations employ the same standard (that is,
the same level of proximate relationship)
in considering whether a transaction is
“part of the distribution” and “in pursuance of a plan of reorganization.” Stakeholders have further requested confirmation in the proposed regulations that the
“no tax avoidance purpose” requirement
in section 355(a)(1)(D)(ii) applies only to
the extent a delayed distribution fails to
qualify under the operative provisions.
Based on their analogy to their view
of the “plan of reorganization” concept,
these stakeholders have contended that the
“as part of the distribution” requirement in
section 355(a)(1)(D) provides substantial
flexibility to the distributing corporation
regarding the timing and manner of dispositions of controlled corporation stock
(for example, in a delayed distribution of
controlled corporation stock to shareholders of the distributing corporation). In this
regard, stakeholders have recommended
that the phrase “as part of the distribution”
be interpreted to provide section 355 qualification for situations in which the distributing corporation contemplates—but
provides no further level of commitment
to—a spectrum of potential dispositions
March 3, 2025
of controlled corporation stock, so long
as the distributing corporation eventually
achieves one or more of those contemplated possibilities or related variants.
As described by such stakeholders, the
distributing corporation need not identify
the timing of those dispositions (regardless of whether they span multiple taxable
years of the distributing corporation), the
potential recipients of controlled corporation stock (for example, creditors of the
distributing corporation), or the method of
disposing of that stock.
The stakeholder input described in the
foregoing paragraphs ultimately focuses
on two aspects of the IRS private letter
ruling program for section 355 transactions: (i) the requirement set forth in section 3.03(3)(a)(ii) of Rev. Proc. 2024-24
(the so-called “pick a lane” requirement);
and (ii) the elimination under that revenue
procedure of so-called “backstop retention
rulings.”
With regard to the “pick a lane” requirement, these stakeholders read section
3.03(3)(a)(ii) of Rev. Proc. 2024-24 as providing that the IRS will entertain a request
for rulings that: (i) a delayed distribution
of controlled corporation stock or securities will be, as applicable, “part of the
distribution” (within the meaning of section 355(a)(1)(D)) or “in pursuance of the
plan of reorganization” (within the meaning of section 361); and (ii) a retention of
controlled corporation stock or securities
that is not included in a ruling request
described in clause (i) of this sentence will
not be in pursuance of a plan having as one
of its principal purposes the avoidance of
Federal income tax (within the meaning
of section 355(a)(1)(D)(ii)). Stakeholders
have further stated that, to comply with
the so-called “pick a lane” requirement, a
taxpayer must specify the portions of controlled corporation stock remaining after
the control distribution (i) to which the taxpayer intends section 361(c) to apply, and
(ii) which the taxpayer intends to retain and
not dispose of under section 361(c). See
section 3.03(3)(d) of Rev. Proc. 2024-24.
In practice, the “pick a lane” requirement requires a taxpayer to identify to the
IRS those transactions that the taxpayer
intends to carry out as part of its plan of
reorganization. However, stakeholders
have contended that this requirement is
problematic because Rev. Proc. 2024-
March 3, 2025
24 also has eliminated the availability of
“backstop retention rulings,” which stakeholders have described as “protective rulings” affording taxpayers a determination
by the IRS, before the first step of a divisive reorganization, that a retention at no
point will have failed to satisfy the “no tax
avoidance purpose” requirement in section 355(a)(1)(D)(ii).
Stakeholders have contended that these
changes in private letter ruling policy,
combined with the requirement that all
controlled corporation stock or securities
be distributed within 12 months of the date
of the first distribution (first distribution
date) to receive a ruling that the distribution qualifies for nonrecognition treatment
under section 355 (see section 3.03(2)(b)
(ii) of Rev. Proc. 2024-24), have created
an unnecessary risk for taxpayers that an
intended divisive reorganization could
fail to qualify under section 355 (section
355(a)(1)(D)(ii) risk). For purposes of
these proposed regulations, the term “first
distribution” means the earliest distribution in a series of distributions made pursuant to the plan of distribution or plan of
reorganization, as appropriate.
Specifically, these stakeholders have
asserted that, because transactions
intended to qualify for nonrecognition
treatment under section 361(c) often
require most of a year to complete, tax
advisors now are faced with three undesirable options. First, tax advisors could
recommend the premature termination of
such transactions, which otherwise would
have been effectuated for bona fide business purposes for corporate taxpayers.
Second, tax advisors could attempt, in an
unreasonably short timeframe, to receive
from the IRS a supplemental private letter
ruling that the “springing retention” (that
is, a retention that arises unexpectedly
during the 12-month period) satisfies the
“no tax avoidance purpose” requirement.
Third, tax advisors could provide an opinion that the springing retention satisfies
the “no tax avoidance purpose” requirement, notwithstanding the lack of authoritative guidance on that issue.
C. Proposed regulations
Consistent with the statement in section 2.02(2) of Notice 2024-38, proposed
§1.355-10(c)(1) would reflect the presump-
996
tion that a retention is pursuant to a plan
having as one of its principal purposes the
avoidance of Federal income tax. However, the Treasury Department and the IRS
appreciate the views of stakeholders regarding delayed distributions and retentions. In
particular, the Treasury Department and the
IRS are sensitive to the potential negative
impacts of the “pick a lane” requirement
and related requirements in Rev. Proc.
2024-24 on divisive reorganizations, and
to the lack of clear, authoritative guidance
regarding the “no tax avoidance purpose”
requirement of section 355(a)(1)(D)(ii).
Therefore, and consistent with the compliance, increased certainty, and transaction
facilitation objectives of these proposed
regulations, the Treasury Department and
the IRS have proposed rules to address the
uncertainty highlighted by stakeholders in
a manner that facilitates the ability of (i)
taxpayers to carry out bona fide section 355
transactions, and (ii) the IRS to ensure that
such transactions comply with all requirements of the Code.
1. Proposed Safe Harbor to Address
Section 355(a)(1)(D)(ii) Risk
a. Overview
In response to stakeholder concerns
regarding the section 355(a)(1)(D)(ii) risk,
these proposed regulations would provide
a safe harbor that incorporates objectively
verifiable conditions for retentions not to be
treated as pursuant to a plan having as one
of its principal purposes the avoidance of
Federal income tax (qualifying retentions).
