5220 Federal Register / Vol. 90, No. 10 / Thursday, January 16, 2025 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–112261–24] 

RIN 1545–BR32 

Guidance Regarding Certain Matters 

Relating to Nonrecognition of Gain or 

Loss in Corporate Separations, 

Incorporations, and Reorganizations 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations regarding certain 

matters relating to corporate 

separations, incorporations, and 

reorganizations qualifying, in whole or 

in part, for nonrecognition of gain or 

loss. These matters include distributions 

and retentions of controlled corporation 

stock, assumptions of liabilities by 

controlled corporations, exchanges of 

property between distributing 

corporations and controlled 

corporations, and distributions and 

transfers of consideration to distributing 

corporation shareholders and creditors. 

The proposed regulations would affect 

corporations and their shareholders and 

security holders. Proposed regulations 

modifying the reporting requirements 

for corporate separations are published 

elsewhere in the Proposed Rules section 

of this issue of the Federal Register. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by March 17, 2025. 

ADDRESSES: Commenters are strongly 

encouraged to submit public comments 

electronically via the Federal 

eRulemaking Portal at https://

www.regulations.gov (indicate IRS and 

REG–112261–24) by following the 

online instructions for submitting 

comments. Requests for a public hearing 

must be submitted as prescribed in the 

‘‘Comments and Requests for a Public 

Hearing’’ section. Once submitted to the 

Federal eRulemaking Portal, comments 

cannot be edited or withdrawn. The 

Department of the Treasury (Treasury 

Department) and the IRS will publish 

for public availability any comments to 

the IRS’s public docket. Send paper 

submissions to CC:PA:01:PR (REG– 

112261–24), Room 5203, Internal 

Revenue Service, P.O. Box 7604, Ben 

Franklin Station, Washington, DC 

20044. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Justin R. Du Mouchel at (202) 317–6975 

(not a toll-free number); concerning 

submissions of comments and requests 

for a hearing, contact the Publications 

and Regulations branch at (202) 317– 

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

to publichearings@irs.gov (preferred). 

SUPPLEMENTARY INFORMATION: 

Authority 

This document contains proposed 

regulations under sections 355, 357, 

361, and 368 of the Internal Revenue 

Code (Code) that would amend 26 CFR 

part 1 (Income Tax Regulations) by 

providing guidance regarding certain 

matters relating to corporate 

separations, reorganizations, and 

incorporations qualifying, in whole or 

in part, for nonrecognition of gain or 

loss. The proposed additions and 

amendments to the Income Tax 

Regulations are issued pursuant to the 

express delegations of authority to the 

Secretary of the Treasury or her delegate 

(Secretary) provided under sections 

337(d), 361(b)(3), and 7805(a) of the 

Code. 

Section 337(d) states, in part, that 

‘‘[t]he Secretary shall prescribe such 

regulations as may be necessary or 

appropriate to carry out the purposes of 

the amendments made by subtitle D of 

title VI of the Tax Reform Act of 1986,’’ 

including regulations ‘‘to ensure that 

such purposes may not be circumvented 

through the use of any provision of law 

or regulations (including the 

consolidated return regulations and part 

III of this subchapter).’’ Relating to the 

treatment of transfers to creditors, the 

second sentence of section 361(b)(3) 

states that ‘‘[t]he Secretary may 

prescribe such regulations as may be 

necessary to prevent avoidance of tax 

through abuse of the preceding sentence 

or [section 361](c)(3).’’ Finally, section 

7805(a) authorizes the Secretary to 

‘‘prescribe all needful rules and 

regulations for the enforcement of [the 

Code], including all rules and 

regulations as may be necessary by 

reason of any alteration of law in 

relation to internal revenue.’’ 

Background 

I. Overview of Section 355 

A. Section 355 Transactions 

1. In General 

If a transaction satisfies the 

requirements of section 355 (section 355 

transaction) and other relevant 

provisions of the Code and Income Tax 

Regulations, the transaction may occur 

without recognition of any gain or loss 

to the distributing corporation (within 

the meaning of section 355(a)(1)(A)) and 

without recognition of any gain or loss 

to, or the inclusion of any amount in the 

income of, the shareholders or security 

holders of the distributing corporation. 

A section 355 transaction may take one 

of the following forms: (i) a spin-off, 

which is a pro rata distribution of stock 

of the controlled corporation (within the 

meaning of section 355(a)(1)(A)) to 

shareholders of the distributing 

corporation; (ii) a split-off, which is a 

distribution of stock of the controlled 

corporation to some (but not all) 

shareholders of the distributing 

corporation in exchange for some or all 

of their stock of the distributing 

corporation; or (iii) a split-up, which is 

a liquidating distribution in which the 

distributing corporation distributes to 

its shareholders, either pro rata or nonpro rata, the stock of more than one 

controlled corporation. As discussed in 

parts I.A.3 and I.A.4 of this Background, 

a section 355 transaction may occur 

either as a ‘‘section 355(c) distribution’’ 

or as part of a ‘‘divisive reorganization.’’ 

2. General Utilities Repeal 

In General Utilities & Operating Co. v. 

Helvering, 296 U.S. 200 (1935), the 

Supreme Court of the United States 

(Supreme Court) held that corporations 

generally could distribute appreciated 

property to their shareholders without 

the recognition of any corporate-level 

gain (General Utilities doctrine). 

Congress repealed the General Utilities 

doctrine beginning with legislation in 

1969 and culminating with the Tax 

Reform Act of 1986 (Public Law 99–514, 

100 Stat. 2085), which, among other 

changes, amended sections 311, 336, 

and 337 of the Code (originally enacted 

in the Internal Revenue Code of 1954 

(1954 Code) (Public Law 83–591, 68A 

Stat. 3) to apply gain and loss 

recognition to non-liquidating and 

liquidating distributions, respectively. 

Notwithstanding the repeal of the 

General Utilities doctrine, section 355 

allows a distributing corporation to 

distribute the stock and securities of a 

subsidiary (that is, a controlled 

corporation) to its shareholders without 

imposing a corporate-level tax on the 

distribution. Accordingly, as observed 

by the United States Tax Court (Tax 

Court), ‘‘more attention has been 

directed toward [s]ection 355 today than 

was ever the case in the past [because] 

it is one of the few (some might say the 

only) viable opportunity to escape the 

repeal of the General Utilities doctrine.’’ 

McLaulin v. Comm’r, 115 T.C. 255, 266 

(2000). 

In connection with the repeal of the 

General Utilities doctrine, Congress 

authorized the Treasury Department to 

promulgate regulations to carry out the 

purposes of that repeal, including by 


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preventing its avoidance. Specifically, 

section 337(d) directs the Secretary to 

prescribe regulations that are necessary 

or appropriate to carry out the purposes 

of General Utilities repeal, including 

‘‘regulations to ensure that such 

purposes may not be circumvented 

through the use of any provision of law 

or regulations (including . . . part III of 

this subchapter).’’ Section 355, among 

other corporate organization and 

reorganization provisions, is included in 

part III of subchapter C of chapter 1 of 

the Code (subchapter C). 

3. Section 355(c) Distributions 

The general rule set forth in section 

355(c)(1) provides that no gain or loss is 

recognized to a distributing corporation 

upon any distribution to which section 

355 (or so much of section 356 of the 

Code as relates to section 355) applies 

and that is not made pursuant to a plan 

of reorganization (section 355(c) 

distribution). However, if the 

distributing corporation distributes any 

property other than stock or securities of 

a controlled corporation (that is, any 

property other than qualified property, 

as defined in section 355(c)(2)(B)) in a 

section 355(c) distribution, and if the 

fair market value of that property 

exceeds the distributing corporation’s 

adjusted basis in that property, then 

section 355(c)(2)(A) requires the 

distributing corporation to recognize 

gain as if the property were sold to the 

distributee at its fair market value. This 

Federal income tax treatment reflects 

the status of section 355 as a narrow 

exception to General Utilities repeal. 

Compare section 311(b). 

Because a section 355(c) distribution 

is not made pursuant to a plan of 

reorganization, a section 355(c) 

distribution (unlike a divisive 

reorganization) does not permit the 

distributing corporation to satisfy 

distributing corporation debt 

constituting securities with property 

other than qualified property. In other 

words, because a section 355(c) 

distribution does not qualify as a 

reorganization under the definitional 

provisions of section 368(a)(1), the 

operative provision set forth in section 

361(b)(3) is not applicable. Therefore, in 

a section 355(c) distribution, a 

distributing corporation cannot transfer 

any property other than qualified 

property to its creditors (including its 

security holders) without recognizing 

gain or loss on that transfer. 

4. Divisive Reorganizations 

A distributing corporation may carry 

out a section 355 transaction as part of 

a transaction that qualifies as a 

reorganization under section 

368(a)(1)(D) or (G) and to which section 

354 of the Code (or so much of section 

356 as relates to section 354) does not 

apply (divisive reorganization). Section 

368(a)(1)(D) provides, in part, that a 

reorganization includes a transfer by the 

distributing corporation of all or a part 

of its assets to a controlled corporation 

if, immediately after the transfer, the 

distributing corporation or one or more 

of its shareholders (including persons 

who were shareholders immediately 

before the transfer) are in control 

(within the meaning of section 368(c)) of 

the controlled corporation; but only if, 

pursuant to the plan of reorganization, 

stock or securities of the controlled 

corporation are distributed in a 

transaction that qualifies under section 

355 or 356. 

Under section 368(a)(1)(G), a transfer 

by a distributing corporation of all or a 

part of its assets to a controlled 

corporation in a case under title 11 of 

the United States Code or a similar case 

described in section 368(a)(3)(A)(ii) 

(title 11 or similar case) also is a 

divisive reorganization if, pursuant to 

the plan of reorganization, stock or 

securities of the controlled corporation 

are distributed in a transaction that 

qualifies under section 355 (or so much 

of section 356 as relates to section 355). 

