On September 29, 2025, the IRS withdrew two notices containing proposed federal tax regulations related to Section 355 corporate separations (REG-112261-24 and REG-116085-23). REG-112261-24, published by the IRS on January 16, 2025, set forth proposed regulations relating to §355 corporate separations and other transactions qualifying in whole or in part for nonrecognition of gain or loss (the proposed technical regulations). REG-116085-23, also published on January 16, 2025, set forth proposed regulations that would have required multiyear tax reporting for corporate separations and related transactions (the proposed reporting regulations). The IRS asked for comments from the public in response to both the proposed technical regulations and the proposed reporting regulations. In its written withdrawal of the proposed regulations, the IRS wrote that it received generally critical comments in response to both sets of proposed regulations. This article will explore the proposed regulations and public comments.
Proposed Technical Regulations
In the preamble to the proposed technical regulations, the IRS wrote that it believed the current regulatory framework underlying reorganization provisions was incomplete, outdated, and not reflective of the provisions’ importance to the corporate tax system. Overall, the IRS intended to establish through the proposed technical regulations a broad set of rules that would implement core definitional and operative provisions that addressed these transactions.
Plan of Reorganization
The proposed technical regulations contained proposed rules related to the “Plan of Reorganization” requirement, which can be applicable to §355 corporate separations and other transactions intended to qualify for nonrecognition of gain or loss.1 The IRS described the “Plan of Reorganization” requirement as serving to distinguish reorganizations from transactions to which the general recognition provisions of the Internal Revenue Code (IRC) apply. While the term “Plan of Reorganization” is not explicitly defined within the IRC, Treasury regulations and case law provide guidance on the requirement.
Treasury Regulation (Treas. Reg.) §1.368-2(g) describes the “Plan of Reorganization” term as referencing a consummated transaction specifically defined as a reorganization under §368(a). According to the regulations, the term does not broaden the definition of reorganization as set forth in §368(a) but is to be taken as limiting the nonrecognition of gain or loss to exchanges or distributions that are directly a part of the reorganization. Treas. Reg. §1.368-1(c) also provides that §368 reorganization principles are inapplicable unless there is a “Plan of Reorganization.”
The proposed technical regulations included new rules through which the IRS sought to clarify the following:
- The metrics needed for a taxpayer to establish a “Plan of Reorganization,”
- The manner whereby parties to a reorganization can adopt a “Plan of Reorganization,” and
- The requirements for prosecuting a “Plan of Reorganization.”
In the preamble to the proposed technical regulations, the IRS added context to the newly proposed “Plan of Reorganization” rules by writing that previous feedback on existing guidance had described the “Plan of Reorganization” regulations as lacking sufficient clarity and comprehensiveness. The proposed technical regulations included new Proposed Treas. Reg. §1.368-4, which contained requirements and procedures for determining a “Plan of Reorganization,” including the scope of transactions properly included within the “Plan of Reorganization.”2 Prop. Treas. Reg. §1.368-4 would have required the “Plan of Reorganization” to be provided in a single broad document, to be finalized and adopted, and to be completed as expeditiously as practicable and in its entirety. A satisfactory “Plan of Reorganization” document would have identified all parties to the reorganization, identified all transactions included in the “Plan of Reorganization,” identified certain liabilities assumed or satisfied as part of the transactions, described the intended U.S. federal income tax treatment and business purpose of the transactions, and set forth continuity of the related businesses.3 The proposed technical regulations also contained modifications to existing tax reporting requirements to include filing a copy of the “Plan of Reorganization” document in the taxable year of the transaction.4
Proposed Reporting Regulations
The proposed reporting regulations, if finalized, would have required multiyear tax reporting for §355 corporate separations and related transactions. Along with the proposed reporting requirements, the IRS released a draft Form 7216, on which taxpayers would have reported information to satisfy the new rules and identify potential compliance issues. The draft Form 7216 contained questions on a variety of §355 requirements, including an entire page of requests devoted to the active trade or business and nondevice requirements. FORsights™ have covered the proposed reporting regulations in previous publications, including “Proposed 355 ATB, Device, & Transaction Cost Reporting” and “From the Hill.”