The Treasury Department and the IRS have
proposed this safe harbor to enable taxpayers to satisfy the requirements of section
355(a)(1)(D)(ii) with greater certainty even
in the absence of a private letter ruling from
the IRS – thereby achieving an increased
certainty and transaction facilitation objectives. For taxpayers that do not satisfy the
requirements of the proposed safe harbor,
the proposed regulations would provide for
a general facts-and-circumstances determination for whether a retention is a qualifying retention.
b. Section 355(a)(1)(D)(ii) safe harbor
Under the section 355(a)(1)(D)(ii) safe
harbor in proposed §1.355-10(c)(3), a dis-
Bulletin No. 2025–10
tributing corporation would be treated as
satisfying the general facts-and-circumstances test in proposed §1.355-10(c)(2)
(ii) for a qualifying retention if all six of the
following conditions are satisfied. First,
the distributing corporation must have a
specific corporate business purpose for the
retention as of the date of adoption of the
plan of distribution or plan of reorganization, as appropriate, and at all times during
the period of retention. Second, stock of
the controlled corporation must be widely
held during the period of retention after
the first distribution date. Third, any overlap between the officers, directors, or key
employees of the DSAG and of the CSAG
must be limited in the manner described
in proposed §1.355-10(c)(3)(iv). Fourth,
any continuing arrangements between the
distributing corporation and the controlled
corporation during the period of retention
either (i) must be negotiated on and reflect
arm’s-length terms, or (ii) within two
years after the first distribution date, must
be terminated or renegotiated to reflect
arm’s-length terms. Fifth, the plan of
distribution or plan of reorganization, as
appropriate, must reflect a definite intent
in the official records of the distributing
corporation that the distributing corporation dispose of all retained controlled corporation stock (or securities) by the end of
the five-year period beginning on the first
distribution date. Sixth, the disposition of
retained controlled corporation stock (or
securities) must not result in less Federal
income tax to the distributing corporation (determined based on the fair market
value and adjusted basis of that stock (or
securities) as of the first distribution date)
than if that stock (or securities) had been
distributed in the first distribution. The
distributing corporation must include in
its plan of distribution or plan of reorganization (as applicable) a description of
each agreement and transaction that establishes the satisfaction of the foregoing six
conditions.
c. Rationale for section 355(a)(1)(D)(ii)
safe harbor
The safe harbor in proposed §1.35510(c)(3) is intended to balance taxpayers’
need for certainty with the IRS’s need to
ensure taxpayer compliance with section
355(a)(1)(D)(ii). As discussed in part IV
Bulletin No. 2025–10
of the Background, TIGTA recommended
that the IRS consider amending the filing
criteria and information required in current forms to develop useful compliance
tools. The inclusion of objective requirements in the section 355(a)(1)(D)(ii) safe
harbor is consistent with both TIGTA’s
recommendation and the compliance,
increased certainty, and transaction facilitation objectives for guidance described in
section 2.01 of Notice 2024-38.
Moreover, under proposed §1.355-5
and new IRS Form 7216 (see part V of
the Background), and consistent with the
recommendation in the TIGTA Report, a
taxpayer would be required to report key
information that would enable the IRS to
ensure that the taxpayer, during each taxable year of the retention period, continues to comply with the requirements of
the section 355(a)(1)(D)(ii) safe harbor.
Thus, the section 355(a)(1)(D)(ii) safe
harbor, coupled with the enhanced reporting requirements for section 355 transactions, would increase taxpayer certainty
(by reducing the so-called section 355(a)
(1)(D)(ii) risk) and would facilitate IRS
administration of section 355(a)(1)(D)(ii).
The Treasury Department and the IRS are
of the view that these two proposals would
significantly help achieve all three objectives of these proposed regulations.
The proposed regulations would not
incorporate the stakeholders’ recommendation that the requirements of section
355(a)(1)(D)(ii) be treated as satisfied
so long as the distributing corporation
disposes of all controlled corporation
stock pursuant to the plan of reorganization. Such an approach would conflict
with long-standing §1.355-2(e)(2), which
requires the consideration of factors aside
from the manner in which the distributing
corporation disposes of its retained controlled corporation stock (for example, if
the distribution would be treated to any
extent as a distribution of “other property”
under section 356). The stakeholders’
recommendation would not be consistent
with section 355(a)(1)(D)(ii), because
that recommendation, by itself, would not
ensure a genuine separation.
In addition, the proposed regulations
would not incorporate stakeholders’ recommendation that a strong corporate
business purpose for a section 355 transaction be treated as sufficient to satisfy
997
the requirements under section 355(a)
(1)(D)(ii). This suggestion is inconsistent with the plain reading of the statute,
which requires a determination that the
avoidance of Federal income tax was not
a principal purpose of the retention. In
other words, the distributing corporation
could possess a strong corporate business
purpose for the section 355 transaction in
general and for the retention in particular, and yet also possess a principal purpose for the retention of avoiding Federal
income tax.
Ultimately, the stakeholders’ recommended approaches would conflict with
the purpose of section 355(a)(1)(D),
which is to ensure genuine separations
between the distributing and controlled
corporations—a policy reflected in the
legislative history of section 355(a)(1)(D)
and the long-standing view of the Treasury Department and the IRS regarding
that purpose as fundamental to all section
355 transactions. The legislative history of
section 355(a)(1)(D) indicates that Congress’s initial preference was to provide
no exception to the complete-distribution
requirement under section 355(a)(1)(D)
(i), and that the exception for retentions
originated through a subsequent Senate
amendment. See H.R. Rep. No. 83-1337,
at A121 (1954); S. Rep. No. 83-1622, at
266 (1954). Indeed, Treasury regulations
that predated the enactment of section
355(a)(1)(D), and that tax advisors have
acknowledged as the basis for section
355(a)(1)(D), provided that the business reasons supporting a distribution of
controlled corporation stock ordinarily
required the distribution of all controlled
corporation stock owned by the distributing corporation. See §29.112(b)(11)-2(c)
of Regulation 111 (issued under section
112(b)(11) of the 1939 Code, the predecessor to section 355 of the 1954 Code);
see also §1.355-2(e)(2), which continues
to reflect this language). Long-standing
revenue rulings and general counsel memoranda also reflect the view that, under the
plain reading of section 355(a)(1)(D)(ii),
Congress intended to subject retentions to
heightened scrutiny to ensure that the section 355 transaction effectuates a genuine
separation of the distributing corporation
and the controlled corporation. See Rev.
Rul. 75-469; Rev. Rul. 75-321; see also
G.C.M. 32136 (Oct. 23, 1961).
March 3, 2025
2. Facts-and-Circumstances Test for
Determining Compliance with Section
355(a)(1)(D)(ii)
If a taxpayer fails to satisfy the requirements of the section 355(a)(1)(D)(ii) safe
harbor in proposed §1.355-10(c)(3), the
taxpayer may establish compliance with
section 355(a)(1)(D)(ii) through satisfaction of the facts-and-circumstances test
in proposed §1.355-10(c)(2)(ii). As with
qualification for the proposed section
355(a)(1)(D)(ii) safe harbor, satisfaction
of the proposed facts-and-circumstances
test would require a determination that the
distributing corporation and the controlled
corporation have genuinely separated,
among other requirements. This proposed facts-and-circumstances approach
combined with the proposed safe harbor
would provide taxpayers and the IRS with
increased certainty regarding the application of section 355(a)(1)(D)(ii).
