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

ion (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)

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

rough (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

g 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

ion 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)

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

(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)

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

zation. 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)

he 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

.

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

rolled 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

ognition 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

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

usion 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

orporate 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

t 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

ection 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

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

orting 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

ion.”

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

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))

ributed 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

ue.

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

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

G 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

ed 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

ide 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)

damental 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)

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

rdless 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

eparation 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

reased 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

i); 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

ted 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

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

on 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

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

nization 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)

tly, 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

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)

f 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

ments 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

l 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

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).

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

o not produce results that are inconsistent with the underlying intent of section 361(c)(3). In other words, stakeholders have suggested that, in determining whether an intermediated exchange should be recharacterized, the relevant question is whether the distributing corporation debt acquired by the intermediary was issued with a purpose of avoiding any requirement or limitation under section 361.

In this regard, one stakeholder has requested guidance providing that steps of an intermediated exchange will not be recast under Federal income tax principles if (i) the intermediary acts on its own account in acquiring distributing corporation debt from third parties (that is, the intermediary becomes the owner of such debt for Federal income tax purposes and the acquisition is not funded or guaranteed by the distributing corporation), (ii) the intermediary assumes the risk that the distributing corporation may default on its debt while such debt is held by the intermediary, and (iii) the distributing corporation debt acquired by the intermediary was not issued with a purpose of avoiding the requirements or limitations of section 361.

Another stakeholder has recommended that the Treasury Department and the IRS refrain from issuing substantive guidance given the fact-intensive nature of determining whether an intermediated exchange should be recast. The stakeholder has recommended that the IRS continue to issue private letter rulings on a case-by-case basis to taxpayers that are able to establish an intermediary's status as a creditor acting for its own account by reference to the factors specified in a series of technical advice memoranda previously issued by the IRS. See T.A.M. 8815003 (Dec. 11, 1987); T.A.M. 8738003 (May 22, 1987); T.A.M. 8735007 (May 18, 1987); T.A.M. 8735006 (May 18, 1987).

2. Direct Issuances

Stakeholders have provided various recommendations to the Treasury Department and the IRS regarding the treatment of direct issuance transactions

has suggested additional factors to be considered, including (i) the number of days the newly issued debt is outstanding before the exchange of that debt for controlled corporation stock or securities, and (ii) whether the intermediary participating in the direct issuance transaction is a member of a syndicate of lenders that has historically provided debt financing to the distributing corporation. Additionally, a stakeholder has recommended (i) limiting permissible direct issuance transactions to situations in which the proceeds of the new debt are used to retire historical debt, and (ii) including a general anti-avoidance rule based on the distributing corporation's business purpose for entering into the direct issuance transaction.

C. Proposed Regulations

1. Overview

The Treasury Department and the IRS continue to be of the view that, under certain circumstances, intermediated exchanges and direct issuance transactions can be recast or otherwise recharacterized under Federal income tax principles. Certain stakeholders have described the aforementioned concerns of the Treasury Department and the IRS with respect to such transactions as new or as deriving primarily from direct issuance transactions or refinancing transactions.

However, these concerns are neither new nor unique. As confirmed almost a century ago by the Supreme Court in Gregory v. Helvering, the application of substance over form and other general Federal income tax principles is inseparable from the application of the Code itself. See also Newman v. Comm'r, 894 F.2d 560, 562 (2d Cir. 1990) (emphasizing that, “in reviewing a transaction for tax consequences, the substance of the agreement takes precedence over its form”). Accordingly, one objective of these proposed regulations is to clarify that general Federal income tax principles apply with regard to the application of section 361 just as such principles would apply with regard to the application of other Code provisions

ern is not simply the status of the newly issued distributing corporation debt as debt for Federal income tax purposes, but also that the form of those debt-elimination transactions should be respected and not recharacterized under Federal income tax principles.

With regard to the latter point, the Treasury Department and the IRS replaced the 5/14 standard for private letter rulings in Rev. Proc. 2018-53 with a standard based on a facts-and-circumstances analysis. This change was made due to concerns that the 5/14 standard provided a temporal requirement that was indifferent to the particular facts and circumstances of the transaction, including the intermediary's relationship with the distributing corporation. As a consequence, the Treasury Department and the IRS observed that the 5/14 standard created confusion for taxpayers as to whether temporal proximity is the sole consideration with regard to the application of agency or substance-over-form principles to intermediated exchanges and direct issuance transactions.

The Treasury Department and the IRS also continue to be of the view that Rev. Rul. 2017-9 and other revenue rulings mentioned by stakeholders in their submitted feedback do not (and cannot) set forth broadly applicable principles that would dictate the positions set forth in these proposed regulations. One reason is that there are long-established limitations on the precedential value of revenue rulings. Specifically, “[r]evenue rulings published in the [Internal Revenue] Bulletin do not have the force and effect of Treasury Department regulations (including Treasury Decisions), but are published to provide precedents to be used in the disposition of other cases, and may be cited and relied upon for that purpose.” Section 601.601(d)(2)(v)(d) of the Statement of Procedural Rules (codifying section 7.01(4) of Rev. Proc. 89-14, 1989-8 I.R.B. 20)

C.1, the Treasury Department and the IRS do not view it as appropriate for these proposed regulations to extend the analysis of Rev. Rul. 79-258 to proposed rules addressing the application of section 361.

2. General Approach of Proposed Regulations

The Treasury Department and the IRS appreciate the feedback received from stakeholders on intermediated exchanges and direct issuance transactions. As emphasized in Notice 2024-38, and consistent with other aspects of these proposed regulations, the proposed rules addressing these topics are intended (i) to be consistent with all relevant provisions of the Code (that is, the compliance objective); (ii) to provide certainty to taxpayers and the IRS regarding the application of all relevant provisions of the Code to purported section 355 transactions (that is, the increased certainty objective); and (iii) to be responsive to the manner in which section 355 transactions are engaged in by taxpayers and reflect current market practices and preferences (that is, the transaction facilitation objective), to the extent that doing so does not conflict with the compliance and increased certainty objectives.

With regard to the increased certainty objective, the Treasury Department and the IRS have leveraged the expertise of IRS audit and examination personnel to develop proposed rules that, to the extent practicable, employ bright-line safe harbors, objectively verifiable conditions for qualification, and other similar architecture that can be readily reflected on Form 7216. These rules reflect the express delegation of authority to the Secretary to prevent avoidance of tax through abuse of section 361(b)(3) or (c)(3). The Treasury Department and the IRS have endeavored to balance this increased certainty objective with the transaction facilitation objective.

3. Specific Aspects of Proposed Regulations

a

y distributing corporation related person or as a related person with respect to any controlled corporation related person, would be determined at the time of that person's receipt of the section 361 consideration in exchange for the satisfaction and retirement of debt in a transfer or series of transfers described in proposed § 1.361-5(b)(2)(ii)(A).

c. Eligible Distributing Corporation Debt

i. In General

Proposed § 1.361-5(c)(1) would provide that distributing corporation debt is not eligible to be satisfied with section 361 consideration under proposed § 1.361-5(a) unless that debt qualifies as eligible distributing corporation debt.