Section 368(a)(3)(C) provides an 

ordering rule under which a transaction 

that would qualify both under section 

368(a)(1)(G) and, among other 

provisions, under section 368(a)(1)(D) or 

section 351 of the Code, is treated as 

qualifying solely under section 

368(a)(1)(G) for all purposes of 

subchapter C other than section 

357(c)(1). 

If a transaction satisfies the 

definitional requirements of section 

368(a)(1)(D) or (G), the distributing 

corporation may qualify for 

nonrecognition treatment for (i) its 

exchange of property with the 

controlled corporation, (ii) its 

distribution of certain property to its 

shareholders, and (iii) its transfer of 

certain property to its creditors. Under 

section 357(a), the controlled 

corporation generally may assume 

distributing corporation liabilities 

without the distributing corporation 

recognizing gain or loss, except as 

provided in (i) section 357(b) (if the 

principal purpose for the liability 

assumption is to avoid Federal income 

tax or is not a bona fide business 

purpose), and (ii) section 357(c) (if the 

sum of the amount of liabilities assumed 

by the controlled corporation is greater 

than the total adjusted basis of assets 

transferred in the exchange). 

Under section 361(a), the distributing 

corporation recognizes no gain or loss if 

it exchanges property pursuant to the 

plan of reorganization solely for stock 

and securities in the controlled 

corporation. Under section 361(b)(1)(A), 

if section 361(a) would apply to an 

exchange but for the fact that the 

property received by the distributing 

corporation also includes money or 

other property, no gain will be 

recognized by the distributing 

corporation if it distributes the money 

or other property pursuant to the plan 

of reorganization. Under section 

361(b)(3), the distributing corporation 

also generally may transfer that money 

or other property in connection with the 

reorganization to its creditors in 

satisfaction of distributing corporation 

debt held by those creditors, without 

recognition of gain or loss under section 

361(b)(1)(A) to the extent the sum of the 

money and the fair market value of the 

other property transferred to such 

creditors does not exceed the adjusted 

bases of such assets transferred (reduced 

by the amount of liabilities assumed 

within the meaning of section 357(c)). 

Under section 361(c)(1), the 

distributing corporation recognizes 

neither gain nor loss on its distribution 

of qualified property to its shareholders 

pursuant to the plan of reorganization. 

For this purpose, section 361(c)(2)(B) 

defines ‘‘qualified property’’ as any 

stock in, right to acquire stock in, or 

obligation of (i) the distributing 

corporation, or (ii) another corporation 

that is a party to the reorganization (for 

example, the controlled corporation) if 

such stock, stock right, or obligation is 

received by the distributing corporation 

in the exchange. In connection with the 

reorganization, the distributing 

corporation also generally may transfer 

that qualified property to its creditors in 

satisfaction of distributing corporation 

debt held by those creditors, without 

recognition of gain or loss under section 

361(c). 

For purposes of this preamble, the 

term ‘‘section 361 consideration’’ 

means, as described in section 361(a) 

and (b), the consideration received by a 

target corporation from an acquiring 

corporation in exchange for property 

transferred by the target corporation to 

the acquiring corporation pursuant to a 

plan of reorganization. Accordingly, in 

the context of a divisive reorganization, 

the term ‘‘section 361 consideration’’ 

means, for purposes of this preamble, 

the consideration received by the 

distributing corporation from the 

controlled corporation in exchange for 

property transferred by the distributing 

corporation to the controlled 

corporation pursuant to the plan of 

reorganization. 


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B. General Federal Income Tax 

Consequences to Distributing 

Corporation Shareholders 

Section 355(a)(1) provides that, if a 

distributing corporation distributes to 

its shareholders with respect to its 

stock, or distributes to its security 

holders in exchange for their securities, 

solely stock or securities of a controlled 

corporation, and if certain other 

requirements are satisfied, then no gain 

or loss is recognized by, and no amount 

is included in the income of, the 

distributing corporation’s shareholders 

or security holders upon the receipt of 

stock or securities of the controlled 

corporation. However, if any property is 

received that is not permitted to be 

received under section 355(a)(1), then 

section 356 (and not section 355) 

applies to the receipt of such property 

as provided in sections 355(a)(4)(A) and 

356. 

C. General Requirements for 

Qualification Under Section 355 

To qualify as a section 355 transaction 

under section 355(a)(1), a transaction 

must satisfy the following requirements. 

First, under section 355(a)(1)(A), the 

distributing corporation must distribute 

stock or securities of a controlled 

corporation to a shareholder with 

respect to distributing corporation stock, 

or to a security holder in exchange for 

its securities. Second, under section 

355(a)(1)(B), the transaction may not be 

used principally as a device for the 

distribution of the earnings and profits 

of the distributing corporation, the 

controlled corporation, or both. Third, 

under section 355(a)(1)(C), the 

distributing corporation and each 

controlled corporation must satisfy the 

active trade or business requirements of 

section 355(b). 

With particular regard to these 

proposed regulations, section 355(a)(1) 

imposes a fourth requirement regarding 

distributions of controlled corporation 

stock and securities. Specifically, 

section 355(a)(1)(D) requires that, ‘‘as 

part of the distribution,’’ the distributing 

corporation must distribute either (i) all 

stock and securities in the controlled 

corporation held by the distributing 

corporation immediately before the 

distribution, or (ii) an amount of stock 

in the controlled corporation 

constituting ‘‘control’’ within the 

meaning of section 368(c) (control 

distribution). In the case of distributions 

of less than 100 percent of stock in the 

controlled corporation, it must be 

established to the satisfaction of the 

Secretary that the retention by the 

distributing corporation of stock (or 

stock and securities) of the controlled 

corporation was not pursuant to a plan 

having as one of its principal purposes 

the avoidance of Federal income tax. 

For purposes of this preamble, such a 

retention of controlled corporation stock 

(or stock and securities) by the 

distributing corporation is referred to as 

a ‘‘retention,’’ and the requirements in 

section 355(a)(1)(D) are referred to 

collectively as the ‘‘distribution 

requirement.’’ 

D. The Distribution Requirement and 

Retentions 

1. Overview 

As described in part I.C of this 

Background, the distribution 

requirement consists of two alternative 

rules. Under section 355(a)(1)(D)(i), the 

distributing corporation will satisfy the 

distribution requirement if it distributes 

all stock and securities in the controlled 

corporation held by the distributing 

corporation immediately before the 

distribution. Alternatively, under 

section 355(a)(1)(D)(ii), the distributing 

corporation will satisfy the distribution 

requirement if it satisfies the following 

two discrete requirements: (i) the 

distributing corporation distributes an 

amount of controlled corporation stock 

sufficient to qualify as a control 

distribution; and (ii) the distributing 

corporation establishes to the 

satisfaction of the Secretary that the 

retention of any controlled corporation 

stock or securities was not pursuant to 

a plan having as one of its principal 

purposes the avoidance of Federal 

income tax. 

2. Requirements for Control 

Distribution; Commissioner v. Gordon 

Section 355(a)(1)(D) provides that, if a 

distributing corporation does not 

distribute all its stock and securities in 

the controlled corporation, the 

distributing corporation must make a 

control distribution as ‘‘part of the 

distribution.’’ However, section 

355(a)(1)(D) does not expressly impose 

a temporal requirement for making a 

control distribution. Accordingly, 

section 355(a)(1)(D) could be read as 

permitting a control distribution to 

occur over multiple taxable years of the 

distributing corporation. 

In Commissioner v. Gordon, 391 U.S. 

83 (1968), the Supreme Court 

considered the application of the 

distribution requirement to distributions 

by Pacific Telephone and Telegraph 

Company (Pacific) of stock of a newly 

formed, wholly owned subsidiary 

(Northwest) over multiple taxable years 

of Pacific. American Telephone and 

Telegraph Company (AT&T), which 

owned approximately 90 percent of the 

stock of Pacific, decided to separate 

Pacific into two separate companies 

and, to effectuate that separation, 

caused Pacific to engage in the 

following transactions. First, pursuant 

to a plan of reorganization submitted to 

its shareholders, Pacific issued to its 

shareholders (including the taxpayer) 

transferable rights to acquire 

approximately 57 percent of the stock of 

Northwest on September 29, 1961. That 

plan of reorganization also provided 

that Pacific had an ‘‘expectation’’ that 

the remaining 43 percent of Northwest 

stock would be offered to Pacific’s 

shareholders. Among other reasons for 

not distributing 100 percent of its 

Northwest stock, Pacific desired to 

achieve an appropriate capital structure 

and avoid potential State regulatory 

issues. On June 12, 1963, Pacific issued 

to its shareholders transferable rights to 

acquire the remaining 43 percent of 

Northwest stock. The taxpayer 

contended that the 1961 and 1963 

distributions collectively qualified 

under section 355. 