Under the facts-and-circumstances
approach of proposed §1.355-10(c)(2)
(ii), the distributing corporation first must
establish that the distribution resulted in a
genuine separation of the DSAG and the
CSAG. Second, the distributing corporation must establish that the retention does
not allow the DSAG to retain any practical
control over the CSAG. Third, there must
be a sufficient corporate business purpose
for the retention as of the date the plan
of distribution or the plan of reorganization (as applicable) is adopted. Fourth,
there must be a sufficient corporate business purpose for the retention at all times
during the period of retention. Fifth, the
disposition of retained controlled corporation stock (or securities) must not result in
less Federal income tax to the distributing
corporation (determined based on the fair
market value and adjusted basis of that
stock (or securities) as of the first distribution date) than if that stock (or securities)
had been distributed in the first distribution.
Consistent with the views set forth
in section 2.02(2) of Notice 2024-38,
the existence of (i) overlapping officers,
directors, or key employees between the
DSAG and the CSAG, and (ii) non-arm’slength continuing contractual agreements
between the DSAG and the CSAG, would
be facts and circumstances indicating that
the retention fails the requirements under
March 3, 2025
section 355(a)(1)(D)(ii). For purposes of
proposed §1.355-10(c)(2)(ii), the relative
weight of those indicia would depend
upon all facts and circumstances, including the corporate business purpose for
the section 355 transaction. For example,
such continuing relationships particularly
would weigh against a determination that
the retention satisfies the requirements
under section 355(a)(1)(D)(ii) if the purported corporate business purpose for the
section 355 transaction is so-called “fit
and focus” (that is, a separation to enhance
the success of the separated businesses by
resolving management, systemic, or other
problems that arise by virtue of the distributing corporation’s operation of different
businesses within a single corporation or
affiliated group).
3. Consistent Voting Requirements
Regardless of whether a section 355
transaction qualifies for the section 355(a)
(1)(D)(ii) safe harbor, if the section 355
transaction involves a retention, proposed
§1.355-10(c)(2)(iii) would require the
DSAG to vote any retained controlled corporation stock in proportion to the votes
cast by the controlled corporation’s other
shareholders (other than persons related
to the distributing corporation). This proposed requirement is consistent with the
long-standing position of the Treasury
Department and the IRS with regard to
section 355(a)(1)(D)(ii), as expressed
through several revenue rulings, revenue procedures, and other sub-regulatory
guidance.
4. Plan of Distribution
Consistent with long-standing guidance, the Treasury Department and the
IRS continue to agree with stakeholders
that the plan of reorganization is relevant for determining the applicability of
the definitional and operative provisions
under subchapter C to dispositions of controlled corporation stock. Compare Rev.
Rul. 2002-85, 2002-2 C.B. 986 (concluding that an acquiring corporation’s contribution of a target corporation’s assets to
a subsidiary corporation subsequent to a
transaction otherwise qualifying as a reorganization under section 368(a)(1)(D) was
“pursuant to the plan of reorganization”;
998
therefore, the continuity of business enterprise (COBE) requirement was not violated); Rev. Rul. 69-142, 1969-1 C.B. 107
(concluding that an acquiring corporation’s exchange of its debentures for those
held by bondholders of the target corporation was not part of the reorganization
exchange; therefore, the “solely for voting stock” requirement in section 368(a)
(1)(B) was satisfied). In this regard, the
“plan of reorganization” concept provides
a useful analogy for distinguishing distributions to which section 355 should apply
from those to which other sections of the
Code (such as section 311) should apply.
Accordingly, proposed §1.355-4 would
set forth a series of provisions pursuant to
which a taxpayer would establish its plan
of distribution for distributions to which
section 355(c) is purported to apply. These
proposed rules generally would parallel
the proposed plan of reorganization provisions in proposed §1.368-4, as discussed
in more detail in part III.C of this Explanation of Provisions.
Specifically, under the proposed rules,
section 355 would apply to those distributions that are properly included in the plan
of distribution and, therefore, are treated
as “part of the distribution” within the
meaning of section 355(a)(1)(D). Thus,
for example, proposed §1.355-4(d)(2)(iii)
would provide that distributions that are
carried out in close temporal proximity
with a section 355(c) distribution are not
properly included in the plan of distribution and therefore would not qualify for
nonrecognition treatment under section
355 unless Federal income tax principles
(including the step transaction doctrine)
would apply to determine that those distributions are in substance part of the plan
of distribution for the section 355(c) distribution.
Additionally, a distribution that is
merely one of several (if not more) contemplated possibilities would not be properly included in the plan of distribution.
Instead, proposed §1.355-4(d)(1) would
require the distributing corporation to evidence a definite intent to carry out the distribution through a written commitment in
one or more official records that substantiate the plan of distribution. As previously
discussed in part I.B of this Explanation
of Provisions, the Treasury Department
and the IRS disagree with the stakehold-
Bulletin No. 2025–10
ers’ view that a plan of distribution should
reflect mere transactional possibilities
under a “wait and see” approach. Adoption of this stakeholder recommendation
would conflict with the requirement of
section 355(a)(1)(D)(ii) that the non-tax
avoidance nature of a retention be “established to the satisfaction of the Secretary,”
because it would not be possible for the
Secretary to establish the actual nature
of a hypothetical transaction. In addition,
adopting this stakeholder recommendation would both significantly compromise the IRS’s ability to administer and
enforce the requirements of section 355
and reduce certainty regarding section 355
qualification.
Under proposed §1.355-4(a)(2)(i) and
(b)(1), the term “plan of distribution” generally would mean a plan of distribution
established by a distributing corporation
that satisfies all requirements set forth in
proposed §1.355-4(c) and that is filed with
the IRS pursuant to proposed §1.355-5.
Proposed §1.355-4(a)(2)(iii) and (b)(2)
would provide that a plan of distribution
also may be established based on corrections to the taxpayer-filed plan by the
Commissioner based on all relevant facts
and circumstances, all relevant provisions of the Code, and general principles
of Federal income tax law (including the
step transaction doctrine). If the taxpayer
fails to file a plan of distribution under
proposed §1.355-5, proposed §1.355-4(a)
(2)(iv) and (b)(2) would provide that the
Commissioner may identify a plan of distribution for the transaction.
Consistent with the objectives for guidance described in section 2.01 of Notice
2024-38, the proposed plan of distribution provisions are intended to facilitate
taxpayer certainty in identifying distributions to which section 355 properly should
be applied. See, for example, proposed
§1.355-4(c)(3)(i)(B) (providing a safe
harbor presumption for timely prosecuting
the plan of distribution) and (d) (providing rules for determining whether a distribution is properly included in the plan of
distribution).