(a) Historical Distributing Corporation Debt

In general, proposed § 1.361-5(c)(2)(i) would provide that distributing corporation debt that qualifies as historical distributing corporation debt is eligible to be satisfied with section 361 consideration. In general, distributing corporation debt qualifies as historical distributing corporation debt if that debt was incurred before the “earliest applicable date,” and that debt has an original term that ends after the date of the exchange described in § 1.361-2(a) or 1.361-3(a) and is identified in the plan of reorganization or original plan of reorganization (if amended). The “earliest applicable date” is defined in proposed § 1.361-1(b)(27) as the earliest date of three specified events: (i) the date of the first public announcement (as defined in § 1.355-7(h)(10)) of the divisive reorganization or a similar transaction; (ii) the date the distributing corporation entered into a written agreement to effectuate the divisive reorganization or a similar transaction; and (iii) the date the distributing corporation's board of directors approved the divisive reorganization or a similar transaction.

However, the Treasury Department and the IRS are of the view that a debt refinancing exception would be appropriate to help achieve the transaction facilitation objective

ed into a written agreement to effectuate the divisive reorganization or a similar transaction; and (iii) the date the distributing corporation's board of directors approved the divisive reorganization or a similar transaction.

However, the Treasury Department and the IRS are of the view that a debt refinancing exception would be appropriate to help achieve the transaction facilitation objective. Specifically, proposed § 1.361-5(c)(2)(ii) would provide that distributing corporation debt incurred by the distributing corporation after the earliest applicable date is treated as historical distributing corporation debt only if the following four requirements are met. First, proposed § 1.361-5(c)(2)(ii)(A) would provide that the distributing corporation debt must be (i) a refinancing of historical distributing corporation debt, or (ii) a refinancing of refinanced historical distributing corporation debt (that is, the debt must be traced directly through one or more refinancings to debt that qualifies as historical distributing corporation debt). Second, proposed § 1.361-5(c)(2)(ii)(B) would provide that the refinanced historical distributing corporation debt must not have been incurred as part of a plan to incur debt in addition to historical distributing corporation debt determined under proposed § 1.361-5(c)(2)(i) (or an amount of debt in addition to the amount of historical distributing corporation debt determined under paragraph (d) of that section, without regard to proposed § 1.361-5(d)(2)(iv)) in anticipation of the divisive reorganization (for example, the incurrence of the refinanced historical distributing corporation debt would have occurred without regard to the divisive reorganization). Third, proposed § 1.361-5(c)(2)(ii)(C) would provide that the distributing corporation must engage in a qualifying debt elimination transaction solely under proposed § 1.361-5(e)(3) or (4) to eliminate that refinanced historical distributing corporation debt

the incurrence of the refinanced historical distributing corporation debt would have occurred without regard to the divisive reorganization). Third, proposed § 1.361-5(c)(2)(ii)(C) would provide that the distributing corporation must engage in a qualifying debt elimination transaction solely under proposed § 1.361-5(e)(3) or (4) to eliminate that refinanced historical distributing corporation debt. Fourth, proposed § 1.361-5(c)(2)(ii)(D) would provide that the qualifying debt elimination transaction must be described and identified in the plan of reorganization or original plan of reorganization (if amended) for the divisive reorganization.

Proposed § 1.361-5(c)(2)(iii) would provide that a revolving credit agreement to which the distributing corporation is a debtor qualifies as historical distributing corporation debt only if the following requirements are met. First, the distributing corporation must have entered into the agreement before the earliest applicable date. Second, the agreement does not expire until after the date of the exchange described in proposed § 1.361-2(a) or 1.361-3(a). Third, the agreement is identified in the plan of reorganization or original plan of reorganization (if amended). The Treasury Department and the IRS request comments regarding whether there are other arrangements similar to revolving credit agreements that, based on the same rationale employed by these proposed regulations, should be treated similarly.

bed in proposed § 1.361-2(a) or 1.361-3(a). Third, the agreement is identified in the plan of reorganization or original plan of reorganization (if amended). The Treasury Department and the IRS request comments regarding whether there are other arrangements similar to revolving credit agreements that, based on the same rationale employed by these proposed regulations, should be treated similarly.

(b) Qualifying Trade Payables

Proposed § 1.361-5(c)(2)(iv) would provide that qualifying trade payables are eligible to be satisfied with section 361 consideration. For purposes of that qualification, the following requirements must be met. First, the trade payables must be described in a plan of reorganization or original plan of reorganization (if amended). Second, the trade payables must have been incurred in the ordinary course of business of the distributing corporation. Third, the satisfaction of such trade payables is necessary (A) to ensure the allocation to the controlled corporation of all liabilities properly associated with the business assets transferred to that corporation and (B) to result in the controlled corporation being allocated liabilities in an amount that properly relates to its business operations, the earnings of which will be used to properly satisfy those liabilities.

(c) Direct Issuance Debt

These proposed regulations would also provide that direct issuance debt is eligible to be satisfied with section 361 consideration. Specifically, proposed § 1.361-5(c)(2)(v) would provide that direct issuance debt incurred as part of a direct issuance transaction (as defined in proposed § 1.361-1(b)(17)) satisfying the requirements of proposed § 1.361-5(e)(4) is eligible to be satisfied with section 361 consideration. See the discussion in part IV.C.3.d.iv regarding qualifying direct issuance transactions.

ii

consideration. Specifically, proposed § 1.361-5(c)(2)(v) would provide that direct issuance debt incurred as part of a direct issuance transaction (as defined in proposed § 1.361-1(b)(17)) satisfying the requirements of proposed § 1.361-5(e)(4) is eligible to be satisfied with section 361 consideration. See the discussion in part IV.C.3.d.iv regarding qualifying direct issuance transactions.

ii. Amount of Distributing Corporation Debt Repaid

Under proposed § 1.361-5(d)(1), the maximum amount of distributing corporation debt that can be satisfied with section 361 consideration under proposed § 1.361-5(a) would equal the amount obtained by subtracting the aggregate amount of distributing corporation debt that the controlled corporation assumes (in accordance with proposed §§ 1.357-2 through 1.357-4) pursuant to the plan of reorganization from the lesser of (i) the

aggregate amount of distributing corporation debt (as determined under proposed § 1.361-5(c)(3)), and (ii) the aggregate amount of distributing corporation debt determined under the eight-quarterly-average test set forth in proposed § 1.361-5(d)(2). The Treasury Department and the IRS are of the view that incorporating the IRS's long-standing, quarterly average test for advance ruling purposes (which was expanded to an eight-quarterly-average test in Rev. Proc. 2018-53 to provide a more accurate determination) into this computation would help achieve the increased certainty objective of these proposed regulations.

), then the amount of that debt distributing corporation debt would equal the lesser of (i) the original principal amount of the refinanced distributing corporation debt and (ii) the principal amount of the original historical distributing corporation debt (that is, the distributing corporation debt to which the refinanced distributing corporation debt is traced) as of the earliest applicable date. With regard to a revolving credit agreement that satisfies the requirements set forth in § 1.361-5(c)(2)(iii), proposed § 1.361-5(c)(3)(ii)(C) would provide that the amount of that debt would be the lesser of (i) the balance under that agreement as of the earliest applicable date (and not the maximum amount that could be incurred by the distributing corporation under that agreement), and (ii) the lowest balance under the agreement beginning on the earliest applicable date and ending on the control distribution date.