The Court concluded that neither 

distribution qualified under section 355, 

notwithstanding Pacific’s ‘‘expectation’’ 

regarding the second distribution and its 

purposes for making multiple 

distributions. Gordon, 391 U.S. at 98. In 

its analysis, the Court expressed a 

general principle of Federal income tax 

that, ‘‘[a]bsent other specific directions 

from Congress, Code provisions must be 

interpreted so as to conform to the basic 

premise of annual tax accounting.’’ Id. 

at 96. With regard to the distribution 

requirement, the Court noted that, if an 

initial transfer of less than a controlling 

interest in the controlled corporation is 

to be treated for Federal income tax 

purposes as a mere first step in the 

divestiture of control, ‘‘it must at least 

be identifiable as such at the time it is 

made.’’ Id. The Court further stated that 

the requirement that the character of a 

transaction be determinable ‘‘does not 

mean that the entire divestiture must 

necessarily occur within a single tax 

year,’’ but it does mean that, if one 

transaction is to be characterized as a 

‘‘first step,’’ then ‘‘there must be a 

binding commitment to take the later 

steps.’’ Id. Of particular relevance to 

both the IRS’s administrative function 

and the objective of these proposed 

regulations to provide increased 

certainty (see part IV of this 

Background), the Court expressed that it 

would be wholly inconsistent with the 

annual accounting premise to hold that 

the essential character of a transaction, 

and its Federal income tax impact, 

should remain ‘‘not only 

undeterminable but unfixed for an 


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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 bindingcommitment standard set forth by the 

Court. Id. at 97. Although Pacific’s plan 

of reorganization evidenced an 

expectation to distribute its remaining 

Northwest stock within a three-year 

period following its initial 57-percent 

distribution, the Court emphasized that 

‘‘there is obviously no promise to sell 

any particular amount of stock, at any 

particular time, at any particular price’’ 

set forth in that document. Id. Instead, 

Pacific’s plan of reorganization merely 

stated that such subsequent 

distributions would occur ‘‘[a]t a time or 

times related to its (Pacific’s) need for 

new capital.’’ Id. Consequently, the 

Court reasoned that, ‘‘[i]f the 1961 

distribution played a part in what later 

proved to be a total divestiture of the 

Northwest stock, it was not, in 1961, 

either a total divestiture or a step in a 

plan of total divestiture.’’ Id. at 97–98. 

3. Retentions 

Section 1.355–2(e), which reiterates 

the distribution requirement, provides 

that the corporate business purpose or 

purposes for the distribution ordinarily 

will require the distribution of all stock 

and securities of the controlled 

corporation. If the distributing 

corporation retains any controlled 

corporation stock or securities, and if it 

is not established to the satisfaction of 

the Commissioner that the retention was 

not pursuant to a plan having as one of 

its principal purposes the avoidance of 

Federal income tax, section 355 does 

not apply to the entire distribution (that 

is, the entire distribution fails to qualify 

as a section 355 transaction). 

In Rev. Rul. 75–321, 1975–2 C.B. 123, 

the IRS addressed whether the retention 

by a widely held and publicly traded 

corporation (Distributing) of stock in its 

banking subsidiary (Controlled) 

complied with section 355(a)(1)(D)(ii) 

(that is, whether the retention was 

pursuant to a plan having as one of its 

principal purposes the avoidance of 

Federal income tax). In this revenue 

ruling, Distributing distributed 95 

percent of the stock of Controlled to 

Distributing’s shareholders to comply 

with Federal banking laws in a 

transaction that otherwise satisfied the 

requirements of section 355. 

Distributing retained 5 percent of 

Controlled’s stock to meet collateral 

requirements for short-term financing. 

The IRS concluded that the retention 

was not pursuant to a plan having as 

one of its principal purposes the 

avoidance of Federal income tax, 

because (i) a genuine separation of the 

corporate entities was effectuated, (ii) 

retention of a 5-percent stock interest in 

Controlled would not enable 

Distributing to maintain practical 

control over Controlled following the 

distribution, and (iii) a sufficient 

corporate business purpose existed for 

Distributing’s retention of the 5-percent 

interest in Controlled. See also Rev. Rul. 

75–469, 1975–2 C.B. 126 (similar ruling 

with respect to a distributing 

corporation’s retention of controlled 

corporation securities to serve as 

collateral for a bank loan to the 

distributing corporation). 

Similarly, in G.C.M. 32136 (Oct. 23, 

1961), the IRS considered whether the 

retention by a distributing corporation 

(Distributing) of stock in a newly formed 

controlled corporation (Controlled) was 

pursuant to a plan having as one of its 

principal purposes the avoidance of 

Federal income tax. Under the facts 

described in that memorandum, 

Distributing distributed 80 percent of 

Controlled stock to Distributing’s 

shareholders to comply with State 

banking laws in a transaction that 

otherwise satisfied the requirements of 

section 355, and Distributing retained 

20 percent of Controlled stock. The 

avowed purpose for the retention was to 

permit a controlling group of 

Distributing’s shareholders to maintain 

effective control over Controlled. In 

concluding that Distributing had a 

Federal income tax avoidance purpose 

for the retention, the IRS determined 

that the requirement that a retention be 

specially justified ‘‘seems most likely to 

be intended to insure a genuine 

separation.’’ See also G.C.M. 32380 

(Aug. 24, 1962) (reiterating that view). 

II. Definitional and Operative 

Provisions Regarding Reorganizations 

A. Overview 

Subchapter C generally includes (i) 

definitional provisions, including under 

section 368, and (ii) operative 

provisions, including under sections 

354, 356, 357, and 361. See, for 

example, Microdot, Inc. v. United 

States, 728 F.2d 593, 598 (2d Cir. 1984) 

(‘‘Section 368(a)(1) is a definitional 

section, wholly distinct from [section] 

354.’’). As described in greater detail in 

part II.B of this Background, section 

368(a)(1) defines the term 

‘‘reorganization’’ as seven specifically 

described types of transactions under 

subparagraphs (A) through (G). 

Qualification of a transaction (or series 

of transactions) for a definitional 

provision under section 368(a)(1) is the 

sole manner by which the application of 

an operative provision relating to a 

reorganization can occur. This statutory 

structure ensures that the taxadvantaged treatment provided by such 

operative provisions applies exclusively 

to those transactions that satisfy all 

statutory, regulatory, and judicial 

requirements for a particular 

definitional provision (for example, the 

continuity of interest and continuity of 

business enterprise requirements). As 

discussed in greater detail in part III of 

this Background, a primary purpose of 

the ‘‘plan of reorganization’’ 

requirement is to ensure that a 

transaction to which an operative 

provision is purported to apply is 

sufficiently connected to a 

reorganization defined in section 

368(a)(1). 

B. Section 368: Definitions Relating to 

Corporate Reorganizations 

Section 368(a)(1) is the primary 

definitional provision of subchapter C 

with regard to reorganizations. For 

purposes of parts I through III of 

subchapter C, section 368(a)(1) defines 

the term ‘‘reorganization’’ to mean any 

of the seven types of transactions 

described in section 368(a)(1)(A) 

through (G), including triangular 

reorganizations (as defined in § 1.358– 

6(b)(2)) that are variants of such 

transactions and divisive 

reorganizations described in section 

368(a)(1)(D) and (G). Section 368(a)(2) 

provides special rules that support the 

definitional provisions set forth in 

section 368(a)(1), and section 368(a)(3) 

similarly provides additional rules 

relating to title 11 or similar cases. 

Section 368(b) and (c) also contains 

definitional provisions. For purposes of 

part III of subchapter C, section 368(b) 

generally defines the term ‘‘a party to a 

reorganization’’ to include (i) a 

corporation resulting from a 

reorganization, and (ii) both 

corporations, in the case of a 

reorganization resulting from the 

acquisition by one corporation of stock 

or properties of another. Section 368(b) 

defines other corporations as parties to 

a transaction depending on the type of 

transaction. See also § 1.368–2(f). 

For purposes of subchapter C (other 

than sections 304 and 385 of the Code), 

section 368(c) defines the term 

‘‘control’’ to mean the ownership of (i) 

stock possessing at least 80 percent of 

the total combined voting power of all 

classes of stock entitled to vote, and (ii) 

at least 80 percent of the total number 

of shares of all other classes of stock of 

the corporation. See also Rev. Rul. 59– 

259, 1959–2 C.B. 115 (requiring 


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ownership of (i) stock possessing at least 

80 percent of the total combined voting 

power of all classes of voting stock, and 

(ii) at least 80 percent of the total 

number of shares of each class of 

outstanding non-voting stock). 

C. Section 357: Assumptions of 

Liabilities by Transferee Corporations 

1. Overview 

Section 357 is an operative provision 

that facilitates exchanges involving the 

assumption of liabilities by generally 

preventing such assumptions from (i) 

being treated as the receipt of money or 

other property in an exchange, and (ii) 

disqualifying the exchange for 

nonrecognition treatment. See section 

357(a); see also the anti-abuse rule in 

section 357(b) and the adjusted basis 

limitation in section 357(c). Section 357 

reflects Congress’s view that, ‘‘[i]n 

typical transactions changing the form 

or entity of a business it is not 

customary to liquidate the liabilities of 

the business and such liabilities are 

almost invariably assumed by the 

corporation which continues the 

business,’’ but that nonrecognition 

treatment in section 357 should be 

limited solely to ‘‘bona fide transactions 

of this type.’’ H.R. Rep. No. 76–855, at 

19 (1939) (Conf. Rep.). 

2. Response to United States v. Hendler 

The original predecessor to current 

section 357, section 112(k) of the 

Internal Revenue Code of 1939 (1939 

Code), was enacted by Congress as 

section 213(a) of the Revenue Act of 

1939 (Public Law 76–155, 53 Stat. 862, 

870) to address the adverse 

consequences of judicial and taxpayer 

interpretations of the Supreme Court’s 

decision in United States v. Hendler, 

303 U.S. 564 (1938). See S. Rep. No. 76– 

648, at 3 (1939) (referencing the Hendler 

opinion by name). In Hendler, the Court 

examined the Federal income tax 

consequences of a transaction that 

qualified as a reorganization under 

section 112 of the Revenue Act of 1928 

(Public Law 70–562, 45 Stat. 791). As 

part of the reorganization, the transferee 

corporation (Borden Company) assumed 

and paid the indebtedness of the 

transferor (Hendler Company). The 

Court regarded the assumption and 

payment in substance as though the 

Borden Company had made the 

payment directly to the Hendler 

Company. Hendler, 303 U.S. at 566. 