In addition, the plan of distribution
would provide the IRS with a single,
timely document that identifies all relevant distributions necessary to determine
the appropriate Federal income tax treatment of the purported section 355(c) dis-
Bulletin No. 2025–10
tribution. This proposal, combined with
the enhanced reporting requirements for
section 355 transactions under proposed
§1.355-5, would reestablish an appropriate line of sight for the IRS into taxpayer
compliance under section 355, thereby
helping to achieve the compliance and
increased certainty objectives. Compare
former §1.355-5 (effective from November 26, 1960, to May 29, 2006) (requiring
the taxpayer to “attach to its return for the
year of the distribution a detailed statement setting forth such data as may be
appropriate in order to show compliance
with the provisions of [section 355]”).
5. Treatment of Delayed Distributions
and Retentions
The Treasury Department and the IRS
appreciate the feedback received from
stakeholders regarding the similarities
between delayed distributions and retentions. The Treasury Department and the
IRS agree with stakeholders that, because
a section 355 transaction requires the distribution of controlled corporation stock
by the distributing corporation, each of the
following could apply to the same transaction: (i) the “part of the distribution”
requirement in section 355(a)(1)(D); (ii)
the “in pursuance of the plan of reorganization” requirement in section 361; and
(iii) the retention requirements in section
355(a)(1)(D)(ii).
In particular, the Treasury Department
and the IRS share the stakeholders’ view
that, if the distributing corporation does
not distribute all its controlled corporation
stock in the first distribution, the “delayed
distribution” and “retention” labels give
rise to a distinction without a difference
in determining the existence of a genuine
separation between the distributing corporation and the controlled corporation.
In this respect, proposed §1.355-2(e)(2)
(iii) would focus on whether a genuine
separation has occurred, without regard to
whether the controlled corporation stock
not distributed as part of the first distribution is disposed of through a distribution
or transfer under section 361(c) or a taxable sale under section 1001.
However, the Treasury Department
and the IRS continue to view the “part of
the distribution” requirement in section
355(a)(1)(D), the “in pursuance of the plan
999
of reorganization” requirement in section
361, and the “no tax avoidance purpose”
requirement in section 355(a)(1)(D)(ii) as
discrete requirements that address discrete
issues reflective of discrete policies. The
“part of the distribution” requirement in
section 355(a)(1)(D) serves as a scoping
provision for the applicability of section
355(a)(1)(D)(i) and (ii) to distributions of
controlled corporation stock. As discussed
in parts I.C.4 and III.C of this Explanation of Provisions, the proposed plan of
distribution and plan of reorganization
rules would facilitate the determination of
which distributions are “part of the distribution.”
As reflected in the legislative history of
section 361, the “in pursuance of the plan
of reorganization” requirement serves
in large part to limit the application of
the operative provisions in subchapter C
to those transactions with a sufficiently
proximate relationship with transactions
that qualify under a definitional provision
in subchapter C. See part II.A of the Background.
Lastly, the “no tax avoidance purpose”
requirement in section 355(a)(1)(D)(ii)
serves to ensure there is a genuine separation of the distributing corporation and
the controlled corporation in situations
in which the distributing corporation
continues to hold controlled corporation
stock following the first distribution. This
requirement applies regardless of whether
that controlled corporation stock is disposed of pursuant to the plan of reorganization under section 361(c).
6. Timing Requirement for Control
Distribution
Consistent with the Supreme Court’s
decision in Gordon (discussed in part I.D.2
of the Background), proposed §1.355-2(e)
(2) would require a distributing corporation, pursuant to a plan of distribution or
plan of reorganization, as appropriate, to
distribute an amount of stock of the controlled corporation constituting control
(within the meaning of section 368(c))
either (i) within a single taxable year, or
(ii) over two taxable years, but only if all
distributions up to and including the control distribution are effectuated pursuant
to a binding commitment that is described
in the plan of distribution or plan of reor-
March 3, 2025
ganization (as applicable). A two-year
limitation for distributing control would
provide taxpayers with additional transactional flexibility while facilitating the
IRS’s ability to administer and enforce the
requirements of section 355. This approach
would help achieve the increased certainty
and transaction facilitation objectives of
these proposed regulations.
7. Requirements for Nonrecognition
Treatment
In accordance with the foregoing discussion in this part I.C, these proposed
regulations would revise §1.355-2(e) to
provide that a distribution does not qualify for nonrecognition treatment under
section 355(a)(1) unless the following
requirements are satisfied. First, proposed
§1.355-2(e)(2)(i) and (ii) would provide
that the distributing corporation must
distribute an amount of stock of the controlled corporation constituting control
(within the meaning of section 368(c))
either (i) within a single taxable year, or
(ii) during two taxable years, subject to
the “binding commitment” requirement
described in part I.C.6 of this Explanation
of Provisions. Second, proposed §1.3552(e)(2)(iii) would provide that any controlled corporation stock not distributed
as part of the first distribution must satisfy
the requirements for a qualifying retention
in proposed §1.355‑10(c).
As previously discussed in parts I.C.1
through 3 of this Explanation of Provisions, to satisfy the requirements for a
qualifying retention (and to thereby rebut
the presumption of a tax avoidance purpose for the retention), the distributing
corporation must: (i) either qualify for
the section 355(a)(1)(D)(ii) safe harbor
in proposed §1.355‑10(c)(3) or satisfy the
facts-and-circumstances test in proposed
§1.355‑10(c)(2)(ii); and (ii) vote any
retained controlled corporation stock in
proportion to votes cast by the controlled
corporation’s other shareholders (other
than distributing corporation related persons). See proposed §1.355-10(c)(2)(iii).
II. Non-Substantive Modifications to
Section 355 Regulations
These proposed regulations would
make certain non-substantive revisions to
March 3, 2025
current §§1.355-1 and 1.355-4. For example, these proposed regulations would
modify current §1.355-1 by adding general definitions that apply for purposes of
the section 355 regulations, incorporating
the rules in current §1.355-4 as proposed
§1.355-1, and moving the applicability
dates from current §1.355-1(a) to proposed §1.355-1(e). These revisions are not
intended to make any substantive change.
III. Plan of Reorganization; Party to a
Reorganization
A. Notice 2024-38
As stated in section 2.02(4) of Notice
2024-38, the Treasury Department and
the IRS understand that confusion and
disagreement exists regarding the application of the “plan of reorganization”
requirement to divisive reorganizations.
For example, some stakeholders view
the applicability of the “plan of reorganization” requirement to be potentially
obviated by the temporal requirements
set forth in section 3.04(6) of Rev. Proc.