Additionally, proposed § 1.361-5(c)(3)(ii)(D) would provide that the amount of qualifying trade payables would equal the aggregate amount of those payables on the date of the exchange described in proposed § 1.361-2(a) or 1.361-3(a). With regard to direct issuance debt, proposed § 1.361-5(c)(3)(ii)(E) would provide that the amount of that debt would equal the aggregate principal amount of that debt on the date exchange described in proposed § 1.361-2(a) or 1.361-3(a).

Lastly, proposed § 1.361-5(c)(3)(iii) would require the aggregate amount of distributing corporation debt be reduced to reflect certain offsetting debts. That is, if the distributing corporation is a creditor, and if the debtor with respect to that debt is a creditor with respect to distributing corporation debt, the distributing corporation would be required to reduce the aggregate principal amount of its distributing corporation debt by the aggregate principal amount of debt issued to that other person for purposes of the computation under proposed § 1.361-5(c)(3)(ii)

buting corporation is a creditor, and if the debtor with respect to that debt is a creditor with respect to distributing corporation debt, the distributing corporation would be required to reduce the aggregate principal amount of its distributing corporation debt by the aggregate principal amount of debt issued to that other person for purposes of the computation under proposed § 1.361-5(c)(3)(ii). This proposed rule also would include reductions to account for revolving credit agreements.

(b) Eight-Quarterly-Average Test

Proposed § 1.361-5(d)(2)(i) would provide that, under the eight-quarterly-average test, the aggregate amount of distributing corporation debt generally would equal the average of the amount of distributing corporation debt owed to persons other than distributing corporation related persons as of the close of each of the eight fiscal quarters that end immediately before the earliest applicable date. Proposed § 1.361-5(d)(2)(ii) and (iii) would provide additional rules to address (i) the calculation of distributing corporation debt at the close of each quarter, and (ii) distributing corporation debt held by distributing corporation related persons.

d. Qualifying Debt Elimination Transactions

i. Overview

The Treasury Department and the IRS are proposing bright-line rules for qualifying debt elimination transactions to achieve the transaction facilitation and increased certainty objectives for these proposed regulations. The determination of whether a debt elimination transaction qualifies under section 361(b)(3) and (c)(3), and the extent of that qualification, has created more uncertainty for taxpayers and the IRS than perhaps any other issue arising from divisive reorganizations

bt elimination transactions to achieve the transaction facilitation and increased certainty objectives for these proposed regulations. The determination of whether a debt elimination transaction qualifies under section 361(b)(3) and (c)(3), and the extent of that qualification, has created more uncertainty for taxpayers and the IRS than perhaps any other issue arising from divisive reorganizations. With these proposed rules, the Treasury Department and the IRS are seeking to strike a balance that would facilitate intermediated exchanges and direct issuance transactions in a manner that (i) is consistent with the Code (particularly sections 355, 361, and 368) and underlying legislative history, and (ii) facilitates IRS administration and enforcement.

ii. Section 361 Transactions in Which No Intermediary is Used

Proposed § 1.361-5(e)(2) would set forth rules for qualifying original creditor exchanges. Specifically, proposed § 1.361-5(e)(2) would provide that the satisfaction of distributing corporation debt with section 361 consideration in an exchange not described in proposed § 1.361-5(e)(3) or (4) is treated as a qualifying debt elimination transaction (that is, the exchange will be treated as a nonrecognition transaction for Federal income tax purposes) if all applicable requirements set forth in proposed § 1.361-5(b) through (d) are satisfied. In particular, proposed § 1.361-5(c)(2)(ii)(C) would provide that the refinancing exception set forth in proposed § 1.361-5(c)(2)(ii) would not apply to distributing corporation debt that is refinanced and then eliminated in a qualifying original creditor exchange. In other words, for a distributing corporation to apply that refinancing exception, the distributing corporation would be required to engage in a qualifying intermediated exchange or a qualifying direct issuance transaction (as discussed in parts IV.C.3.d.iii and iv of this Explanation of Provisions).

iii

ion debt that is refinanced and then eliminated in a qualifying original creditor exchange. In other words, for a distributing corporation to apply that refinancing exception, the distributing corporation would be required to engage in a qualifying intermediated exchange or a qualifying direct issuance transaction (as discussed in parts IV.C.3.d.iii and iv of this Explanation of Provisions).

iii. Qualifying Intermediated Exchanges

Under proposed § 1.361-5(e)(3), an intermediated exchange would not qualify as a qualifying debt elimination transaction unless certain requirements are satisfied. First, proposed § 1.361-5(e)(3)(i)(A) generally would prohibit the holder of historical distributing corporation debt that will be satisfied with section 361 consideration from holding that debt for the benefit of the distributing corporation, the controlled corporation, a distributing corporation related person, or a controlled corporation related person. However, under proposed § 1.361-5(e)(3)(i)(B) this prohibition would not apply to a collateral benefit (such as the efficient purchase by an intermediary of historical distributing debt on the open market) received by a distributing corporation or a distributing corporation related person, from the intermediary's

facilitation of the transfer of section 361 consideration in satisfaction of historical distributing corporation debt.

Second, proposed § 1.361-5(e)(3)(ii) would prohibit the intermediary from acquiring historical distributing corporation debt that is satisfied with section 361 consideration from the distributing corporation, the controlled corporation, or any distributing corporation related person or controlled corporation related person. However, under proposed § 1.361-5(c)(2)(ii)(A) the refinancing exception set forth in proposed § 1.361-5(c)(2)(ii) would be available for distributing corporations that engage in qualifying intermediated exchanges

ied with section 361 consideration from the distributing corporation, the controlled corporation, or any distributing corporation related person or controlled corporation related person. However, under proposed § 1.361-5(c)(2)(ii)(A) the refinancing exception set forth in proposed § 1.361-5(c)(2)(ii) would be available for distributing corporations that engage in qualifying intermediated exchanges. The Treasury Department and the IRS are of the view that this exception would help achieve the transaction facilitation objective by providing distributing corporations with significant flexibility to engage in debt elimination transactions under section 361 with debt refinanced after the earliest applicable date.

Third, the proposed regulations would impose long-standing requirements consistent with the analysis in the aforementioned technical advice memoranda addressing intermediated exchanges under former section 108. Specifically, proposed § 1.361-5(e)(3)(iii) would require the intermediary and the distributing corporation to effectuate the exchange of section 361 consideration for historical distributing corporation debt based on terms and conditions arrived at by the parties bargaining at arm's length.

Fourth, proposed § 1.361-5(e)(3)(iv) would prohibit the distributing corporation, the controlled corporation, and any distributing corporation related person or controlled corporation related person from (i) participating in any profit gained by the intermediary upon the exchange of section 361 consideration, or (ii) limiting the intermediary's profit by agreement or other arrangement.

