Guidance Regarding Certain Matters Relating to Nonrecognition of Gain or Loss in Corporate Separations, Incorporations, and Reorganizations

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-112261-24]

RIN 1545-BR32

Guidance Regarding Certain Matters Relating to Nonrecognition of Gain or Loss in Corporate Separations, Incorporations, and Reorganizations

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 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 Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.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.

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) 317-6901 (not a toll-free number) or by email to

publichearings@irs.gov

(preferred).

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).” 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.”

Background

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.”

2. General Utilities Repeal

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).

3. Section 355(c) Distributions

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.

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 transfer 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 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 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 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 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 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 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 short-term 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 distributed 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).

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 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.

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 section 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 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 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 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 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 (Pub. L. 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).

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).

3. Enactment of Section 361(b): Conduit for Distribution to Shareholders

The original predecessor to current section 361(b) was enacted by Congress as section 203(e) of the Revenue Act of 1924 (Pub. L. 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 (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.

4. Section 361(c): Distributions of Appreciated Property to Target Corporation Shareholders

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 (Pub. L. 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) (concerning 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 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 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 (Pub. L. 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 corporations 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 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 (Pub. L. 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 committee 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 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 § 1.368-2(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 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 corporate reorganizations. Section 1.368-3(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 § 1.368-3(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.

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 § 1.368-3(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 § 1.368-3(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. 2019-30-050 (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.

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,

Multi-Year 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. 2024-24, 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 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.

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 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 Department 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 business 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 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. 2024-24 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 presumption 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 distributing 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 § 1.355-10(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 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 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).

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's-length continuing contractual agreements between the DSAG and the CSAG, would be facts and circumstances indicating that the retention fails the requirements under 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”; 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 stakeholders' 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) distribution. 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 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 reorganization (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 § 1.355-2(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 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 §§ 1.368-1(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 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”).

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 first-step 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 T.C. at 96 (

quoting

Peter L. Faber,

The Use and Misuse of the Plan of Reorganization Concep

t, 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 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 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 current § 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 § 1.368-3(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 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 § 1.368-4(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 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 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 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 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 reorganization 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 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 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 § 1.368-4(e)(2)(i)(A).

The “necessary to satisfy” condition is intended to convey, with more precision, a requirement set forth in current § 1.368-2(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 specifically described as a reorganization in section 368(a)

” (emphasis added). The Treasury Department and the IRS view this “directly a part” standard as less stringent than the “necessary to satisfy” standard but nonetheless view it as mandating that a transaction must be essential to qualifying a series of transactions as a reorganization. Accordingly, the proposed regulations would replace the phrase “directly a part of the transaction” with an “integral part” standard.

The proposed “integral part” standard is intended to reflect the structure of section 368(a)(1) and the long-standing position of the IRS and the courts. For example, a distributing corporation that retains controlled corporation stock may qualify under section 355—and therefore ultimately may satisfy a condition in section 368(a)(1)(D)—through multiple types of dispositions of controlled corporation stock. In each instance, such disposition may be viewed as integral to section 368(a)(1)(D) qualification. (

See also

the requirements for qualifying retentions previously discussed in part I.C of this Explanation of Provisions.)

The foregoing principle is reflected in Rev. Rul. 57-518, 1957-2 C.B. 253, which addressed whether a transaction satisfied a prior version of section 368(a)(1)(C) that did not yet impose a liquidation requirement. In Rev. Rul. 57-518, a target corporation transferred 70 percent of its assets to an acquiring corporation for acquiring corporation voting stock. The target corporation then disposed of all its remaining assets in recognition transactions (that is, not under the operative nonrecognition

provisions of subchapter C) and liquidated. Although the liquidation was not described in, or required by, that prior version of section 368(a)(1)(C), the IRS concluded that the liquidation was part of the plan of reorganization. Like the disposition by a distributing corporation of retained controlled corporation stock in a transaction to which section 1001 applies, the target corporation liquidation was not necessary to achieve qualification under section 368(a)(1), but it was an integral part of a series of transactions carried out to satisfy the requirements of that definitional provision.