2018-53 (concerning delayed satisfaction
of distributing corporation debt). It is the
view of the Treasury Department and the
IRS that this is incorrect.
Section 2.02(4) of Notice 2024-38
further states that, although the “plan of
reorganization” requirement incorporates
a degree of transactional flexibility, such
flexibility is limited by current §§1.3681(c) and 1.368-2(g), and the Treasury
Department and the IRS view this requirement as helpful to ensure that delayed distributions are not used to avoid the repeal
of the General Utilities doctrine (see part
I.A.2 of the Background).
B. Stakeholder input
The Treasury Department and the IRS
have received a broad spectrum of feedback from stakeholders regarding the
“plan of reorganization” requirement.
However, consistent with the view of the
Treasury Department and the IRS set forth
in Notice 2024-38, stakeholders uniformly
have contended that this requirement
should be applied in a flexible manner.
Certain stakeholders have described the
guidance in current §1.368-2(g) regarding the meaning and scope of the “plan
1000
of reorganization” requirement as circular and incomplete. Those stakeholders
similarly have described §1.368-1(c) as
providing only conceptual guidance as to
which transactions are properly included
in a plan of reorganization. These stakeholders also have described §1.368-3(a)
as requiring each party to the reorganization to adopt that plan but then failing to
provide any guidance on how such parties
are to satisfy that requirement. Stakeholders have aptly noted that Notice 2024-38
provided little additional clarity regarding
the “plan of reorganization” requirement.
Additionally, certain stakeholders have
noted that few cases address the meaning
and scope of the “plan of reorganization”
concept, and that, even within such cases,
courts often have applied the step transaction doctrine and the substance-over-form
doctrine to determine the existence of a
plan of reorganization. For example, one
stakeholder highlighted King Enterprises,
Inc. v. United States, 418 F.2d 511 (Ct. Cl.
1969), in which the U.S. Court of Federal
Claims applied the step transaction doctrine to treat the acquisition of stock of a
target corporation (Tenco), followed by
the merger of the target corporation into
the acquiring corporation (Minute Maid),
as a reorganization qualifying under section 368(a)(1)(A). The court identified the
threshold issue as “whether the transfer
of Tenco stock to Minute Maid is to be
treated for tax purposes as an independent
transaction of sale, or as a transitory step
in a transaction qualifying as a corporate
reorganization,” which dictated the resolution of the central issue of “whether the
initial exchange of stock was a step in a
unified transaction pursuant to a ‘plan of
reorganization’.” King Enterprises, 418
F.2d at 514-15. Based on an analysis of
the “operative facts in this case,” the court
applied the step transaction doctrine to
conclude that the two transactions comprised a single, unified transaction. Id. at
515-16, 519. Even though no formal plan
of reorganization existed, the court relied
on those facts and that analysis to identify
a plan of reorganization for that unified
transaction. Id. at 519 n.11 (relying on
Redfield v. Commissioner, 34 B.T.A. 967
(1936), for the proposition that “[a] formal
plan or reorganization is not necessary if
the facts of the case show a plan to have
existed”).
Bulletin No. 2025–10
In Seagram Corp. v. Commissioner,
104 T.C. 75 (1995), the Tax Court considered whether to integrate (i) an acquisition
of stock of a target corporation (Conoco)
through a first-step tender offer made by
a subsidiary of an acquiring corporation
(DuPont Tenderor and DuPont, respectively), and (ii) a subsequent merger of
Conoco into DuPont Tenderor. The court
acknowledged that the tender offer and
subsequent merger each possessed independent significance, and that the subsequent merger was subject to several contingencies. Seagram, 104 T.C. at 93-94.
However, the court emphasized that
DuPont and DuPont Tenderor “were under
a binding and irrevocable commitment to
complete the culminating merger—the
second step—upon the successful completion of the DuPont tender offer—the
first step.” Id. at 98. Based on all facts and
circumstances of the tender offer and subsequent merger, including official records
of DuPont and DuPont Tenderor, the court
identified the existence of a plan of reorganization, reasoning that, “because DuPont
was contractually committed to undertake
and complete the second-step merger once
it had undertaken and completed the firststep tender offer, these carefully integrated
transactions together constituted a plan of
reorganization within the contemplation
of section 354(a).” Id. at 98-99 (relying
principally on, and noting satisfaction of,
the Supreme Court’s binding commitment
standard in Gordon).
Stakeholders also have noted that
the Tax Court in Seagram characterized
the “plan of reorganization” concept
expressed in §1.368-2(g) as one of “substantial elasticity,” relying on the court’s
prior observations on that concept in Int’l
Telephone. Seagram, 104 T.C. at 96. (In
Int’l Telephone, the Tax Court noted that
§1.368-2(g) “is imbued with qualities of
flexibility and vagueness, with the result
that it does not present precise self-executing guidelines.” 77 T.C. at 75.) The Tax
Court in Seagram also relied on scholarly
commentary for the proposition that, even
though §1.368-2(g) at that time required a
plan of reorganization to be filed with the
IRS, it was self-evident that the IRS and
the courts could identify the existence of
a plan of reorganization in the event the
taxpayer either did not file one or filed one
that was inaccurate. See Seagram, 104
Bulletin No. 2025–10
T.C. at 96 (quoting Peter L. Faber, The
Use and Misuse of the Plan of Reorganization Concept, 38 Tax L. Rev. 515, 523
(1982-1983)).
Stakeholders also have commented on
temporal considerations relating to plans
of reorganization. Stakeholders have contended that the length of time between
transactions effectuating a plan of reorganization should not prevent any particular
transaction from being considered part of
the plan. Conversely, these stakeholders
have contended that the temporal proximity of one transaction to another transaction that is properly included in a plan of
reorganization should not be determinative as to whether the other transaction is
properly included in the plan. Stakeholders also have contended that imposing a
time limitation for completing a plan of
reorganization would be inappropriate.
Additionally, some stakeholders have
recommended granting taxpayers the flexibility to either execute the steps identified
in the plan of reorganization or change
them at any time, based on each taxpayer’s judgment on how best to achieve the
objectives of their transaction. However,
other stakeholders have recommended
clarifying that entering into a new transaction not contemplated by the plan, even in
the alternative, is not treated as pursuant
to the plan of reorganization.
In sum, stakeholders uniformly have
described the current regulations addressing the “plan of reorganization” requirement as lacking sufficient clarity and
comprehensiveness. Accordingly, some
stakeholders have requested guidance
regarding the metrics needed for a taxpayer to establish a plan of reorganization.
