Treasury and IRS Withdraw Controversial Proposed Regulations, Return to Prior Rules for Spin-Off Transactions
The U.S. government has withdrawn a set of controversial proposed regulations issued near the end of the prior administration, which would have imposed significant new substantive and procedural requirements on taxpayers seeking to separate their businesses on a tax-free basis.
The U.S. Department of Treasury and the Internal Revenue Service ("IRS"), as we anticipated in a prior Alert, have withdrawn controversial proposed regulations (REG–112261–24 and REG–116085–23) issued at the end of the prior administration that would have imposed new and onerous requirements on spin-off transactions and other tax-free transactions, limited taxpayer flexibility, and increased reporting requirements and other formalities for our clients contemplating tax-free restructuring and spin-off transactions. In its notice of withdrawal, the government cited criticism of the proposed regulations by practitioners and commenters as a reason for the withdrawal. The IRS and Treasury Department have also revoked related guidance (Notice 2024-38) listing "views and concerns" that underlaid the proposed regulations.
Now may also be a favorable time to seek a private letter ruling on an upcoming spin-off transaction. Guidance accompanying the withdrawal of the proposed regulations (Revenue Procedure 2025-30) has cut back on representations and other requirements in the IRS private letter ruling program that were related to the proposed regulations, restoring in significant part the rules that existed under Revenue Procedures 2017-52 and 2018-53. Taxpayers who recently received or started the process of obtaining a private letter ruling will need to examine their situation carefully to avoid a foot fault (e.g., relying on some aspect of the prior guidance that is no longer in effect), as well as to consider whether they can take advantage of this return to prior policy.
In the aftermath of these changes, taxpayers should have significantly greater freedom in structuring tax-free separations and restructurings of their businesses, especially in the areas targeted by the now withdrawn proposed regulations, such as contingent changes in deal structure, significant post-separation continuing arrangements or payments, exchanges involving distributing corporation debt, and assumptions of distributing corporation liabilities. Prior to the withdrawn proposed regulations, existing U.S. tax law in these areas was based on various existing authorities and older pieces of guidance.
Taxpayers will now need to consider this existing body of law in greater detail, and can largely set aside the prescriptive and often stricter requirements of the withdrawn proposed regulations. Nevertheless, certain issues relating to spin-offs still appear to be under focus in the government's new guidance, especially distributions and exchanges involving controlled corporation stock and securities under I.R.C. § 361, including whether these distributions or exchanges occur simultaneously or as part of plan, whether taxpayers adjust these distributions or exchanges depending on events and circumstances after the spin-off, and whether applicable basis limitations are satisfied. These exchanges and distributions are sometimes referred to as "monetization" transactions and have long been subject to significant government scrutiny; taxpayers should continue to plan such transactions with care under the government's new spin-off guidance.