Based on that treatment, the Court 

viewed the Hendler Company in 

substance as receiving money or other 

property that it failed to distribute to its 

shareholders (because that payment was 

made to a Hendler Company creditor, 

albeit in form by the Borden Company). 

Id. Accordingly, the Court held that the 

Hendler Company recognized gain in 

the amount of that payment. Id. at 567. 

Following the Hendler decision, 

Congress observed that the Court’s 

analysis had ‘‘been broadly interpreted 

to require that, if a taxpayer’s liabilities 

are assumed by another party in what is 

otherwise a tax-free reorganization, gain 

is recognized to the extent of the 

assumption.’’ H.R. Rep. No. 76–855, at 

19 (emphasis added). In other words, as 

successfully argued by the IRS in cases 

following Hendler, a transferee 

corporation’s lack of payment of the 

liabilities was immaterial for the 

Hendler analysis to apply to treat the 

transferee corporation’s assumption of a 

transferor’s liabilities as a cash payment 

to the transferor. See Haass v. Comm’r, 

37 B.T.A. 948, 955 (1938). The IRS 

advocated for this broad interpretation 

in response to an aggressive position 

taken by taxpayers, who relied on the 

Hendler decision to argue that the basis 

of stock they had received in prior 

exchanges should be increased by the 

amount of gain that should have been 

recognized and taxed by reason of the 

transferee corporation’s assumption of 

liabilities, even though that gain had not 

actually been taxed by the IRS (and that 

tax had not been paid). 

However, this broad interpretation 

jeopardized the nonrecognition 

treatment of bona fide assumptions 

carried out as part of reorganizations 

that Congress originally had intended to 

facilitate through the enactment of the 

reorganization provisions. See H.R. Rep. 

No. 76–855, at 19 (‘‘Your committee 

therefore believes that such a broad 

interpretation as is indicated above will 

largely nullify the provisions of existing 

law which postpone the recognition of 

gain in such cases.’’). 

3. Enactment of Section 357(a) and (b) 

Congress enacted section 112(k) of the 

1939 Code to balance (i) the need to 

facilitate the bona fide assumption of 

liabilities in transactions that satisfy the 

definitional requirements of a 

reorganization, with (ii) the need to 

minimize abusive tax planning through 

such assumptions (including through 

transitory transactions). Accordingly, 

section 112(k) of the 1939 Code 

provided for both (i) the general 

nonrecognition treatment adopted by 

section 357(a) of the 1954 Code and set 

forth in current section 357(a), and (ii) 

a supporting anti-abuse provision 

adopted by section 357(b) of the 1954 

Code and set forth in current section 

357(b). 

Under section 357(b)(1), the total 

amount of liabilities assumed in an 

assumption described in section 357(a) 

is treated for purposes of section 351 or 

361 (as applicable) as money received 

by the transferor in the exchange if it 

appears that the principal purpose of 

the transferor with respect to the 

assumption was (i) to avoid Federal 

income tax on the exchange, or (ii) not 

a bona fide business purpose. In effect, 

section 357(b) can apply to a transaction 

to preserve the treatment required by 

Hendler for such abusive assumptions. 

In making the determination required 

by section 357(b)(1), the nature of the 

liabilities and the circumstances under 

which the arrangement for the 

assumption was made are taken into 

account. In addition, section 357(b)(2) 

provides that, in any suit or proceeding 

in which the burden is on the transferor 

to prove that the liability assumption 

should not be treated as money received 

in the exchange, the transferor must 

meet that burden by a clear 

preponderance of the evidence. 

4. Application of Section 357(b) to 

Divisive Reorganizations 

In Rev. Rul. 79–258, 1979–2 C.B. 143, 

the IRS considered the application of 

section 357(b) to the assumption by a 

newly formed transferee corporation 

(Controlled) of a liability incurred by 

the transferor (Distributing) in close 

temporal proximity to, and in 

anticipation of, a transaction that 

qualified as a divisive reorganization 

under sections 355 and 368(a)(1)(D). 

One of the Distributing liabilities that 

Distributing desired Controlled to 

assume was a $4,000x portion of a 

$25,000x long-term debt owed to an 

insurance company that Distributing 

had incurred in connection with the 

business transferred to Controlled, and 

that had been outstanding for several 

years before the divisive reorganization 

(historical Distributing debt). However, 

Distributing could not apportion the 

historical Distributing debt between it 

and Controlled because the insurance 

company refused to relieve Distributing 

of its primary liability for repayment. 

Therefore, in exchange for $4,000x in 

loan proceeds, Distributing issued a new 

long-term note for which Distributing 

was primarily liable to a bank (new 

Distributing debt). Distributing then 

caused Controlled to assume the new 

Distributing debt in the divisive 

reorganization, and Distributing was 

relieved of its primary repayment 

liability (Controlled assumption). The 

proceeds of the new Distributing debt 

were used by Distributing to pay off 

$4,000x of the historical Distributing 

debt. Distributing then distributed the 

Controlled stock to Distributing’s 

shareholders. 


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From Distributing’s standpoint, 

having Controlled assume the new 

Distributing debt was desirable because, 

absent Controlled’s assumption of this 

debt, Distributing’s assets would be 

reduced by the value of the Controlled 

stock (which was distributed to 

Distributing’s shareholders), but 

Distributing’s liabilities would not be 

reduced by the $4,000x liability 

attributable to the business transferred 

to Controlled. As a result, Distributing’s 

ability to borrow (and its ability to pay 

off the portion of the historical 

Distributing debt attributable to the 

business transferred to Controlled) 

could be adversely affected if Controlled 

did not assume the new Distributing 

debt. 

To determine the potential 

application of section 357(b), the IRS 

engaged in a detailed analysis of the 

facts and circumstances relating to the 

issuance of the new Distributing debt 

and the Controlled assumption. First, 

the IRS observed that Distributing used 

the proceeds of the new Distributing 

debt to satisfy $4,000x of the historical 

Distributing debt, thereby placing 

Distributing and Controlled in the same 

net economic position after the 

Controlled assumption as each 

corporation would have been in had 

Controlled been able to assume $4,000x 

of the historical Distributing debt. 

Second, the IRS observed that the 

incurrence of the new Distributing debt 

and the Controlled assumption not only 

were necessary to effectuate the divisive 

reorganization, but also were a normal 

adjunct to the divisive reorganization 

given the non-assumable nature of part 

of the historical Distributing debt. 

Third, the IRS observed that 

Distributing’s incurrence of the new 

Distributing debt and the Controlled 

assumption merely were in substitution 

for Controlled’s assumption of a pro rata 

portion of the historical Distributing 

debt that Controlled could not assume. 

In that regard, because the divisive 

reorganization resulted in Controlled 

assuming a liability in an amount that 

properly related to its business 

operations and would be satisfied from 

earnings generated by those operations, 

the IRS viewed the incurrence of the 

new Distributing debt and the 

Controlled assumption as consistent 

with sound business practice. 

Accordingly, the IRS concluded that tax 

avoidance was not a principal purpose 

of the transaction and, therefore, that 

section 357(b) did not apply to the 

Controlled assumption. 

Additionally, the IRS determined that 

the acquisition of the new Distributing 

debt and the Controlled assumption 

would not be viewed for Federal income 

tax purposes as if Controlled had 

obtained the new Distributing debt and 

transferred the proceeds to Distributing. 

In this regard, the IRS found it 

immaterial that Distributing and 

Controlled may have been able to 

arrange their affairs in another manner, 

because the taxpayer satisfied its burden 

of proof as required under section 

357(b). See Simpson v. Comm’r, 43 T.C. 

900, 916 (1965) (stating that the 

application of section 357(b) is limited 

to transactions ‘‘arranged primarily so 

that the assumption of the [transferor]’s 

liability in the transaction itself results 

in tax avoidance for the transferor, or 

has no bona fide business purpose,’’ and 

that section 357(b) was not intended to 

require recognition of gain on bona fide 

transactions designed to rearrange one’s 

business affairs in such a manner as to 

minimize taxes in the future, consistent 

with existing provisions of the law); ISC 

Industries, Inc. v. Comm’r, T.C. Memo. 

1971–283 (concluding that petitioner’s 

principal purpose in having a new 

subsidiary assume liabilities placed 

upon the assets transferred to the 

subsidiary was not to avoid Federal 

income taxes on the transfer, but rather 

was to protect lines of credit for 

petitioner’s finance business, and 

finding it immaterial that petitioner may 

have been able to arrange its affairs in 

another manner, or in a manner that 

produced more tax revenue, because 

section 357(b) clearly looks to the 

taxpayer’s motives for doing what 

actually occurred). 

5. Application of Section 357(c) 

In the case of an exchange to which 

section 351 applies (section 351 

exchange) or to which section 361 

applies by reason of a divisive 

reorganization that qualifies under 

sections 355 and 368(a)(1)(D), section 

357(c)(1) generally provides that, if the 

sum of the amount of the transferor’s 

liabilities assumed by the transferee 

corporation exceeds the total adjusted 

basis of the assets transferred by the 

transferor to the transferee corporation 

in the exchange, then such excess is 

considered as a gain from the sale or 

exchange of a capital asset or of 

property that is not a capital asset, as 

the case may be. See also section 

368(a)(3)(C) (providing that a 

reorganization that would qualify under 

both section 368(a)(1)(D) and (G) is 

treated as qualifying under section 

368(a)(1)(D) for purposes of section 

357(c)(1)). 

However, section 357(c)(2) provides 

that the general rule in section 357(c)(1) 

does not apply to any exchange (i) to 

which section 357(b) applies, or (ii) that 

is pursuant to a plan of reorganization 

within the meaning of section 

368(a)(1)(G) in which no former 

shareholder of the transferor receives 

any consideration for its stock. Rev. Rul. 