Fifth, proposed § 1.361-5(e)(3)(v)(A) and (B) would require the intermediary (i) to act for its own account with regard to all components of the intermediated exchange, and (ii) bear the risk of loss with regard to the historical distributing corporation debt and any subsequent disposition of any section 361 consideration received in the exchange

n facilitation and increased certainty objectives of these proposed regulations. The proposed rule would depart from the facts-and-circumstances approach set forth in Rev. Proc. 2018-53.

iv. Qualifying Direct Issuance Transaction

Under proposed § 1.361-5(e)(4), a direct issuance transaction would not qualify as a qualifying debt elimination transaction unless certain requirements are satisfied. For this purpose, proposed § 1.361-1(b)(17) would define the term “direct issuance transaction” to mean a transaction, or a series of transactions (or similar transaction or series of transactions), in which (i) the distributing corporation incurs distributing corporation debt with a creditor after the earliest applicable date, (ii) the distributing corporation uses the proceeds of the newly incurred distributing corporation debt (directly or indirectly) to repay historical distributing corporation debt, and (iii) the new creditor exchanges that newly incurred distributing corporation debt for controlled corporation stock or securities held by the distributing corporation.

First, proposed § 1.361-5(e)(4)(i)(A) would require that a direct issuance transaction be determined to comprise a transfer by the distributing corporation of section 361 consideration to the creditor in exchange for the satisfaction of distributing corporation debt held by that creditor (direct issuance debt), and not a sale by the distributing corporation of section 361 consideration to the creditor for the proceeds of that direct issuance debt, for Federal income tax purposes. Proposed § 1.361-5(e)(4)(i)(B) would provide that that determination is made based on all relevant provisions of the Code and general principles of Federal income tax law, including the step transaction doctrine

issuance debt), and not a sale by the distributing corporation of section 361 consideration to the creditor for the proceeds of that direct issuance debt, for Federal income tax purposes. Proposed § 1.361-5(e)(4)(i)(B) would provide that that determination is made based on all relevant provisions of the Code and general principles of Federal income tax law, including the step transaction doctrine. Proposed § 1.361-5(e)(4)(i)(B) also would provide that the substance of the direct issuance transaction must be determined, pursuant to all relevant provisions of the Code and general principles of Federal income tax law, before the requirements of section 361 can be applied.

Second, proposed § 1.361-5(e)(4)(ii)(A) would provide that, unless the transaction satisfies the safe harbor under proposed § 1.361-5(e)(4)(iii), the determination of whether a direct issuance transaction is an exchange under section 361, and not a sale, is made using a facts-and-circumstances test. For this purpose, proposed § 1.361-5(e)(4)(ii)(B) would provide a set of factors to be used in determining whether the direct issuance transaction exchange qualifies as an exchange under section 361. Proposed § 1.361-5(e)(4)(ii)(B) would provide that each of the specified factors represents either evidence of qualification or non-qualification as an exchange. The strength of evidence provided by the factors is determined based on an analysis of all relevant facts and circumstances.

ained upon the exchange of section 361 consideration; (3) the creditor acts for its own account with regard to all components of the direct issuance transaction; and (4) the creditor bears the risk of loss with respect to the refinanced historical distributing corporation debt and any subsequent sale or other disposition of section 361

consideration transferred to the creditor in satisfaction of the refinanced historical distributing corporation debt. However, pursuant to proposed § 1.361-5(e)(4)(ii)(B)( 2 )( iii ), the satisfaction of all these aforementioned requirements is substantial evidence of qualification.

Third, proposed § 1.361-5(e)(4)(ii)(B)( 3 ) would provide that, if the creditor holds the refinanced historical distribution corporation debt for a period of less than 30 days ending on the control distributing date, then that fact is evidence of non-qualification. Conversely, if the creditor holds that debt for a period of at least 30 days ending on control distribution, then that fact is evidence of qualification.

Fourth, proposed § 1.361-5(e)(4)(ii)(B)( 4 ) would provide that if the distributing corporation has legal or practical dominion or control over any proceeds of the refinanced historical distributing corporation debt (as determined in accordance with § 1.357-(e)(2)), then that fact is substantial evidence of non-qualification. However, the distributing corporation's lack of legal or practical dominion or control over any of those proceeds is substantial evidence of qualification.

Fifth, proposed § 1.361-5(e)(4)(ii)(B)( 5 ) provides that if the distributing corporation issued the refinanced historical distributing corporation debt with a principal purpose of avoiding any of the requirements or limitations of section 361, then that fact is evidence of non-qualification.

l or practical dominion or control over any of those proceeds is substantial evidence of qualification.

Fifth, proposed § 1.361-5(e)(4)(ii)(B)( 5 ) provides that if the distributing corporation issued the refinanced historical distributing corporation debt with a principal purpose of avoiding any of the requirements or limitations of section 361, then that fact is evidence of non-qualification.

(b) Safe Harbor for Direct Issuance Transactions

Proposed § 1.361-5(e)(4)(iii) would provide a safe harbor for direct issuance transactions. A direct issuance transaction would qualify under the safe harbor to be treated as a qualifying debt elimination transaction only if all the following requirements are satisfied: (1) the distributing corporation does not have, at any time, legal or practical dominion or control over any proceeds of the refinanced historical distributing corporation debt, as determined in accordance with § 1.357-(e)(2); (2) the creditor holds the refinanced historical distributing corporation debt for a period of not less than 30 days ending on the control distribution date; (3) each exchange of section 361 consideration for refinanced historical distribution corporation debt between the distributing corporation and the creditor is effectuated on arm's-length terms and conditions; (4) none of the distributing corporation, controlled corporation, or any distributing controlled corporation related person or controlled corporation related person participates in any profit gained by the creditor upon the exchange of section 361 consideration, or limits by agreement or other arrangement any profit gained by the creditor upon the exchange of section 361 consideration; (5) the creditor acts for its own account with regard to all components of the direct issuance transaction; and (6) the creditor bears the risk of loss with respect to the refinanced historical distributing corporation debt and any subsequent sale or other disposition of section 361 consideration transferred to the creditor in satisfactio

ablishes that (i) the character of the payment for Federal income tax purposes is section 361 consideration, (ii) as of the first distribution date, the fair market value of the distributing corporation's right to receive the payment was not (or will not be) reasonably ascertainable ( see Burnet v. Logan, 283 U.S. 404, 413 (1931)), and (iii) the payment will be properly accounted for when received. For the avoidance of doubt, the Treasury Department and the IRS also expressed the view in Notice 2024-38 that Arrowsmith v. Commissioner, 344 U.S. 6 (1952), applies solely to the requirement described in clause (i) of the preceding sentence (that is, characterization of the post-distribution payment for Federal income tax purposes).

B. Stakeholder Input

As an initial matter, stakeholders have stated in their feedback that post-distribution payments between the distributing corporation and the controlled corporation in connection with both section 355(c) transactions and divisive reorganizations are subject to different doctrines (for example, Arrowsmith or the open transaction doctrine) depending on the facts and circumstances. Due to the variable fact patterns, the non-recurring nature of such payments, and the complex interplay of the legal provisions governing such payments, one stakeholder has contended that additional substantive guidance (for example, in the form of Treasury regulations) would not be appropriate, and that the Treasury Department and the IRS should continue to address this topic through the IRS's private letter ruling program

tterns, the non-recurring nature of such payments, and the complex interplay of the legal provisions governing such payments, one stakeholder has contended that additional substantive guidance (for example, in the form of Treasury regulations) would not be appropriate, and that the Treasury Department and the IRS should continue to address this topic through the IRS's private letter ruling program.