Specifically, stakeholders have requested
guidance regarding (i) the means by which
parties to a reorganization can adopt a
plan of reorganization (in particular, some
stakeholders have recommended allowing actions of a corporation’s authorized
representatives, and not just formal written actions of the board, to be taken into
account for this purpose), (ii) transactions
that may occur at a future time, are contingent, or are in the alternative, and (iii)
transactions that may develop as a result
of events arising after the plan of reorganization is adopted.
The stakeholder input received has
highlighted not only the deficiencies
1001
in authoritative guidance regarding the
meaning and scope of the “plan of reorganization” requirement, but also the importance of this requirement in determining
whether the operative provisions of subchapter C apply to a particular transaction.
C. Proposed regulations
1. Overview
The Treasury Department and the IRS
agree with stakeholders that the current
guidance regarding the “plan of reorganization” requirement is inadequate and
creates significant confusion. Consistent with stakeholder recommendations,
the proposed regulations would clarify,
among other items, (i) the metrics needed
for a taxpayer to establish a plan of reorganization, (ii) the manner whereby parties to a reorganization can adopt a plan
of reorganization, and (iii) the requirements for prosecuting a plan of reorganization (including in the event of a change
in circumstances following adoption of
the plan). In proposing this guidance, the
Treasury Department and the IRS have
endeavored to balance the importance of
providing taxpayers with transactional
flexibility to effectuate bona fide business
transactions with the need to facilitate IRS
administration of the reorganization provisions of subchapter C. Accordingly, the
Treasury Department and the IRS believe
that this guidance would help achieve
the compliance, increased certainty, and
transaction facilitation objectives of these
proposed regulations. (See the discussion
of the objectives for guidance in part VI of
the Background; see also the discussion of
the TIGTA Report in part IV of the Background.)
2. Proposed Rules Regarding Plan of
Reorganization
a. Purpose and effect of plan of
reorganization
The Treasury Department and the IRS
view a plan of reorganization as serving
two related purposes. First, a plan of reorganization serves to identify those transactions to which the definitional and operative provisions of subchapter C apply.
Second, a plan of reorganization serves
March 3, 2025
to distinguish transactions the Federal
income tax treatment of which is governed by the reorganization provisions of
subchapter C from transactions to which
the general recognition provisions of the
Code (such as section 1001) apply.
However, under the proposed regulations, a taxpayer’s failure to set forth a
plan of reorganization in a single, comprehensive document neither would be determinative as to the existence or scope of
a plan of reorganization for a transaction
nor would govern the application of any
definitional or operative provision to that
transaction. See proposed §1.368-4(a)(3).
b. Determination of plan of
reorganization
The proposed regulations would permit
a plan of reorganization to be determined in
several different manners. Under the manner preferred by the Treasury Department
and the IRS, a taxpayer would prepare a
single, comprehensive document that satisfies all requirements set forth in proposed
§1.368-4(d) and file that document with the
IRS as required by proposed §1.368-3(a)
(5) (taxpayer-filed plan of reorganization).
See proposed §1.368-4(b)(1). The taxpayer-filed plan of reorganization would contain the information required by prior and
current §1.368-3(a) and incorporate recommendations of the TIGTA Report.
Specifically, proposed §1.368-4(d)
would set forth the following requirements. First, the proposal would require
the taxpayer-filed plan of reorganization
to identify (i) all parties to the reorganization (as required by current §1.368-3(a)),
(ii) all transactions properly included in
the plan of reorganization (as required by
prior §1.368-3(a)), and (iii) all liabilities
(including debt) to be assumed by the
acquiring corporation and the obligees (or
creditors) of those liabilities, and (iv) all
debt of the target corporation that will be
satisfied with section 361 consideration
and the creditors of that debt. Second,
the proposal would require such plan to
describe the intended Federal income tax
treatment of those transactions (which
would facilitate implementing the recommendations of the TIGTA Report). Third,
the proposal would require such plan to
describe the corporate business purpose
for each transaction (consistent with cur-
March 3, 2025
rent §1.368-2(g)). Lastly, the proposal
would require such plan to establish that
each transaction facilitates the continuance of the business of a corporation a
party to the reorganization (consistent
with current §1.368-2(g)). See proposed
§1.368-4(d)(1).
The proposed regulations would reflect
a preference that taxpayers will timely
file a complete and accurate plan of reorganization. See proposed §1.368-4(c)(1).
Accordingly, the Federal income tax consequences of the subject transactions generally would be determined in accordance
with that plan. See proposed §1.368-4(a)
(2)(i). Throughout the duration of the
transaction or series of transactions,
which potentially could span several taxable years, the IRS would possess the ability to monitor the taxpayer’s execution of
that plan of reorganization (for example,
through the taxpayer’s annual filing of
Form 7216 for divisive transactions). The
Treasury Department and the IRS intend
the proposed approach (i) to increase
taxpayer certainty regarding the Federal
income tax treatment of transactions properly included in a plan of reorganization,
and (ii) to facilitate IRS administration of
the reorganization provisions of subchapter C.
However, if a taxpayer files a plan of
reorganization with the IRS that fails to
satisfy any requirement set forth in proposed §1.368-4(d), or if the taxpayer fails
to file a plan of reorganization with the
IRS in accordance with proposed §1.3683(a)(5), proposed §1.368-4(c)(2)(i) recognizes that the Commissioner may correct
or identify a plan of reorganization. Under
proposed §1.368-4(c)(2)(ii), the Commissioner may determine that a transaction or
series of transactions should be included
in, or excluded from, a plan of reorganization based on (i) all facts and circumstances regarding the transaction or series
of transactions, and (ii) all relevant provisions of the Code and general principles of
Federal income tax law, including the step
transaction doctrine.
The proposed approach is consistent
with long-standing caselaw indicating that
the existence and proper scope of a plan
of reorganization can be determined in the
absence of formal documentation. See, for
example, Redfield, 34 B.T.A.at 973 (“It is
not necessary, however, that such a plan
1002
of reorganization be evidenced by a formal written document, such as a contract
or corporate minutes. It is sufficient if the
circumstances indicate that the various
steps taken were pursuant to a definite
plan of reorganization.”); Fry v. Comm’r,
5 T.C. 1058, 1070 (1945) (similar). The
proposed regulations would reflect this
long-standing position because conditioning the applicability of the definitional and
operative provisions of subchapter C on
whether a plan of reorganization formally
was prepared and filed would, in particular and contrary to law, make the reorganization regime entirely elective.
Nonetheless, the Treasury Department
and the IRS are of the view that formal
documentation requirements for taxpayer-filed plans of reorganization are necessary to facilitate the IRS’s administration
of the reorganization provisions of subchapter C. See part III of the Background.