2007–8, 2007–1 C.B. 469, holds that the 

general rule in section 357(c)(1) does 

not apply to a section 351 exchange if 

that transaction also qualifies as a 

reorganization described in section 

368(a)(1)(A), (C), (D) (provided the 

requirements of section 354(b)(1) are 

satisfied), or (G) (provided the 

requirements of section 354(b)(1) are 

satisfied). 

Furthermore, under section 357(c)(3), 

if the transferor transfers in a section 

351 exchange (including a divisive 

reorganization that overlaps with a 

section 351 exchange; see section 

357(c)(3) (referencing an exchange to 

which section 357(c)(1) applies)) a 

liability the payment of which either 

would give rise to a deduction or would 

be described in section 736(a) of the 

Code (concerning payments made in 

liquidation of the partnership interest of 

a retiring or deceased partner), the 

amount of such liability is excluded in 

determining the amount of liabilities 

assumed under section 357(c)(1) unless 

the incurrence of the liability resulted in 

the creation of (or an increase in) the 

basis of any property. In addition, 

liabilities the payment of which would 

give rise to a capital expenditure are not 

included for purposes of section 

357(c)(1) unless the incurrence of the 

liability resulted in the creation of (or an 

increase in) the basis of any property. 

See Rev. Rul. 95–74, 1995–2 C.B. 36. 

D. Section 361: Distributions to 

Shareholders of Target Corporation 

1. Overview 

Section 361 is an operative provision 

applicable to certain exchanges and 

distributions of property in a transaction 

that satisfies the definitional 

requirements for qualification as a 

reorganization under section 368(a)(1). 

Section 361(a) and (b) provides the 

Federal income tax consequences to a 

target corporation (such as a distributing 

corporation in a divisive reorganization) 

that (i) is a party to a reorganization, and 

(ii) pursuant to the plan of 

reorganization, exchanges property with 

an acquiring corporation (such as a 

controlled corporation in a divisive 

reorganization) that also is a party to the 

reorganization. Section 361(c) provides 

the Federal income tax consequences to 

the target corporation (such as a 

distributing corporation in a divisive 

reorganization) of the distribution by the 

target corporation to its shareholders, or 

transfer to its creditors, of certain 

property in pursuance of or in 


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connection with the plan of 

reorganization that includes the 

exchange of property with an acquiring 

corporation (such as a controlled 

corporation in a divisive reorganization) 

that also is a party to the reorganization. 

See the discussion in part III.A of this 

Background (noting that the phrases ‘‘in 

pursuance of’’ and ‘‘in connection with’’ 

in section 361 convey the same 

meaning). 

2. Enactment of Section 361(a): Purely 

Paper Transactions 

The original predecessor to current 

section 361(a) was enacted by Congress 

as part of section 202(b) of the Revenue 

Act of 1918 (Pub. L. 65–254, 40 Stat. 

1057, 1060 (1919)). The applicable part 

of section 202(b) of the Revenue Act of 

1918 was subsequently incorporated in 

section 112 of the 1939 Code before 

being adopted as section 361(a) of the 

1954 Code and thereafter as current 

section 361(a). 

Congress enacted the applicable part 

of section 202(b) of the Revenue Act of 

1918 ‘‘to establish the rule for 

determining taxable gains in the case of 

exchanges of property and to negate the 

assertion of tax in the case of certain 

purely paper transactions.’’ S. Rep. No. 

65–617, at 5 (1918). As stated in the 

legislative history, the substance of the 

original predecessor to section 361(a) is 

that (i) when property is exchanged for 

other property, the property received in 

the exchange should be treated as the 

equivalent of cash in the amount of its 

fair market value, but (ii) when, in 

connection with the reorganization or 

consolidation of a corporation, a person 

receives, in place of stock or securities, 

new stock or securities of no greater 

aggregate par value, or when a person 

receives, in place of property, stock of 

a corporation formed to take over such 

property, no gain or loss should be 

deemed to occur from the exchange. See 

id. at 5–6. 

More than a century after the 

enactment of its original predecessor, 

section 361(a) continues to provide 

generally that a corporation (that is, the 

target corporation) that is a party to a 

reorganization (such as the distributing 

corporation in a divisive reorganization) 

recognizes no gain or loss if it exchanges 

property pursuant to the plan of 

reorganization solely for stock and 

securities in another corporation (that 

is, the acquiring corporation) that is a 

party to the reorganization (such as a 

controlled corporation in a divisive 

reorganization). 

3. Enactment of Section 361(b): Conduit 

for Distribution to Shareholders 

The original predecessor to current 

section 361(b) was enacted by Congress 

as section 203(e) of the Revenue Act of 

1924 (Pub. L. 68–176, 43 Stat. 253, 256). 

Section 203(e) of the Revenue Act of 

1924 was subsequently incorporated in 

section 112 of the 1939 Code before 

being adopted as section 361(b) of the 

1954 Code and thereafter as current 

section 361(b). 

Congress enacted section 203(e) of the 

Revenue Act of 1924 to provide that (i) 

if the corporation that sells its assets in 

connection with the reorganization 

‘‘acts merely as a conduit’’ in passing 

the sale proceeds on to its shareholders, 

no gain to the corporation is to be 

recognized, but (ii) if the corporation 

‘‘retains the entire amount of proceeds 

with the result that the transaction is in 

substance a real sale, then the gain shall 

be recognized.’’ S. Rep. No. 68–398, at 

16 (1924). This stated policy is reflected 

in current section 361(b)(1). 

Section 361(b)(1)(A) provides that, if 

section 361(a) would apply to an 

exchange but for the fact that the 

property received by the target 

corporation also includes money or 

other property, no gain will be 

recognized by the target corporation if it 

distributes the money or other property 

pursuant to the plan of reorganization. 

Congress has enacted no limitation on 

the aggregate amount of cash and the 

fair market value of other property that 

a target corporation can distribute to its 

shareholders (as opposed to creditors) 

under section 361(b)(1)(A) (although 

section 368 limits the amount of money 

or other property that may be received 

in certain corporate reorganizations). 

Section 361(b)(1)(B), which reflects 

congressional intent with respect to a 

target corporation’s failure to act solely 

as a conduit in distributing the sale 

proceeds (that is, money or other 

property) to its shareholders, provides 

that the target corporation (such as the 

distributing corporation in a divisive 

reorganization) recognizes gain in an 

amount that does not exceed the sum of 

the money and fair market value of the 

other property that the corporation fails 

to distribute pursuant to the plan of 

reorganization. 

4. Section 361(c): Distributions of 

Appreciated Property to Target 

Corporation Shareholders 

Section 361(c) originally was enacted 

by Congress as section 1804(g)(1) of the 

Tax Reform Act of 1986. As part of a 

wholesale rewrite of section 361, 

Congress amended section 361(c) by 

enacting section 1018(d)(5)(A) of the 

Technical and Miscellaneous Revenue 

Act of 1988 (Pub. L. 100–647, 102 Stat. 

3342, 3578) so that the statute 

‘‘conforms the treatment of distributions 

of property by a corporation to its 

shareholders in pursuance of a plan of 

reorganization to the treatment of 

nonliquidating distributions (under 

section 311).’’ S. Rep. No. 100–445, at 

393 (1988). 

Section 311(a) generally provides that, 

except as provided in section 311(b) 

(concerning distributions of appreciated 

property), no gain or loss is recognized 

by a corporation on the distribution (not 

in complete liquidation) with respect to 

its stock of (i) its stock (or rights to 

acquire its stock), or (ii) property. 

Accordingly, section 361(c)(1) generally 

provides that, except as provided in 

section 361(c)(2) (concerning 

distributions of appreciated property), 

no gain or loss is recognized by a target 

corporation that is a party to a 

reorganization upon a distribution of 

property to its shareholders pursuant to 

a plan of reorganization. 

Consistent with section 311(b), 

section 361(c)(2)(A) provides that, if the 

target corporation distributes property 

other than qualified property in a 

distribution described in section 

361(c)(1), and if the fair market value of 

that other property exceeds the 

corporation’s adjusted basis in that 

other property, then gain is recognized 

by the target corporation as if the 

property were sold to the distributee at 

its fair market value. The term 

‘‘qualified property’’ is defined in 

section 361(c)(2)(B) to mean (i) any 

stock, right to acquire stock, or 

obligation (including a security) of the 

corporation, and (ii) any stock, right to 

acquire stock, or obligation (including a 

security) of another corporation that is 

a party to the reorganization received by 

the target corporation in the exchange. 

Therefore, although a target 

corporation would recognize no gain on 

an exchange described in section 361(a) 

(section 361(a) exchange) if that 

corporation received appreciated nonqualified 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). 


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5. Safe Harbors for Transfers to 

Creditors of the Distributing Corporation 

Congress added section 361(b)(3) and 

(c)(3) as part of the wholesale rewrite of 

section 361 in the Technical and 

Miscellaneous Revenue Act of 1988. 

Section 361(b)(3) provides that, for 

purposes of section 361(b)(1), any 

transfer of the money or other property 

received in the exchange by the target 

corporation to its creditors in 

connection with the reorganization is 

treated as a distribution pursuant to the 

plan of reorganization. Similarly, 

section 361(c)(3) provides that, for 

purposes of section 361(c), any transfer 

of qualified property by the target 

corporation to its creditors in 

connection with the reorganization is 

treated as a distribution to its 

shareholders pursuant to the plan of 

reorganization. 

6. Response to Supreme Court’s 

Decision in Minnesota Tea Company 

In Minnesota Tea Co. v. Helvering, 

302 U.S. 609 (1938), the Supreme Court 

held that a distribution by a target 

corporation to its shareholders of cash 

received from an acquiring corporation 

in a reorganization was not a qualifying 

‘‘distribution’’ for purposes of the 

predecessor to section 361(b)(1)(A), 

because the shareholders immediately 

used that distributed cash to pay the 

target corporation’s creditors as part of 

a prearranged plan. Citing Gregory v. 