Stakeholders also have contended that indemnification payments made under the governing transaction documents, which constitute the overwhelming majority of post-distribution payments, clearly are subject to the Arrowsmith doctrine and should be characterized as either (i) a contribution by the distributing corporation to the controlled corporation, or (ii) a payment of section 361 consideration by the controlled corporation to the distributing corporation, unless the transaction documents result in the assumption of a liability under section 357(d). Accordingly, other than limited guidance with respect to the treatment of so-called “indemnity purges” (that is, the distributing corporation's satisfaction of a liability with cash on hand and subsequent reimbursement by the controlled corporation), stakeholders have expressed the view that substantive guidance is unnecessary.

With regard to such indemnity purges, stakeholders have recommended different approaches for the proposed regulations. One stakeholder has recommended (i) treating the distributing corporation's receipt of the indemnity payment from the controlled corporation as section 361 consideration, and (ii) treating the distributing corporation's payment of the indemnified liability as a transfer of such section 361 consideration to a creditor in satisfaction of section 361(b)(3) (that is, a post-distribution

payment)

. One stakeholder has recommended (i) treating the distributing corporation's receipt of the indemnity payment from the controlled corporation as section 361 consideration, and (ii) treating the distributing corporation's payment of the indemnified liability as a transfer of such section 361 consideration to a creditor in satisfaction of section 361(b)(3) (that is, a post-distribution

payment). Alternatively, other stakeholders have suggested (i) treating the liability giving rise to the indemnity payment as having been assumed by the controlled corporation under the principles of section 357(d), and (ii) treating the distributing corporation as having received payment from, and as making a payment to satisfy the liability as an agent of, the controlled corporation.

C. Proposed Regulations

1. General Treatment of Target Corporations Under Section 361(a)

Consistent with section 361(a), these proposed regulations generally would provide that a target corporation (including a distributing corporation) that is a party to a reorganization does not recognize gain or loss on its transfer of property to an acquiring corporation (including a controlled corporation) if the following three requirements are satisfied. First, proposed § 1.361-2(a)(1) would require that the acquiring corporation (or a corporation controlling the acquiring corporation) must be a party to the reorganization. Second, proposed § 1.361-2(a)(2) would require that the target corporation must receive solely stock or securities of the acquiring corporation (or the corporation controlling the acquiring corporation) in exchange for the transferred property. Third, proposed § 1.361-2(a)(3) would require that the exchange must occur pursuant to the plan of reorganization.

2. Receipt of Money or Other Property

a

operty to a creditor pursuant to the plan of reorganization and in satisfaction of target corporation debt. To obtain similar treatment in the case of a divisive reorganization, proposed § 1.361-4(a)(2)(ii) would provide that the distributing corporation's transfer of qualified property to a creditor in satisfaction of distributing corporation debt also must meet the requirements in § 1.361-5.

b. Appreciated Nonqualified Property

Under proposed § 1.361-4(b)(1) and (c), if a target corporation distributes appreciated nonqualified property to its shareholders pursuant to a plan of reorganization, the target corporation would recognize gain (but not loss) as if it sold the property to its shareholders at the property's fair market value. Proposed § 1.361-4(b)(2) would provide that, if such property is subject to a liability, or if a shareholder assumes a liability of the target corporation in connection with the distribution, the fair market value of that property for purposes of proposed § 1.361-4(b)(1) is treated as an amount not less than the amount of that liability.

For this purpose, proposed § 1.361-1(b)(4) would define “appreciated nonqualified property” as property other than qualified property that, at the time of the distribution of that property, has a fair market value that exceeds its adjusted basis in the hands of the target corporation. For example, appreciated nonqualified property would include controlled corporation stock or securities held by the distributing corporation prior to the exchange under section 361. The definition in proposed § 1.361-1(b)(4) also would include all controlled corporation stock or securities that (i) is treated as other property under section 355(a)(3)(B), (ii) is distributed in a disqualified distribution (as defined in section 355(d)(2)), or (iii) is distributed by a distributing corporation pursuant to an acquisition described in section 355(e)(2).

VI. Effect of Transaction Related to Divisive Reorganization on Controlled Securities

A

elcome suggestions on appropriate bright-line

rules or safe harbors, as well as supporting analysis that discusses how those suggestions would balance the compliance, increased certainty, and transaction facilitation objectives that guide these proposed regulations.

As set forth in section 2.02(7) of Notice 2024-38, the Treasury Department and the IRS do not view Rev. Rul. 98-27 and Rev. Rul. 98-44 as determinative for questions regarding the impact of the application of general Federal income tax principles to acquisitions of a controlled corporation following the control distribution date that result in a modification of the controlled corporation's securities. For the avoidance of doubt, and consistent with the discussion in part IV.C.1 of this Explanation of Provisions, this view of the Treasury Department and the IRS also directly extends to Rev. Rul. 2003-79, 2003-29 I.R.B. 80. None of Rev. Rul. 98-27, Rev. Rul. 98-44, or Rev. Rul. 2003-79 sets forth broadly applicable principles regarding the application of the step transaction or substance-over-form doctrines beyond the fact patterns directly addressed by those rulings.

VII. Replacement of Distributing Debt

A. Notice 2024-38

As stated in section 2.02(8) of Notice 2024-38, the Treasury Department and the IRS are considering the application of the Code to borrowings by a distributing corporation that replace distributing corporation debt satisfied with section 361 consideration in a divisive reorganization. The Treasury Department and the IRS are concerned that, in certain circumstances, the replacement of distributing corporation debt that was satisfied with section 361 consideration could be used as an artifice for increasing the aggregate debt and other liabilities of the distributing corporation and the controlled corporation

satisfied with section 361 consideration in a divisive reorganization. The Treasury Department and the IRS are concerned that, in certain circumstances, the replacement of distributing corporation debt that was satisfied with section 361 consideration could be used as an artifice for increasing the aggregate debt and other liabilities of the distributing corporation and the controlled corporation.

As one example, the Treasury Department and the IRS have considered situations in which, as of the date on which assets are contributed to a controlled corporation in a divisive reorganization, the distributing corporation anticipates entering into a borrowing that effectively reverses the de-leveraging achieved through the distribution of section 361 consideration pursuant to the plan of reorganization. Such a borrowing would render the de-leveraging merely transitory and without real economic effect. As emphasized in Notice 2024-38, the Treasury Department and the IRS are concerned that this result resembles a partial sale of the controlled corporation that would not qualify for nonrecognition treatment under section 361.

B. Stakeholder Input

Stakeholders have acknowledged the aforementioned potential for abuse and the potential treatment of such transactions as partial sales. However, stakeholders have contended that distributing corporations generally do not plan to replace historical debt satisfied in the section 355 transaction. Accordingly, stakeholders have suggested that any substantive guidance on this issue (i) should be narrowly tailored to address abusive structures that do not reflect the policies of section 361, and (ii) should take into account distributing corporations' need to borrow in the ordinary course of business and obtain funding for circumstances unrelated to the section 355 transaction

55 transaction. Accordingly, stakeholders have suggested that any substantive guidance on this issue (i) should be narrowly tailored to address abusive structures that do not reflect the policies of section 361, and (ii) should take into account distributing corporations' need to borrow in the ordinary course of business and obtain funding for circumstances unrelated to the section 355 transaction. Stakeholders also have suggested that the main difficulty in issuing guidance will be identifying clear anti-abuse principles that sufficiently differentiate between artificial post-distribution re-leveraging transactions (which should be disallowed) and genuine post-distribution re-leveraging transactions with a bona fide commercial purpose unrelated to the divisive transaction (which should be allowed).