(c) But for, or Integral to, Test for Application of Operative Provision

Under proposed § 1.368-4(e)(2)(i)(B), a transaction would be treated as part of the plan of reorganization to which an operative provision can apply only if, on its own or as part of a series of transactions, the transaction either (i) would not have occurred but for the reorganization that is covered by the plan of reorganization, or (ii) is an integral part of a series of transactions carried out to satisfy the requirements of the definitional provision intended to apply to the reorganization. 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. Both of these conditions are intended to replace the “directly a part of” standard set forth in current § 1.368-2(g) with standards that are clearer and more reflective of the purpose and requirements of the operative provisions in subchapter C.

The proposed “but for” condition is embedded within the “directly a part of” requirement in current § 1.368-2(g). Among other objectives, this proposed condition is intended to help clarify the determination of whether an operative provision applies to a distribution that occurs within close temporal proximity to one or more transactions that are properly included in a plan of reorganization. For example, in determining whether section 361(b) should apply to a distribution by a distributing corporation to its shareholders in close temporal proximity to a divisive reorganization, the proposed “but for” test would clarify that section 361(b) treatment would be applicable only if that distribution would not have occurred “but for” the divisive reorganization.

See

the examples in proposed § 1.361-3(f)(2) through (5).

An “integral part” standard also would increase taxpayer certainty as compared to the current “directly a part of” standard, particularly because courts historically have applied an “integral part” standard. For example, in

Sheldon

v.

Commissioner,

6 T.C. 510 (1946), the Tax Court found that a transaction was integral to a merger even though the transaction was not necessary for qualification for a definitional provision under section 368(a)(1). In

Sheldon,

the Tax Court considered whether a pre-merger distribution should be included in the plan of reorganization for the merger. 6 T.C. at 517-18. The court emphasized that the pre-merger distribution was made to equalize values of the target corporation and the acquiring corporation so that the merger could be one of equals, thereby satisfying a condition for executing the merger.

Id.

In its analysis, the court provided that “[t]he purpose of this distribution, its place in the sequence of events, and the surrounding circumstances, lead to but one conclusion. They all demonstrate that it was an integral part of the reorganization transaction as a whole and must be treated in connection with it.”

Id.

at 517.

See also Int'l Telephone,

77 T.C. at 76 (noting the absence of “a binding agreement or other factors indicating that conversion [of debentures] was an integral part of the plans of reorganization”).

Additionally, the Treasury Department and the IRS are of the view that replacing the “directly a part of” standard in current § 1.368-2(g) with the standards in proposed § 1.368-4(e)(2)(i)(B) would improve taxpayer certainty in determining the applicability of an operative provision of subchapter C. Proposed § 1.368-4(e) would provide additional certainty by requiring the “but for” standard to be applied in tandem with the “definite intent” requirement set forth in proposed § 1.368-4(e)(1). In other words, a transaction would not be properly included in a plan of reorganization if the party to the reorganization failed to evidence a definite intent to carry out that transaction, regardless of whether the transaction would not have occurred “but for” the reorganization.

This implementation of the “but for” standard would be consistent with judicial authorities, including those cited by stakeholders. For example, in

International Telephone,

the Tax Court considered exchanges involving debentures that could not have occurred but for the execution of a reorganization that qualified under section 368(a)(1)(C). 77 T.C. at 72-78. Although the court observed the existence of that “but for” relationship, the court reasoned that “[t]he fact that [the acquiring corporation] assumed the conversion obligation as part of the plans of reorganization does not mean . . . that the subsequent conversions and retirement of the debentures were also part of the reorganizations.”

Id.

at 76. Based on the lack of indicia indicating satisfaction of the proposed “direct intent” requirement, the Tax Court concluded that such exchanges were not properly included in the plan of reorganization.

See id.

at 76-77 (noting the lack of any binding agreement, any other type of obligation, or other facts that would indicate satisfaction of the “direct intent” requirement).

See also Becher

v.

Comm'r,

22 T.C. 932 (1954) (treating a distribution as not part of the plan of reorganization under the predecessor to section 368(a)(1)(D), and therefore not “boot,” based on an examination of the facts and circumstances of the distribution and the transactions comprising the reorganization).