Helvering, 293 U.S. 465, 469 (1935), as 

providing the ‘‘controlling principle’’ 

for its decision, the Court determined 

that the payment of indebtedness, and 

not the distribution of dividends, ‘‘was, 

from the beginning, the aim of the 

understanding with the stockholders 

and was the end accomplished by 

carrying that understanding into effect.’’ 

Minnesota Tea, 302 U.S. at 613–14. 

Because the Minnesota Tea Company 

‘‘received the same benefit as though it 

had retained that amount from [the] 

distribution and applied it to the 

payment of such indebtedness,’’ the 

Court concluded that the company 

failed to satisfy the predecessor to 

section 361(b)(1)(A). See id. at 613 

(emphasis added). 

In describing the rationale for 

enacting section 361(b)(3) and (c)(3), the 

legislative history explains that each 

provision ‘‘overrules the holding in 

Minnesota Tea Company v. Helvering.’’ 

S. Rep. No. 100–445, at 393 n.102 

(1988); see also H.R. Rep. 100–795, at 

372 (1988). The legislative history 

described the substance of the safe 

harbor in section 361(b)(3) as providing 

that ‘‘transfers of property to creditors in 

satisfaction of the corporation’s 

indebtedness in connection with the 

reorganization are treated as 

distributions pursuant to the plan of 

reorganization for this purpose.’’ S. Rep. 

No. 100–445, at 393 (1988) (emphasis 

added). Likewise, the legislative history 

described the corresponding safe harbor 

in section 361(c)(3) as providing that 

‘‘the transfer of qualified property by a 

corporation to its creditors in 

satisfaction of indebtedness is treated as 

a distribution pursuant to the plan of 

reorganization.’’ Id. (emphasis added). 

By treating transfers of property to 

creditors in satisfaction of indebtedness 

as distributions pursuant to the plan of 

reorganization, Congress balanced the 

dual policy objectives of (i) preserving 

consistency with the fundamental 

requirement of section 361 that property 

be distributed, and (ii) enacting a 

provision to address transfers to 

creditors in satisfaction of indebtedness 

that overruled the holding in Minnesota 

Tea. 

7. Adjusted Basis Limitation for 

Purposes of Section 361(b)(3) 

In the case of a divisive reorganization 

described in sections 355 and 

368(a)(1)(D), the third sentence in 

section 361(b)(3) (adjusted basis 

limitation) limits the extent to which a 

transfer of money or other property to a 

creditor is treated as a distribution 

pursuant to the plan of reorganization 

for the purposes of section 361. 

Specifically, section 361(b)(3) applies 

solely to the extent the sum of the 

money and the fair market value of the 

other property transferred to creditors of 

the distributing corporation does not 

exceed the aggregate adjusted bases of 

the assets transferred to the controlled 

corporation in the section 361(a) 

exchange, reduced by the amount of the 

distributing corporation’s liabilities that 

the controlled corporation actually 

assumes within the meaning of section 

357(c). 

Congress enacted the adjusted basis 

limitation in section 361(b)(3) as part of 

the American Jobs Creation Act of 2004 

(Pub. L. 108–357, 118 Stat. 1418) based 

on the concern stated in the legislative 

history that taxpayers had developed 

tax-planning strategies to circumvent 

the adjusted basis limitation in section 

357(c) on actual assumptions by 

controlled corporations in divisive 

reorganizations. See S. Rep. No. 108– 

192, at 185 (2003). Specifically, the 

committee report observed that a 

distributing corporation (i) could cause 

the controlled corporation to borrow 

money from a financial institution and 

transfer that money to the distributing 

corporation in the section 361(a) 

exchange, and then (ii) could use that 

money to pay its creditors. Id. The 

committee report concluded that, 

although this series of transactions does 

not involve an actual assumption by the 

controlled corporation within the 

meaning of section 357, it is 

‘‘economically similar to the actual 

assumption’’ because, at the end of the 

series of transactions, the distributing 

corporation has reduced its 

indebtedness to its creditor and the 

controlled corporation has become 

indebted to a creditor (albeit a different 

creditor) for an equal amount. See id. 

Accordingly, ‘‘because section 361(b) 

[did] not contain a limitation on the 

amount that can be distributed to 

creditors,’’ Congress limited the scope of 

the section 361(b)(3) safe harbor to ‘‘the 

amount of the basis of the assets 

contributed to a controlled corporation 

in a divisive reorganization.’’ Id. 

8. Express Grant of Authority 

As stated previously in the Authority 

section of this preamble, the second 

sentence of section 361(b)(3) provides 

the Secretary with an express grant of 

authority to prescribe such regulations 

as may be necessary to prevent 

avoidance of Federal income tax 

through abuse of the safe harbors in 

section 361(b)(3) and (c)(3). Congress 

included this grant of authority in 

section 361(b)(3) when Congress 

enacted both provisions as part of the 

Technical and Miscellaneous Revenue 

Act of 1988. 

III. Plan of Reorganization; Party to a 

Reorganization 

A. Overview 

For more than a century, the ‘‘plan of 

reorganization’’ requirement has served 

to limit the application of the operative 

provisions in subchapter C solely to 

those transactions with a sufficiently 

proximate relationship to transactions 

that satisfy the definitional 

requirements in subchapter C for a 

reorganization (proximate relationship 

requirement). For example, see section 

202(b) of the Revenue Act of 1918 

(providing that an exchange did not 

qualify for nonrecognition treatment 

unless the transaction was ‘‘in 

connection with’’ a reorganization). In 

other words, Congress has long viewed 

the proximate relationship requirement 

as an integral tool for preventing the 

nonrecognition provisions in subchapter 

C from applying to transactions to 

which general gain or loss provisions of 

the Code (for example, section 1001 of 

the Code) should apply. 

This long-standing congressional 

purpose is illustrated by the evolution 

of section 202(c)(1) of the Revenue Act 


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of 1921 (Pub. L. 67–98, 42 Stat. 227). 

That provision originally provided 

nonrecognition treatment for an 

exchange of property held for 

investment or for productive use in a 

trade or business, with no exception for 

stock or securities, and with no 

proximate relationship requirement. Tax 

advisors took advantage of this 

provision by structuring exchanges of 

portfolio investment securities for other 

securities in transactions that resulted 

in no recognition of Federal income tax. 

After receiving a request from the 

Treasury Department to address this 

abuse, Congress amended section 

202(c)(1) by removing exchanges of 

stock and securities from 

nonrecognition treatment except for 

exchanges occurring in the context of a 

reorganization. See An Act to Amend 

the Revenue Act of 1921 in Respect to 

Exchanges of Property, Public Law 67– 

545, 42 Stat. 1560 (1923); J. Seidman, 

Legislative History of Federal Income 

Tax Laws: 1938–1861, at 798 (1938); see 

also Letter from A. W. Mellon, Secretary 

of the Treasury, to Congressman 

William R. Green, Acting Chairman of 

the Committee on Ways and Means (Jan. 

13, 1923). 

Since first establishing the proximate 

relationship requirement, Congress has 

implemented that requirement through 

various linguistic formulations over 

time. However, Congress has indicated 

that such variations in language were 

not intended to reflect substantive 

differences. For example, Congress 

replaced ‘‘in connection with’’ in 

section 202(b) of the Revenue Act of 

1918 with ‘‘in the reorganization’’ in 

section 202(c) of the Revenue Act of 

1921. When describing section 202(c) of 

the Revenue Act of 1921, a 

congressional committee print explicitly 

referred to the proximate relationship 

under that section as requiring an ‘‘in 

connection with’’ relationship. See S. 

Comm. on Finance, 68th Cong., 

Statement of the Changes Made in the 

Revenue Act of 1921 by H.R. 6715 and 

the Reasons Therefor, at 5–6 (Comm. 

Print 1924). 

In section 203(c) of the Revenue Act 

of 1924, Congress restated the proximate 

relationship requirement as requiring an 

‘‘in pursuance of a plan of 

reorganization’’ relationship. This 

requirement, like the ‘‘in connection 

with’’ requirement, exists in the current 

definitional and operative provisions of 

subchapter C. The legislative history 

underlying section 203 of the Revenue 

Act of 1924 explicitly refers to the ‘‘in 

pursuance of the plan of reorganization’’ 

formulation in several instances as ‘‘in 

connection with the reorganization.’’ 

See H.R. Rep. No. 68–179, at 13–16 

(1924). In particular, at one point, the 

Committee on Ways and Means 

described the change in formulation of 

the proximate relationship requirement 

as a result of ‘‘minor changes in 

phraseology.’’ See id. at 13. 

B. Definition of ‘‘Plan of 

Reorganization’’ 

The term ‘‘plan of reorganization’’ is 

not defined in subchapter C. Instead, the 

sole authoritative guidance defining this 

term is set forth in the Income Tax 

Regulations. Specifically, § 1.368–2(g) 

provides that the term ‘‘plan of 

reorganization’’ refers to a 

‘‘consummated transaction specifically 

defined as a reorganization under 

section 368(a),’’ and that ‘‘[s]ection 

368(a) contemplates genuine corporate 

reorganizations which are designed to 

effect a readjustment of continuing 

interests under modified corporate 

forms.’’ Section 1.368–2(g) further 

provides that the term ‘‘plan of 

reorganization’’ ‘‘is not to be construed 

as broadening the definition of 

reorganization as set forth in section 

368(a),’’ but rather ‘‘is to be taken as 

limiting the nonrecognition of gain or 

loss to such exchanges or distributions 

as are directly a part of the transaction 

specifically described as a 

reorganization in section 368(a).’’ 

