New Proposed Regulations Address Spin-Off Transactions
These proposed regulations applicable to tax-free spin-offs would impose a range of new substantive requirements and greatly expand the information that must be reported to the Internal Revenue Service ("IRS") by taxpayers who engage in tax-free spin-offs.
On January 13, 2025, the IRS issued notices of proposed rulemaking (REG–112261–24 and REG–116085–23) (the "NPRMs") that would impose many new requirements, both transactional and reporting, on spin-off transactions. The NPRMs address IRS concerns similar to those raised in Revenue Procedure 2024-24 (revising the spin-off letter ruling program) and Notice 2024-38, including:
- Retention of SpinCo stock/debt: Propose an extensive facts-and-circumstances analysis (or, in the alternative, a detailed safe harbor) that any retention must satisfy.
- Delayed distributions of SpinCo stock/debt: Propose new rules for determining whether a delayed distribution constitutes part of the series of distributions qualifying for tax-free spin-off treatment.
- Satisfaction of distributing company ("Distributing") debt with SpinCo securities or debt: Propose various limitations on Distributing's use of SpinCo securities or debt, including restrictions on the manner by which the debt exchange is effectuated and on Distributing's replacement of any debt satisfied with SpinCo securities or debt.
- SpinCo's assumption of liabilities: Would impose burdensome substantive and reporting requirements related to liabilities assumed by SpinCo in a spin-off transaction in order to qualify the assumption as tax-free.
- Plans of reorganization: Would formalize the reporting process under which a "plan of reorganization" (or "plan of distribution" for non-reorganization spin-offs) may be established and give the IRS greater visibility into the steps of such plan.
- IRS Form 7216: Propose a five-year annual reporting requirement on all corporations that engage in a tax-free spin-off after January 16, 2025, as well as their significant (generally, 5% or greater) shareholders.
The NPRMs would add further complexity to tax-free spin-off transactions. As the IRS is likely to receive significant stakeholder comments (due by March 17, 2025) on these NPRMs, and it is possible that the new administration will not embrace these proposals, any final regulations could potentially be modified, perhaps significantly, or the proposals could even be abandoned due to the extraordinary documentary burden that they would impose on taxpayers. We will be carefully monitoring the situation to see whether, and to what extent, these rules may be implemented.