One stakeholder has recommended providing a safe harbor for transactions that do not raise debt replacement concerns, in order to increase certainty for taxpayers pursuing bona fide transactions. According to the stakeholder, the common factors in those transactions that should be included in such a safe harbor are: (i) a genuine non-tax business purpose for the re-leveraging transaction; (ii) use of the re-leveraging proceeds in a manner consistent with such business purpose; and (iii) a non-tax economic effect of the re-leveraging transaction.

The stakeholder has further recommended evaluating re-leveraging transactions that fall outside the aforementioned safe harbor based on all facts and circumstances

(i) a genuine non-tax business purpose for the re-leveraging transaction; (ii) use of the re-leveraging proceeds in a manner consistent with such business purpose; and (iii) a non-tax economic effect of the re-leveraging transaction.

The stakeholder has further recommended evaluating re-leveraging transactions that fall outside the aforementioned safe harbor based on all facts and circumstances. According to the stakeholder, factors that would support respecting the re-leveraging as a new borrowing for Federal income tax purposes include: (i) the existence of a non-tax business purpose supporting the re-leveraging transaction; (ii) the use of re-leveraging proceeds in a manner consistent with such business purpose; (iii) the absence of a plan to enter into the re-leveraging transaction at the time of the distribution; (iv) the passage of time between the distributing corporation's satisfaction of debt with section 361 consideration and the re-leveraging transaction; (v) the occurrence of the re-leveraging transaction in the ordinary course of business and/or the consistency of the transaction with historical practices; and (vi) evidence that, as a result of the de-leveraging transaction, the distributing corporation was appropriately leveraged from a capital markets perspective.

In contrast, according to the stakeholder, the following factors would not support respecting the re-leveraging as a new borrowing. First, the lenders with regard to the re-leveraging transaction are the same as those with regard to the distributing corporation debt satisfied in the de-leveraging transaction. Second, the terms of the new distributing corporation debt are the same as (or substantially similar to) the terms of the distributing corporation debt satisfied in the de-leveraging transaction. Third, the proceeds of the re-leveraging transaction are retained (unless such retention is consistent with the business purpose for the re-leveraging)

ion debt satisfied in the de-leveraging transaction. Second, the terms of the new distributing corporation debt are the same as (or substantially similar to) the terms of the distributing corporation debt satisfied in the de-leveraging transaction. Third, the proceeds of the re-leveraging transaction are retained (unless such retention is consistent with the business purpose for the re-leveraging). Finally, the de-leveraging transaction, when taken together with the re-leveraging transaction, has little or no economic effect.

C. Proposed Regulations

1. Overview

The Treasury Department and the IRS appreciate the feedback provided by stakeholders regarding transitory borrowings. In developing these proposed regulations, the Treasury Department and the IRS have attempted to balance the compliance and increased certainty objectives with the understanding that distributing corporations should be able to borrow in the ordinary course of business and obtain financing for circumstances demonstrably unrelated to the divisive reorganization (that is, the transaction facilitation objective).

2. General Rule

Proposed § 1.361-5(f)(1) generally would reduce the amount of section 361 consideration that the distributing corporation is treated as transferring to a creditor in a qualifying debt elimination transaction by the amount of eligible distributing corporation debt that is “transitorily eliminated.” Proposed § 1.361-5(f)(2)(i) would treat a distributing corporation as transitorily eliminating an amount of eligible distributing corporation debt equal to the amount of such debt that the distributing corporation or a distributing corporation related person replaces after the earliest applicable date, directly or indirectly, with borrowing that the distributing corporation or any

distributing corporation related person expects or is committed to, directly or indirectly, before that date

f these proposed regulations, and consequently the compliance and transaction facilitation objectives as well.

3. Exceptions to General Transitory Debt Elimination Rule

Based on feedback from stakeholders, proposed § 1.361-5(f)(2)(ii) and (iii) would provide exceptions to the general transitory debt elimination rule for ordinary course borrowings and borrowings resulting from unexpected events. With regard to each of these exceptions, the intent of the Treasury Department and the IRS is to provide safe harbors for borrowings that could not have had any connection to the distributing corporation's elimination of eligible distributing corporation debt because such borrowings would have occurred regardless of the occurrence of the divisive reorganization. In proposing these exceptions, the Treasury Department and the IRS are guided conceptually by existing regulations under section 355(e) (section 355(e) regulations) addressing non-plan factors for determining the existence of a plan. The intent of extending those principles to these proposed regulations is to increase certainty for taxpayers and the IRS by providing rules based on long-standing Treasury regulations.

a. Ordinary Course Borrowings

The Treasury Department and the IRS have proposed an ordinary course borrowing exception in proposed § 1.361-5(f)(2)(iii) to help achieve the increased certainty and transaction facilitation goals of these proposed regulations. Specifically, the Treasury Department and the IRS do not intend for the safeguards against transitorily eliminated distributing corporation debt to prevent the distributing corporation from engaging in its ordinary course business activities

borrowing exception in proposed § 1.361-5(f)(2)(iii) to help achieve the increased certainty and transaction facilitation goals of these proposed regulations. Specifically, the Treasury Department and the IRS do not intend for the safeguards against transitorily eliminated distributing corporation debt to prevent the distributing corporation from engaging in its ordinary course business activities. Although the Treasury Department and the IRS agree with stakeholders that proposed rules on this issue would be challenging to provide in bright-line form, the purpose of these proposed rules is to reduce uncertainty by removing from consideration of the general rule those borrowings that the distributing corporation readily could identify as part of its ordinary course business operations.

Consequently, the proposed regulations would provide that a replacement borrowing is not treated as transitorily eliminating eligible distributing corporation debt if the replacement borrowing (i) is incurred in the ordinary course of business of the distributing corporation or distributing corporation related person, and (ii) would have been incurred without regard to the divisive reorganization (or any transaction related to the divisive reorganization). See proposed § 1.361-5(f)(2)(iii). The Treasury Department and the IRS based this proposed rule conceptually on § 1.355-7(b)(4)(vi) (“In the case of an acquisition either before or after a distribution, the distribution would have occurred at approximately the same time and in similar form regardless of the acquisition or a similar acquisition.”).

b. Unexpected Borrowings

In addition, proposed § 1.361-5(f)(2)(ii) would provide that certain borrowings are not treated as expected (or otherwise committed) borrowings and, therefore, are not within the scope of the general rule of proposed § 1.361-5(f)(2)(i) if two conditions are met

market or business conditions occurring after the distribution that resulted in the acquisition that was otherwise unexpected at the time of the distribution.”) and (iv) (“In the case of an acquisition before a distribution, there was an identifiable, unexpected change in market or business conditions occurring after the acquisition that resulted in a distribution that was otherwise unexpected.”). It is the intent of the Treasury Department and the IRS that exceptions based on the established section 355(e) regulations would facilitate bona fide transactions in the same manner that the section 355(e) regulations facilitate such transactions while addressing the challenging issue of determining the existence of a plan.