Section 1.368–2(g) further provides that 

the transaction (or series of transactions) 

‘‘embraced in a plan of reorganization 

must not only come within the specific 

language of section 368(a),’’ but also that 

‘‘the readjustments involved in the 

exchanges or distributions effected in 

the consummation [of the plan of 

reorganization] must be undertaken for 

reasons germane to the continuance of 

the business of a corporation a party to 

the reorganization.’’ 

However, significant uncertainty and 

confusion have arisen regarding the 

scope, purpose, and application of 

§ 1.368–2(g). As expressed by the Tax 

Court in an observation often referenced 

by courts and commentators, ‘‘the above 

definition is imbued with qualities of 

flexibility and vagueness, with the 

result that it does not present precise 

self-executing guidelines.’’ Int’l 

Telephone & Telegraph Corp. v. 

Comm’r, 77 T.C. 60, 75 (1981); see also 

J.E. Seagram Corp. v. Comm’r, 104 T.C. 

75, 96 (1995) (relying on the quote in 

Int’l Telephone in observing that 

§ 1.368–2(g) provides ‘‘substantial 

elasticity’’). As a result, § 1.368–2(g) 

(including its proximate relationship 

requirement) has created significant 

uncertainty and confusion for taxpayers 

and the IRS in determining the scope of 

transactions that properly should be 

taken into account for purposes of 

applying the definitional and operative 

provisions of subchapter C. 

Section 1.368–1(c) further describes 

the ‘‘plan of reorganization’’ concept 

and provides important context 

regarding the application of this concept 

and its embedded proximate 

relationship requirement. Specifically, 

§ 1.368–1(c) provides, in part, that ‘‘[t]he 

provisions of [part III of subchapter C] 

referred to in this paragraph are 

inapplicable unless there is a plan of 

reorganization’’ (emphasis added). 

Section 1.368–1(c) further provides that 

‘‘[a] plan of reorganization must 

contemplate the bona fide execution of 

one of the transactions specifically 

described as a reorganization in section 

368(a) and for the bona fide 

consummation of each of the requisite 

acts under which nonrecognition of gain 

is claimed.’’ That transaction, and those 

acts, must be an ‘‘ordinary and 

necessary incident of the conduct of the 

enterprise and must provide for a 

continuation of the enterprise.’’ Id. 

Finally, § 1.368–1(c) provides that a 

scheme involving ‘‘an abrupt departure 

from normal reorganization procedure 

in connection with a transaction on 

which the imposition of tax is 

imminent, such as a mere device that 

puts on the form of a corporate 

reorganization as a disguise for 

concealing its real character, and the 

object and accomplishment of which is 

the consummation of a preconceived 

plan having no business or corporate 

purpose, is not a plan of 

reorganization.’’ 

Consistent with the discussion in part 

III.A of this Background, § 1.368–1(c) 

reflects the function of the ‘‘plan of 

reorganization’’ concept and its 

embedded proximate relationship 

requirement—namely, to limit the 

application of the definitional and 

operative provisions of subchapter C to 

those transactions included in the plan 

of reorganization. Section 1.368–1(c) 

also requires all transactions properly 

included in the plan of reorganization to 

be consistent with, and to facilitate 

satisfaction of, a principal requirement 

for nonrecognition treatment under the 

reorganization provisions of subchapter 

C (that is, the continuation of an 

enterprise). Finally, § 1.368–1(c) reflects 

that devices and sham transactions 

cannot properly be included in a plan 

of reorganization. 

C. Party to a Reorganization 

Section 368(b) generally provides that 

the term ‘‘a party to a reorganization’’ 

includes (i) a corporation resulting from 

a reorganization, and (ii) both 

corporations, in the case of a 

reorganization resulting from the 


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acquisition by one corporation of stock 

or properties of another. Consistent with 

section 368(b), § 1.368–2(f) defines the 

term ‘‘party to a reorganization’’ as 

including ‘‘a corporation resulting from 

a reorganization, and both corporations 

in a transaction qualifying as a 

reorganization where one corporation 

acquires stock or properties of another 

corporation.’’ Section 1.368–2(f) further 

articulates which entities are parties to 

a reorganization in various types of 

reorganizations defined in section 

368(a)(1). However, the uncertainty 

regarding the meaning of ‘‘plan of 

reorganization,’’ described in part III.B 

of this Background, has resulted in 

confusion regarding the proper 

identification of parties to a 

reorganization. 

D. Reporting and Recordkeeping 

Requirements for Corporate 

Reorganizations 

Section 1.368–3 sets forth reporting 

and recordkeeping requirements for 

corporate reorganizations. Section 

1.368–3(a) requires a plan of 

reorganization to be adopted by each 

corporation that is a party to the 

reorganization, and it requires each such 

corporation to include a statement with 

its Federal income tax return that 

includes certain limited information 

about the reorganization. However, 

§ 1.368–3(a) provides no additional 

detail on the manner in which the plan 

of reorganization must be adopted, and 

it does not require the plan of 

reorganization to be reflected in any 

documentation or records of the parties 

to the reorganization. 

Current § 1.368–3(a) contrasts starkly 

with a prior version of § 1.368–3(a), 

which provided that the plan of 

reorganization ‘‘must be adopted by 

each of the corporations parties thereto; 

and the adoption must be shown by the 

acts of its duly constituted responsible 

officers, and appear upon the official 

records of the corporation.’’ See § 1.368– 

3(a) (effective from November 26, 1960, 

to May 29, 2006) (prior § 1.368–3(a)). 

Prior § 1.368–3(a) also imposed 

additional requirements to facilitate the 

IRS’s administration of the 

reorganization provisions in part III of 

subchapter C. In particular, prior 

§ 1.368–3(a) required the parties to a 

reorganization to file with the IRS a 

‘‘copy of the plan of reorganization, 

together with a statement, executed 

under the penalties of perjury, showing 

in full the purposes thereof and in detail 

all transactions incident to, or pursuant 

to, the plan.’’ In contrast, taxpayers 

currently are not required by § 1.368–3 

to provide as part of their Federal 

income tax return a plan of 

reorganization that describes the 

transactions to which taxpayers intend 

to apply the nonrecognition provisions 

of subchapter C. 

In addition, prior § 1.368–3(a) 

required taxpayers to file with the IRS 

‘‘a complete statement of all facts 

pertinent to the nonrecognition of gain 

or loss in connection with the 

reorganization.’’ Current § 1.368–3(a) 

contains no such requirement. 

Therefore, the IRS currently does not 

receive as part of a taxpayer’s Federal 

income tax return a statement of facts 

necessary to determine the proper 

application of the nonrecognition 

provisions of subchapter C to the 

transactions comprising a corporate 

reorganization. 

Instead, current § 1.368–3(a) merely 

requires each corporate party to a 

reorganization to include a statement, 

on or with its return for the taxable year 

of the exchange, that includes: (i) the 

names and employer identification 

numbers (if any) of all such parties; (ii) 

the date of the reorganization; (iii) the 

value and basis of the assets, stock, or 

securities of the target corporation 

transferred in the transaction, 

determined immediately before the 

transfer in the manner described in 

§ 1.368–3(a); and (iv) the date and 

control number of any one or more 

private letter rulings issued by the IRS 

in connection with the reorganization. 

Current § 1.368–3(b) imposes similar 

requirements on significant holders of 

stock or securities of the target 

corporation. 

Like prior § 1.368–3(c), current 

§ 1.368–3(d) requires taxpayers to retain 

their permanent records with respect to 

a corporate reorganization. 

IV. TIGTA Report To Improve 

Enforcement of Corporate M&A 

Transactions 

In 2019, the Treasury Inspector 

General for Tax Administration (TIGTA) 

published a report titled ‘‘A Strategy Is 

Needed to Assess the Compliance of 

Corporate Mergers and Acquisitions 

With Federal Tax Requirements,’’ Ref. 

No. 2019–30–050 (Sept. 5, 2019) (TIGTA 

Report). In that report, TIGTA 

considered the scope of information 

required to be provided under § 1.368– 

3(a) and expressed that ‘‘the forms 

previously detailed represent only a 

small portion of the information that 

may be filed, and certain forms used to 

report merger and acquisition (M&A) 

transactions may not be providing 

sufficient information to identify 

noncompliance.’’ Id. at 14–15. 

Accordingly, TIGTA recommended 

that, if the IRS finds that the current 

forms do not contain information 

sufficient for identifying potential 

noncompliance in M&A transactions, 

the IRS ‘‘should consider amending the 

filing criteria and information required 

in the forms to develop useful 

compliance tools.’’ Id. at 14. The IRS 

agreed with this recommendation, 

stating that it will continue to consider 

how to use M&A transaction 

information in its compliance efforts. 

V. Reporting Requirements for Section 

355 Transactions 

In a notice of proposed rulemaking 

(REG–116085–23) published elsewhere 

in the Proposed Rules section of this 

issue of the Federal Register, the 

Treasury Department and the IRS are 

issuing proposed regulations to revise 

current § 1.355–5 (proposed § 1.355–5) 

to enhance the IRS’s ability to 

administer and enforce the requirements 

of section 355. Similar to current 

§ 1.368–3 (previously discussed in part 

III.D of this Background), current 

§ 1.355–5 requires the distributing 

corporation and each significant 

distributee (as defined in current 

§ 1.355–5(c)(1)) to include a statement 

with its tax return that includes certain 

limited information about the section 

355 transaction. To implement the 

recommendation in the TIGTA Report 

described in part IV of this Background, 

proposed § 1.355–5 would require 

taxpayers to submit new IRS Form 7216, 

Multi-Year Reporting Related to Section 

355 Transactions (or any successor 

form), to provide the IRS with 

additional information to help the IRS 

identify potential noncompliance in 

section 355 transactions. 