Moreover, the preference for complete
and accurate taxpayer-filed plans of reorganization under proposed §1.368-4(c)(1)
requires adequate substantiation with the
IRS, which would be provided by objectively verifiable, official corporate documents. Accordingly, proposed §1.3684(d) would enhance the current reporting
requirements for plans of reorganization.
c. Agreement by parties to plan of
reorganization; beginning of plan of
reorganization
Proposed §1.368-4(d)(2) would provide that, prior to the first step of a reorganization, the plan of reorganization or
an original plan of reorganization that
becomes the amended plan of reorganization, as applicable, must be finalized and
adopted by the party to the reorganization.
Taxpayers would demonstrate satisfaction
of this requirement through (i) the acts
of duly authorized officers and directors
of the corporation, and (ii) the official
records of the party to the reorganization.
The Treasury Department and the IRS
are of the view that the proposed approach
would provide greater taxpayer certainty
regarding the means by which parties to a
reorganization can adopt a plan of reorganization than current §1.368-3(a), which
provides only that “[t]he plan of reorganization must be adopted by each of the
corporations that are parties thereto.” As
Bulletin No. 2025–10
previously discussed in part III.B of this
Explanation of Provisions, the current
regulations have created significant uncertainty due to the lack of guidance on what
constitutes an “adoption” by the parties.
The proposed regulations would address
this uncertainty in a manner consistent
with prior §1.368-3(a) and statutory law.
See section 806(g)(3) of the Tax Reform
Act of 1976 (Public Law 94-455, 90 Stat.
1520, 1606) (describing how a corporation is considered to have adopted a plan
of reorganization for purposes of determining the effective date of certain modifications to sections 382 and 383).
In addition, the proposed substantiation
requirements would facilitate the IRS’s
administrative function by marking the
beginning of the taxpayer’s plan of reorganization—a feature that the Tax Court
also views as important. See Seagram,
104 T.C. at 98 (emphasizing in its plan of
reorganization analysis that the DuPont/
Conoco Agreement “provides a discrete
start and finish”).
d. Timing requirement for completion of
plan of reorganization
i. General “Expeditious Completion”
Requirement
Proposed §1.368-4(d)(3)(i)(A) and (ii)
(A) would require that, taking into account
all facts and circumstances (including the
one or more corporate business purposes
for a reorganization), all parties to the reorganization must complete the plan of reorganization as expeditiously as practicable,
and in the manner described in that plan.
The proposed approach takes into account
taxpayers’ need for transactional flexibility
and reflects the long-standing principle that
the passage of time is not determinative of
whether a transaction is part of a plan of
reorganization. See, for example, Wilson
v. Comm’r, T.C. Memo. 1961-135 (“The
mere lapse of time is not decisive. The
important thing is that the steps which are
taken evidence a consistent performance of
the reorganization plan and purpose.”).
ii. Presumption of Satisfaction if
Completion within 24 Months
However, the Treasury Department
and the IRS are concerned that the lack
Bulletin No. 2025–10
of a time limitation for completing a plan
of reorganization raises administrability
concerns for the IRS. Accordingly, the
Treasury Department and the IRS are (i)
issuing proposed §1.355-5, and (ii) introducing new Form 7216, to provide the
IRS with information regarding divisive
transactions that span multiple tax years.
See part V of the Background.
Additionally, temporal guidelines
would provide greater certainty to taxpayers. In this regard, stakeholders have
requested the inclusion of safe harbors
in these proposed regulations to mitigate
uncertainty arising from conceptual rules
and facts-and-circumstances determinations. Based on this feedback, proposed
§1.368‑4(d)(3)(i)(B) would provide that
the “expeditious completion” requirement
is presumed to be satisfied if all parties
to a reorganization complete the plan
of reorganization within the 24-month
period beginning on the date of the first
step of the plan of reorganization. This
increased certainty would help achieve
the transaction facilitation objective of
these proposed regulations, and providing a 24-month safe harbor would help
achieve the compliance objective of these
proposed regulations.
e. Requirements for transactions to be
treated as properly included in plan of
reorganization
i. Overview
Stakeholders have recommended various standards and approaches for determining whether a transaction is properly
included in a plan of reorganization. As
noted by stakeholders, neither current
guidance nor the caselaw regarding the
“plan of reorganization” requirement adequately addresses this issue. The proposed
regulations would synthesize the overarching principles of this caselaw into rules
that could be applied by taxpayers and the
IRS with significantly greater certainty
than under current Treasury guidance and
the caselaw.
ii. Definite Intent Requirement
As a threshold requirement, proposed
§1.368-4(e)(1)(i) would require that, prior
to the first step of a plan of reorganization
1003
or an original plan of reorganization that
becomes the amended plan of reorganization, one or more parties to the reorganization must evidence a definite intent
to carry out the transaction. This definite
intent must be evidenced through a written commitment in one or more official
records of the party that substantiate the
plan of reorganization. Under this proposal, the existence of contingencies or
conditions would not be conclusive in
determining whether a party to the reorganization satisfies this requirement.
The “definite intent” standard is
intended to provide sufficient transactional flexibility to encourage bona fide
business transactions in a manner consistent with long-standing caselaw. The origins of the “definite intent” standard can
be traced back to judicial opinions of the
Board of Tax Appeals (BTA), the predecessor to the Tax Court. For example, in
Fry v. Commissioner, the BTA relied on
this standard for determining the existence
of a plan of reorganization from “what
appear[ed] on the minutes of the meeting
of the stockholders and the meeting of the
board of directors of the old bank,” which
had articulated the business objectives and
transaction steps for the reorganization. 5
T.C. at 1070; see also Redfield, 34 B.T.A. at
973 (noting that, although a formal written
plan of reorganization is not necessary, the
circumstances evidencing that a reorganization occurred need to indicate that the
various steps taken in pursuance thereof
were taken “pursuant to a definite plan of
reorganization”) (emphasis added); Seagram, 104 T.C. at 97 (observing that the
DuPont/Conoco Agreement “definitively
states the terms for ‘the acquisition of
[Conoco] by [DuPont Tenderor and]’ sets
out … the series of transactions which in
their totality were intended to accomplish
a section 368 reorganization”).
In contrast, courts have determined that
transactions subject to a lesser degree of
intent or predominated by uncertainty are
not properly included in a plan of reorganization. For example, in National Bank
of Commerce in Memphis v. United States,
87 F. Supp. 302 (W.D. Tenn. 1949), the
court concluded that a transaction contemplated prior to the plan of reorganization was not properly included in that plan
because the transaction was uncertain and
indefinite as of the time of the first step
March 3, 2025
of the plan of reorganization. 87 F. Supp.
at 304. The court emphasized that “[a]n
element in a plan of reorganization that
cannot be legally enforced and, in addition is fraught with much uncertainty, is
indefinite and not necessary to the reorganization, cannot be considered as one of
the steps resulting in the completed transaction.” Id. Accordingly, if the parties did
not anticipate or otherwise contemplate
a transaction prior to the adoption of
the plan of reorganization, that transaction cannot be included in that plan. See
Atwood Grain & Supply Co. v. Comm’r,
60 T.C. 412, 423 (1973) (observing that
“[t]here [wa]s no evidence that issuance
of the preferred stock was contemplated
either in the merger negotiations or in the
merger agreement,” and reasoning that,
“[i]n order to include events occurring
after a merger in the plan of merger there
must be some anticipation of the event in
the merger”).