Public Comments
As mentioned above, the IRS asked for comments from the public in response to both the proposed technical regulations and the proposed reporting regulations. Many professional associations within the tax industry provided feedback in response to the IRS’ request. The IRS reviewed the feedback prior to withdrawing the proposed regulations, describing it as generally critical in the written notice of the withdrawal. However, the IRS did not describe or identify specific comments that led to the withdrawal. The New York State Bar Association (NYSBA), the American Institute of CPAs (AICPA), and the American Bar Association (ABA) each provided reports with comments on the proposed technical regulations and the proposed reporting regulations. The IRS received the comments in written reports submitted publicly by the groups to Regulations.gov.
The NYSBA recommended in its report that the proposed “Plan of Reorganization” rules in Prop. Treas. Reg. §1.368-4 be withdrawn.5 The NYSBA also recommended replacing the requirement to file Form 7216 with a requirement to notify the IRS of the completion of each step that is part of the “Plan of Reorganization.”6 The NYSBA wrote that it did not believe that current “Plan of Reorganization” guidance has created uncertainty and confusion and added instead that determining whether a “Plan of Reorganization” exists and the steps properly included is straightforward in the “vast majority of cases.”7
In the AICPA’s report, the group recommended relaxing the plan requirement to recognize the administrative and commercial practicalities of carrying out tax-free transactions. The AICPA specifically recommended extending the timing of the plan documentation requirement.8
The ABA recommended in its report that the proposed “Plan of Reorganization” requirements should not be finalized in their current form.9 The ABA also recommended removing the requirements to file a “Plan of Reorganization” document (Prop. Treas. Reg. §1.368-3(a)(5)) and narrowing the requirements of Form 7216.10 The ABA wrote that, in its view, the new rules did not achieve comfort for taxpayers.11
Conclusion
If finalized, the proposed regulations would have created new requirements for §355 corporate separations and broadened the tax reporting requirements connected with these transactions. The IRS wrote that it withdrew the regulations based on feedback but did not describe or identify specific comments that led to the withdrawal. The IRS also did not indicate whether the organization intends to propose revised regulations in the future. However, the withdrawn proposed regulations may still provide indications of the IRS’ ruling policy for private letter rulings (PLR). The IRS is not required to issue PLRs and may consider factors in the ruling process beyond the taxpayer’s representations and requested rulings.12 The withdrawn proposed regulations may continue to influence the IRS’ ruling policy despite being withdrawn. Taxpayers and practitioners should continue to consider the withdrawn proposed regulations in planning §355 transactions and preparing ruling requests.
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- 1The “Plan of Reorganization” requirement does not apply to §355(c) distributions. A §355(c) distribution is a distribution to which §355 applies and which is not in pursuance of a “Plan of Reorganization.”
- 2Prop. Treas. Reg. §1.368-4(a) (withdrawn September 29, 2025).
- 3Prop. Treas. Reg. §1.368-4(d) (withdrawn September 29, 2025).
- 4Prop. Treas. Reg. §1.368-3(a)(5) (withdrawn September 29, 2025).
- 5NYSBA Tax Section Report – Regulations Regarding Corporate Separations Incorporations and Reorganizations, p. 38.
- 6NYSBA Tax Section Report – Regulations Regarding Corporate Separations Incorporations and Reorganizations, p. 12.
- 7NYSBA Tax Section Report – Regulations Regarding Corporate Separations Incorporations and Reorganizations, p. 37.
- 8AICPA letter on Corporate Reorg. and Separations 7.14.25 submitted, p. 1.
- 9ABA, Comments in response to REG-112261-24 and REG-116085-23, p. 75.
- 10ABA, Comments in response to REG-112261-24 and REG-116085-23, p. 87.
- 11ABA, Comments in response to REG-112261-24 and REG-116085-23, p. 76.
- 12Section 6.02 of Rev. Proc. 2025-1 provides that the IRS may decline to issue a PLR when appropriate in the interest of sound tax administration or on other grounds whenever warranted by the facts or circumstances of a particular case.