VIII. Application of Section 357 to Assumptions of Liabilities

A. Overview of Proposed Regulations

The Treasury Department and IRS appreciate the feedback received from stakeholders addressing the interaction and separate operation of sections 357 and 361. From the perspective of the Treasury Department and the IRS, such feedback was insightful and has been helpful in the development these proposed regulations, particularly in achieving the three objectives discussed in section 2.01 of Notice 2024-38. Leveraging this feedback, the Treasury Department and IRS have attempted to balance the objectives of (i) facilitating compliance with sections 357 and 361, (ii) providing certainty to taxpayers and the IRS, and (iii) permitting bona-fide corporate readjustments with respect to the assumption of liabilities (including assuming refinanced distributing corporation debt) and the satisfaction of debt with section 361 consideration. In other words, in these proposed regulations, the Treasury Department

and IRS have attempted to provide taxpayers with an appropriate level of transactional flexibility that is consistent, and therefore compliant, with the operation of sections 357 and 361.

B. Liability Assumptions Under Section 357

1

tributing corporation debt) and the satisfaction of debt with section 361 consideration. In other words, in these proposed regulations, the Treasury Department

and IRS have attempted to provide taxpayers with an appropriate level of transactional flexibility that is consistent, and therefore compliant, with the operation of sections 357 and 361.

B. Liability Assumptions Under Section 357

1. General Rules

Consistent with section 357(a), proposed § 1.357-2(a) generally would provide that, if a transferor receives property that would be permitted to be received under section 351 or 361 without the recognition of gain to the transferor if that property were the sole consideration received by the transferor, and if, as part of the consideration, the transferee corporation assumes a liability of the transferor, then the transferee corporation's assumption of that liability (i) will not be treated as the receipt of money or other property by the transferor, and (ii) will not prevent the exchange from being within the provisions of section 351 or 361. Under proposed § 1.357-2(b), this general rule would not preclude any liability of a transferor that is assumed by a transferee corporation from being taken into account for purposes of computing the amount of gain or loss realized to the transferor under section 1001 resulting from the exchange.

2. Amount of Liability Assumed

Proposed § 1.357-2(c) would provide that, if the transferor issues a debt that converts, pursuant to its terms, into a debt of the transferee corporation (traveling note), the transferee corporation is treated as assuming that traveling note at the time at which the debtor on that debt converts from the transferor to the transferee corporation under the terms of the note. Proposed § 1.357-2(d) also would provide general rules for determining the amount of recourse and nonrecourse liabilities assumed by a transferee corporation for purposes of §§ 1.357-2, 1.357-3, 1.357-4, 1.358-3, 1.358-5, 1.358-7, 1.361-3(c)(2), and 1.368-2(d)

4 ( see the discussion in part VIII.C and D of this Explanation of Provisions) do not apply (that is, the Federal income tax consequences of the payment are not determined under section 357).

Proposed § 1.357-2(e)(2)(i) would provide that the determination of whether a payment is within the transferor's legal or practical dominion or control generally is made based on all facts and circumstances. However, proposed § 1.357-2(e)(2)(ii) would treat a payment as within a transferor's legal or practical dominion or control if that payment is made to (i) a segregated account of the transferor (or, in the case of a divisive reorganization, a member of the DSAG), or (ii) any person through which the transferor (or, in the case of a divisive reorganization, a member of the DSAG) can direct the treatment or disposition of the payment, regardless of the brevity or transitory nature of the period in which the payment is in such an account.

b. Exceptions for Indemnification Agreements and Other Payments

These proposed regulations also would except from the general facts-and-circumstances determination certain payments that otherwise would result in the transferor having legal or practical dominion or control over the payment. Under proposed § 1.357-2(e)(2)(iii)(A), payments made pursuant to an indemnification agreement would not be treated as within the transferor's legal or practical dominion or control (and, thus, would not be treated as money or other property received by the transferor) if three requirements are satisfied. First, the transferee corporation must be legally prohibited from assuming the liability. Second, the indemnification agreement must require the transferor to first satisfy the obligation that is the subject of the indemnification before seeking payment from the transferee corporation. Third, the transferor must be in the same net economic position as it would have been had the transferee corporation legally assumed the liability

d regulations would provide that a distributing corporation is presumed to have hade a principal purpose described in proposed § 1.357-3(a)(1) (and, as a result, is presumed to be treated as recognizing an amount of gain determined under proposed § 1.357-3(b)) if the controlled corporation assumes a distributing corporation liability that is not eligible to be assumed under proposed § 1.357-(d)(3). Liabilities of a distributing corporation would be eligible to be assumed under proposed § 1.357-3(d)(3) if (i) the liabilities are described in a plan of reorganization or original plan of reorganization (if amended), (ii) the liabilities were incurred in the ordinary course of business of the distributing corporation, and (iii) the assumption of the liabilities is necessary (A) to ensure the transfer to the controlled corporation of all liabilities properly associated with the business assets transferred to that corporation, and (B) to result in the controlled corporation assuming liabilities in an amount that properly relates to its business operations, the earnings of which will be used to properly satisfy those liabilities.

3. Eligible Distributing Corporation Debt

a. In General

Proposed § 1.357-3(d)(4) would provide additional requirements if the distributing corporation liabilities to be assumed are debt. The general rule in proposed § 1.357-3(d)(4)(i) would provide that distributing corporation debt generally is eligible to be assumed if such debt qualifies as historical distributing corporation debt (as defined in proposed § 1.357-1(b)(13)) (certain exceptions to the general rule are provided in proposed § 1.357-3(d)(4)(ii)).

b

financed distributing corporation debt; (ii) the distributing corporation's refinancing of its historical distributing corporation debt is completed before the controlled corporation's assumption of that refinanced distributing corporation debt; (iii) following the controlled corporation's assumption of the refinanced distributing corporation debt, the distributing corporation and the controlled corporation are in the same net economic position as each corporation would have been had the controlled corporation assumed the historical distributing corporation debt; (iv) the distributing corporation's refinancing of its historical distributing corporation debt and the subsequent assumption of that refinanced debt are included in the plan of reorganization for the divisive reorganization; (v) there is no untaxed gain or other Federal income tax benefit to the distributing corporation or the controlled corporation resulting from the distributing corporation's refinancing of a historical distributing corporation debt and the assumption by the controlled corporation of that refinanced distributing corporation debt; (vi) the business assets transferred by the distributing corporation to the controlled corporation in the section 361(a) exchange are associated with the

refinanced distributing corporation debt assumed by the controlled corporation; and (vii) the refinancing of historical distributing corporation debt by the distributing corporation and the subsequent assumption of that refinanced distributing corporation debt by the controlled corporation result in the controlled corporation assuming liabilities in an amount that properly relates to its business operations and will be properly satisfied with earnings generated by those operations. The foregoing requirements are derived directly from Rev. Rul. 79-258, which provides long-standing IRS guidance on the treatment of an assumption of a refinanced historical distributing corporation debt

result in the controlled corporation assuming liabilities in an amount that properly relates to its business operations and will be properly satisfied with earnings generated by those operations. The foregoing requirements are derived directly from Rev. Rul. 79-258, which provides long-standing IRS guidance on the treatment of an assumption of a refinanced historical distributing corporation debt.