(d) Independent Legal Significance; Temporal Proximity

Proposed § 1.368-4(e)(2)(ii) would confirm that the independent significance of a transaction (for example, the fact that the transaction has a separate business motive apart from the reorganization) does not preclude satisfaction of the proximate relationship requirements in proposed § 1.368-4(e)(2)(i)(A) and (B). The Treasury Department and the IRS view this approach as consistent with established caselaw (

see Seagram,

104 T.C. at 91-93) and reflective of the realities of bona fide business transactions. It has long been the understanding of the Treasury Department and the IRS that a transaction could be included in the plan of reorganization even though it may have separate business motives, or separate and permanent legal, economic, and business consequences, apart from the reorganization.

Additionally, proposed § 1.368-4(e)(2)(iii) would provide that a transaction occurring in close temporal proximity to one or more other transactions is not properly included in a plan of reorganization unless Federal income tax principles (including the step transaction doctrine) would apply to determine that the transaction was, in substance, part of the plan of reorganization.

iv. Business Purpose Consistency Requirement

Lastly, in order for a transaction to be treated as properly included in a plan of reorganization, proposed § 1.368-4(e)(3) would require the transaction (on its

own, or as part of a series of transactions) to be consistent with, and directly related to, one or more corporate business purposes for the reorganization (for example, the transaction directly furthers one or more corporate business purposes for the reorganization).

The Treasury Department and the IRS view the proposed corporate business purpose consistency requirement as reflective of established caselaw.

See Seagram,

104 T.C. at 83, 97 (noting that the tender offer and the merger shared the same corporate business purpose of enabling DuPont to acquire all the stock of Conoco). In addition, the Treasury Department and the IRS view this proposed rule as conceptually grounded in current § 1.368-2(g), which provides that “the readjustments involved in the exchanges or distributions effected in the consummation [of the reorganization] must be undertaken for reasons germane to the continuance of the business of a corporation a party to the reorganization.”

f. Amended Plan of Reorganization

The Treasury Department and the IRS recognize that, in certain circumstances, taxpayers may need to amend their plans of reorganization. Accordingly, proposed § 1.368-4(f)(1) would provide that, if a taxpayer amends a plan of reorganization after the first step of the original plan (amended plan of reorganization), those amendments do not cause the taxpayer to fail to satisfy the “plan of reorganization” requirements set forth in proposed § 1.368-4(d) only if the following requirements are satisfied. First, the amendments to the plan must be in direct response to an identifiable, unexpected, and material change in market or business conditions that occurs after the date on which the original plan of reorganization is adopted by the party to the reorganization. Second, the amendments must be necessary to effectuate the reorganization. Third, the amended plan of reorganization must satisfy all requirements set forth in proposed § 1.368-4(d) to qualify as a plan of reorganization.

If the taxpayer satisfies the requirements in proposed § 1.368-4(f)(1), proposed § 1.368-4(f)(2)(i) would provide that the definitional and operative provisions described in proposed § 1.368-1(c)(2)(i) and (ii) would apply to the transactions identified in, and carried out pursuant to, the amended plan of reorganization. In other words, the proposed regulations would confirm that the Federal income tax consequences of all transactions properly included in the amended plan of reorganization would be determined based on that plan of reorganization (and not on the original plan of reorganization). However, proposed § 1.368-4(f)(2)(ii) would provide that, if the amended plan of reorganization fails to satisfy the requirements in proposed § 1.368-4(f)(1), the Commissioner may correct or identify the amended plan of reorganization.

3. Proposed Rules Regarding Party to a Reorganization

In addition to providing rules regarding the determination, adoption, and prosecution of a plan of reorganization, the proposed regulations would revise current § 1.368-2(f) to further clarify (i) which persons are parties to a reorganization, and (ii) the consequences of determining that a person is (or is not) a party to a reorganization.

Proposed § 1.368-2(f)(1) generally would provide that the definitional and operative provisions described in § 1.368-1(c)(2)(i) and (ii), respectively, apply solely to a transaction that is carried out by, between, or among one or more parties to a reorganization. For purposes of determining the scope of transactions to which those provisions apply, the term “party to a reorganization” would be limited under proposed § 1.368-2(f)(2) through (4) solely to a corporation that (i) engages in a transaction or series of transactions that sa

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