Stakeholders have noted that a “plan
of reorganization” concept that includes
every possibility considered by any taxpayer in connection with a reorganization
would be overbroad and meaningless.
Indeed, a commenter relied upon by the
Tax Court for its analysis in Seagram
noted that “[t]he contemplated possibility
standard is too broad…. A more appropriate standard would be to link the later
transaction to the earlier one only if there
is a firm commitment to consummate it.”
Faber, The Use and Misuse of the Plan of
Reorganization Concept, 38 Tax L. Rev.
at 547. The Treasury Department and the
IRS agree that such a standard would not
be appropriate for the proposed regulations. Accordingly, proposed §1.368-4(e)
(1)(iii)(A) would provide that mere contemplation that a transaction may be carried out would not be sufficient to satisfy
the “definite intent” requirement, regardless of whether that contemplated transaction is included in an official record of the
party.
However, the Treasury Department
and the IRS recognize that the “contemplated possibility” standard is relevant for
certain plan of reorganization determinations. Accordingly, proposed §1.368-4(e)
(1)(iii)(B) would provide that a party’s
mere contemplation of a transaction may
be relevant for purposes of the correction
or identification of a plan of reorganiza-
March 3, 2025
tion by the Commissioner. As previously
discussed in part III.C.2.b. of this Explanation of Provisions, the Commissioner’s
determination under proposed §1.368-4(c)
(2)(ii) would be based on all facts and circumstances pertaining to the transaction
and the application of all relevant Code
provisions and Federal income tax principles, including the step transaction doctrine.
Permitting the IRS to determine the
outer reaches of the scope of transactions
potentially includable in a plan of reorganization through an analysis of all facts
and circumstances and Federal income tax
principles would be consistent with judicial authorities that have applied a “contemplated possibility” test. For example,
in Anheuser-Busch, Inc. v. Commissioner,
40 B.T.A. 1100 (1939), the BTA relied on
substance-over-form principles to determine the scope of transactions included in
a plan of reorganization, based on its determination that a first-step transfer to a parent corporation was “transitory and without real substance.” 40 B.T.A. at 1106. As
part of its analysis, the court observed that
the parent had “contemplated,” but was
not obligated to carry out, the immediate
transfer of the property received to its subsidiary, and the court expanded the scope
of the plan of reorganization to include
that second-step transfer. Id. at 1106-07
(relying on the substance-over-form analysis of Helvering v. Bashford, 302 U.S.
454, 458 (1938)). Other judicial opinions
similarly have used the existence of a contemplated possibility in this manner. See,
for example, Avco Mfg. Corp. v. Comm’r,
25 T.C. 975, 984-85 (1956) (noting that
a “subsequent transfer of the property …
was a contemplated possibility under the
plan that actually eventuated” and was
properly included within the scope of the
plan of reorganization under the mutual
interdependence test); Transport Products
Corp. v. Comm’r, 25 T.C. 853, 857-58
(1956).
Once a definite intent is established,
the existence of contingencies and other
conditions that could affect prosecution of the plan of reorganization are not
treated as diminishing that level of intent.
See, for example, Seagram, 104 T.C. at
96 (“DuPont had an indisputable legal
obligation to complete the Merger with
Conoco, notwithstanding the possibility
1004
of intervening legal impediments, or contingencies, which in fact, never materialized”). Accordingly, proposed §1.368-4(e)
would provide that, for purposes of determining whether a party to a reorganization
satisfies the “definite intent” requirement,
the existence of contingencies or conditions is not conclusive.
Section 355 transactions would be subject to a special definite intent requirement
under proposed §§1.355-4(d)(1)(ii) and
1.368-4(e)(1)(ii). Specifically, if a control
distribution occurs in a later taxable year
than the first distribution, the distributing
corporation would not be treated as establishing a definite intent unless all distributions up to and including the control
distribution are effectuated pursuant to a
binding commitment. This proposed special “definite intent” requirement would
reflect the Supreme Court’s decision in
Gordon. See also the discussion in part
I.D.2 of the Background.
iii. Proximate Relationship Requirement
(a) Overview
The proposed regulations would set
forth standards for determining whether a
transaction shares a sufficient relationship
with other transactions to which a definitional or operative provision applies.
To reflect the distinct purposes for, and
requirements of, the definitional provisions and the operative provisions in subchapter C, the proposed regulations would
set forth two different sets of proximate
relationship requirements.
(b) Necessary or integral test for
qualification under definitional provisions
Under proposed §1.368-4(e)(2)(i)(A),
a transaction would be treated as part of
the plan of reorganization for a reorganization to which a definitional provision
can apply only if, on its own or as part
of a series of transactions, the transaction
either (i) is necessary to satisfy one or
more requirements of the definitional provision, or (ii) is an integral part of a series
of transactions carried out to satisfy the
requirements of the definitional provision.
In practice, the “integral part” test generally would be relevant for transactions
that are not “necessary to satisfy” one or
Bulletin No. 2025–10
more requirements of a definitional provision. The proposed regulations would
require satisfaction of either condition to
be evidenced by a written commitment in
one or more official records of the party to
the reorganization. See proposed §1.3684(e)(2)(i)(A).
The “necessary to satisfy” condition is
intended to convey, with more precision,
a requirement set forth in current §1.3682(g). Section 1.368-2(g) states, in part,
that “[t]he term plan of reorganization has
reference to a consummated transaction
specifically defined as a reorganization
under section 368(a).” In addition, current §1.368-2(g) provides that “[t]he term
is not to be construed as broadening the
definition of ‘reorganization’ as set forth
in section 368(a).” The Treasury Department and the IRS view the “necessary to
satisfy” condition as already clear (given
that the definitional provisions in section
368(a)(1) describe the steps necessary for
qualification) but have rearticulated this
standard to eliminate the circularity and
vagueness that courts and stakeholders
have identified in current §1.368-2(g).
See Int’l Telephone, 77 T.C. at 75 (noting
such vagueness); Seagram, 104 T.C. at 96
(highlighting the Tax Court’s observation
in Int’l Telephone).
The “integral part” condition also is
embedded in current §1.368-2(g), which
provides that the term “plan of reorganization” is to be taken as limiting the nonrecognition of gain or loss to “such exchanges
or distributions as are directly a part of the
transaction
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