Third, proposed § 1.357-3(d)(4)(ii)(C) would provide that a controlled corporation's assumption of a traveling note issued to refinance a historical distributing corporation debt is treated as an assumption of historical distributing corporation debt if the requirements with respect to refinanced distributing corporation debt described in the foregoing paragraph are met. Because the issuance of a traveling note resembles the issuance and assumption of refinanced debt, the Treasury Department and IRS are of the view that traveling notes should be subject to the same degree of scrutiny as the issuance and assumption of refinanced debt.

Fourth, proposed § 1.357-3(d)(4)(ii)(D) would provide that a revolving credit agreement to which the distributing corporation is a debtor qualifies as historical distributing corporation debt only if the distributing corporation entered into the agreement before the earliest applicable date, the agreement does not expire until after the date of the exchange described in proposed § 1.361-2(a) or 1.361-3(a), and that agreement is identified in the plan of reorganization or original plan of reorganization (if amended).

D

is a debtor qualifies as historical distributing corporation debt only if the distributing corporation entered into the agreement before the earliest applicable date, the agreement does not expire until after the date of the exchange described in proposed § 1.361-2(a) or 1.361-3(a), and that agreement is identified in the plan of reorganization or original plan of reorganization (if amended).

D. Liabilities in Excess of Basis Under Section 357(c)

Consistent with section 357(c) and current § 1.357-2(a), proposed § 1.357-4(a)(1) generally would provide that, in an exchange described in section 351 or in section 361 (by reason of a divisive reorganization that qualifies under sections 355 and 368(a)(1)(D)), the excess of (i) the sum of the amount of liabilities of the transferor assumed by the transferee corporation, over (ii) the total adjusted basis of the property transferred by the transferor pursuant tothe exchange, is treated as gain from the sale or exchange of a capital asset or of property that is not a capital asset, as applicable. The determination of whether gain resulting from the transfer of capital assets is long-term or short-term capital gain would be made under proposed § 1.357-4(b) by reference to the transferor's holding period for the transferred assets, based on the proportionate fair market value of the transferor's long-term assets to its short-term assets.

Under proposed § 1.357-4(a)(2), the general rule in proposed § 1.357-4(a)(1) would not apply to any exchange (i) to which proposed § 1.357-3(a) applies, (ii) that is pursuant to a plan of reorganization for a reorganization described in section 368(a)(1)(G) in which no former shareholder of the transferor corporation receives any consideration for the shareholder's stock, or (iii) to which section 351 applies if that exchange also (A) qualifies as part of a reorganization described in section 368(a)(1)(A), (C), or (D) or (G) (provided the requirements of section 354(b)(1) of the Code are satisfied), and (B) is described as a reorgan

ed corporation are capable of carrying on sustained businesses. In this regard, section 355 and related Code provisions were not enacted to provide nonrecognition treatment for section 355 transactions that burden the distributing corporation or the controlled corporation with excessive leverage, thereby jeopardizing their ability to continue as a viable going concern. See, for example, S. Rep. No. 82-781, at 58 (1951) (providing, in relevant part, that the predecessor statute to section 355 was drafted “so as to limit its benefits to reorganizations in which all of the new corporations as well as the parent are intended to carry on a business after the reorganization”).

B. Stakeholder Input

Stakeholders have contended that substantive guidance under section 355, 357, or 361 is not appropriate to address the foregoing solvency concern and that additional rules to address this concern are unnecessary. First, stakeholders have asserted that section 355 already provides safeguards to prevent an abusive transaction (such as a transaction involving the allocation of excess liabilities to the controlled corporation) from qualifying under sections 355 and 361. Those safeguards include the active trade or business requirement ( see section 355(b)), the corporate business purpose requirement ( see § 1.355-2(b)), and the device prohibition ( see section 355(a)(1)(B) and § 1.355-2(d)). Second, stakeholders have noted that, if a taxpayer's principal purpose with respect to a liability assumption is to avoid Federal income tax on the exchange or is not a bona fide business purpose, the total amount of liabilities assumed is treated as money received by the taxpayer in the exchange (that is, as taxable boot). See section 357(b)(1). Third, stakeholders have contended that, if the controlled corporation is not expected to have the capacity to repay the assumed debt, that debt would not be respected as debt for Federal income tax purposes (and would be recharacterized as non-voting equity)

mount of liabilities assumed is treated as money received by the taxpayer in the exchange (that is, as taxable boot). See section 357(b)(1). Third, stakeholders have contended that, if the controlled corporation is not expected to have the capacity to repay the assumed debt, that debt would not be respected as debt for Federal income tax purposes (and would be recharacterized as non-voting equity). Finally, stakeholders have contended that non-tax safeguards, including commercial constraints on capital allocation and structuring, State law restrictions (such as voidable transfers or fraudulent transfers), bankruptcy law, and third-party evaluations (including credit agency ratings), operate as limitations on the assumption of excessive liabilities by the controlled corporation and, thus, obviate the need for a solvency requirement under section 355.

C. Proposed Regulations

The Treasury Department and the IRS disagree that the foregoing safeguards obviate the need for additional guidance to address the solvency concern. As acknowledged by stakeholders, some distributing corporations facing substantial contingent liabilities have separated those liabilities from the

corporations' primary assets through divisive reorganizations. In numerous instances, the controlled corporation has been unable to support those liabilities through operation of the transferred business and consequently became financially unviable, notwithstanding the safeguards mentioned by stakeholders. Such separations have been successfully challenged as fraudulent transfers. See, for example, In re Tronox Inc., 503 B.R. 239 (Bankr. S.D.N.Y. 2013).

The Treasury Department and the IRS view the aforementioned transactions and resulting outcomes as inconsistent with Congress's intent that section 355 “limit its benefits to reorganizations in which all of the new corporations as well as the parent are intended to carry on a business after the reorganization.” S. Rep. No. 82-781, at 58 (1951)

re Tronox Inc., 503 B.R. 239 (Bankr. S.D.N.Y. 2013).

The Treasury Department and the IRS view the aforementioned transactions and resulting outcomes as inconsistent with Congress's intent that section 355 “limit its benefits to reorganizations in which all of the new corporations as well as the parent are intended to carry on a business after the reorganization.” S. Rep. No. 82-781, at 58 (1951). For example, the Treasury Department and the IRS are of the view that so-called “spin-to-bankruptcy” transactions, in certain situations, would fail to evidence an intent for the continued conduct of the business following the divisive reorganization.

Accordingly, the Treasury Department and the IRS intend to address these issues in forthcoming guidance concerning the active trade or business requirement under section 355(b). It is the position of the Treasury Department and the IRS that, while such guidance is pending, solvency and financial viability considerations continue to be relevant for purposes of the IRS's private letter ruling program, as reflected in Rev. Proc. 2024-24. The Treasury Department and the IRS request additional comments on this issue, taking into account the views described in this part IX.C.

Proposed Applicability Dates

Each provision of the regulations contained in this notice of proposed rulemaking is proposed to apply to transactions occurring after the date of publication of final regulations in the Federal Register (publication date), but only if the earliest of the following dates with respect to the transaction occurs after the publication date (general applicability date): (1) the date of the first public announcement; (2) the date of entry by the taxpayer into a written agreement; (3) the date of approval by the board of directors of the taxpayer; (4) the date of a court order (or a plan confirmed, or a sale approved, by order

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