VI. Revenue Procedure 2024–24 and 

Notice 2024–38 

On May 2, 2024, the Treasury 

Department and the IRS released Rev. 

Proc. 2024–24, 2024–21 I.R.B. 1214, to 

provide procedures for requesting 

private letter rulings from the IRS 

regarding certain matters relating to 

section 355 transactions. Rev. Proc. 

2024–24 superseded Rev. Proc. 2018– 

53, 2018–43 I.R.B. 667, and made 

several significant changes to the 

requirements of that revenue procedure 

and to Rev. Proc. 2017–52, 2017–41 

I.R.B. 283. 

Also on May 2, 2024, the Treasury 

Department and the IRS released Notice 

2024–38, 2024–21 I.R.B. 1211, to 

describe their views and concerns 

relating to certain matters addressed in 

Rev. Proc. 2024–24, and to solicit 

feedback on the provisions set forth in 

Rev. Proc 2024–24. In section 2.01 of 

Notice 2024–38, the Treasury 

Department and the IRS requested that 

such feedback take into account the 


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following three objectives for potential 

future guidance: (i) the guidance will be 

consistent with all relevant provisions 

of the Code (compliance objective); (ii) 

the guidance will provide certainty to 

taxpayers and the IRS regarding the 

application of all relevant provisions of 

the Code to purported section 355 

transactions (increased certainty 

objective); and (iii) the guidance will be 

responsive to the manner in which 

section 355 transactions are engaged in 

by taxpayers and reflect current market 

practices and preferences (transaction 

facilitation objective), to the extent that 

such approach does not conflict with 

the first two objectives. 

Explanation of Provisions 

The purpose of these proposed 

regulations is to establish a 

comprehensive set of rules to 

implement certain core definitional and 

operative provisions of subchapter C 

that address corporate separations, 

incorporations, and reorganizations. The 

current regulatory framework 

underlying these provisions is 

incomplete, outdated, and not reflective 

of their importance to the Federal 

corporate income tax system, given the 

trillions of dollars of corporate 

transactions governed by these statutory 

provisions. Due to the lack of up-to-date 

regulatory guidance, taxpayers and the 

IRS must rely on a patchwork of 

caselaw, IRS revenue rulings and 

revenue procedures, and nonauthoritative IRS documents to discern 

the current state of the law with respect 

to these core provisions of subchapter C. 

Accordingly, providing 

comprehensive regulatory guidance to 

facilitate the implementation of these 

core definitional and operative 

provisions of subchapter C would 

promote taxpayer certainty and sound 

tax administration. Although Notice 

2024–38 focused on Federal income tax 

issues regarding section 355 

transactions, these core definitional and 

operative provisions also address 

incorporations and acquisitive 

reorganizations. Therefore, the proposed 

regulations would implement those 

statutory provisions for all corporate 

M&A transactions, in a manner that 

reflects the three objectives described in 

section 2.01 of Notice 2024–38 (that is, 

the compliance objective, the increased 

certainty objective, and the transaction 

facilitation objective) in accordance 

with their respective priorities as set 

forth therein. 

A principal objective of the Treasury 

Department and the IRS in issuing these 

proposed regulations is to significantly 

improve horizonal equities among 

taxpayers and tax advisors. In other 

words, based on feedback from tax 

advisors, the lack of authoritative 

guidance in this area effectively has 

transformed a taxpayer’s option to 

request a private letter ruling on the 

application of certain definitional and 

operative provisions into a requirement. 

Indeed, tax advisors have directly 

reached out to the Treasury Department 

and the IRS to emphasize the mandatory 

nature of private letter rulings on certain 

topics in this area because, based on the 

current state of authoritative guidance, 

those tax advisors could not provide tax 

opinions at a sufficient level of comfort 

in the absence of a private letter ruling. 

Therefore, these tax advisors have 

stressed the importance of engaging in 

bar association panels and other 

professional speaking engagements to 

access the perspectives of Treasury 

Department and IRS officials regarding 

the government’s current views on 

certain fundamental corporate tax 

issues. 

These proposed regulations would 

provide, through publicly accessible 

authoritative guidance, core definitional 

and operative provisions. This guidance 

is intended to facilitate the ability for 

taxpayers to achieve increased comfort 

on the Federal income tax treatment of 

their corporate M&A transactions 

without the need for a private letter 

ruling. Just as importantly, this 

guidance is intended to encourage the 

submission of private letter ruling 

requests and facilitate the IRS private 

letter ruling process. In particular, these 

proposed regulations are intended to 

help direct the focus of tax advisors to 

those issues that raise significant 

Federal income tax compliance 

concerns, and consequently improve the 

organization and focus of their private 

letter ruling submissions. Similarly, 

these proposed regulations are intended 

to increase the efficiency of the private 

letter ruling program by allowing 

submission reviewers to focus primarily 

on such significant issues, rather than 

those issues that would be addressed 

directly by this guidance. 

In explaining the provisions of these 

proposed regulations, this Explanation 

of Provisions discusses issues described 

in Notice 2024–38 and the feedback 

received in response to Notice 2024–38. 

Such feedback has informed the 

development of these proposed 

regulations. This Explanation of 

Provisions also references proposed 

regulations, published elsewhere in the 

Proposed Rules section of this issue of 

the Federal Register, that would 

implement enhanced reporting 

requirements for section 355 

transactions. Those enhanced reporting 

requirements are integral to the 

proposed substantive guidance set forth 

in these proposed regulations. 

Specifically, as described further in this 

Explanation of Provisions, this proposed 

substantive guidance reflects the longstanding reality that corporate 

transactions typically are carried out 

over multiple taxable years. The 

increased transactional flexibility that 

would be provided by these proposed 

regulations is conditioned on the IRS’s 

ability to track the execution of these 

transactions throughout their lifecycle, 

and the enhanced reporting 

requirements for section 355 

transactions would facilitate the IRS’s 

ability to carry out its administrative 

function with respect to these 

transactions. 

I. Distinction Between Delayed 

Distributions and Retentions; Rules for 

Qualifying Retentions 

A. Notice 2024–38 

Section 2.02(1) of Notice 2024–38 

stated the view of the Treasury 

Department and the IRS that the Code 

provides separate and distinct treatment 

for three instances in which a 

distributing corporation temporarily 

continues to hold controlled corporation 

stock or securities following the date on 

which the distributing corporation has 

distributed an amount of controlled 

corporation stock constituting control 

(within the meaning of section 368(c)) 

(control distribution date). These three 

instances are: (i) a delayed distribution 

of controlled corporation stock or 

securities that is ‘‘part of the 

distribution’’ (within the meaning of 

section 355(a)(1)(D)); (ii) a delayed 

distribution of controlled corporation 

stock or securities that is ‘‘in pursuance 

of the plan of reorganization’’ (within 

the meaning of section 361); and (iii) a 

retention of controlled corporation stock 

or securities. 

Section 2.02(2) of Notice 2024–38 

stated the view of the Treasury 

Department and the IRS that section 

355(a)(1)(D) effectively creates a 

rebuttable presumption that any 

retention evidences a plan to achieve a 

Federal income tax avoidance purpose. 

Section 2.02(2) of Notice 2024–38 also 

stated that the Treasury Department and 

the IRS are considering the degree to 

which connections between the 

distributing corporation and the 

controlled corporation (and, as 

appropriate, the DSAG and the CSAG) 

after the control distribution date would 

prevent a transaction from qualifying 

under section 355. (The terms ‘‘DSAG’’ 

and ‘‘CSAG’’ mean the separate 

affiliated group (as defined in section 

355(b)(3)(B)) of which the distributing 


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corporation or the controlled 

corporation, respectively, is the 

common parent.) 

Section 2.02(2) of Notice 2024–38 also 

stated the view of the Treasury 

Department and the IRS that 

overlapping directors, officers, or key 

employees and the existence of 

continuing contractual agreements 

between the distributing corporation 

(and other members of the DSAG) and 

the controlled corporation (and other 

members of the CSAG) that include 

provisions that are not arm’s-length 

weigh against a determination of 

qualification under section 355. 

B. Stakeholder Input 

1. Existence of Rebuttable Presumption 

Under Section 355(a)(1)(D)(ii) 

As an initial matter, some 

stakeholders have contended that 

section 355(a)(1)(D)(ii) does not create a 

rebuttable presumption that a retention 

evidences a plan with a principal 

purpose of avoiding Federal income tax, 

notwithstanding the explicit statutory 

requirement that the Secretary must be 

satisfied that such a purpose does not 

exist. Instead, these stakeholders have 

asserted that Congress’s intent in 

including the ‘‘no tax avoidance 

purpose’’ language in section 

355(a)(1)(D)(ii) is unclear, and that the 

legislative history of section 355 does 

not give further details about the 

meaning of this language. 

Accordingly, these stakeholders have 

suggested that, rather than include a 

rebuttable presumption, the proposed 

regulations should place greater 

emphasis on (i) an examination of the 

corporate business purpose for the 

section 355 transaction, and (ii) a 

determination of whether the retained 

controlled corporation stock is disposed 

of as ‘‘part of the distribution’’ (see 

section 355(a)(1)(D)) or ‘‘in pursuance of 

the plan of reorganization’’ (see section 

361(c)). These stakeholders contend that 

their view is supported by sections 354, 

355, and 361, as well as by § 1.368–2(g), 

which requires readjustments involved 

in the exchanges or distributions 

effected in consummating a plan of 

reorganization to be ‘‘undertaken for 

reasons germane to the continuance of 

the business of a corporation a party to 

the reorganization.’’ 

2. Application of Plan of Reorganization 

With Regard to Section 355(a)(1)(D)(ii) 

Stakeholders also have requested 

clarification in the proposed regulations 

that all delayed distributions, whether 

before or after the control distribution 

date, are treated as part of the 

distribution (within the meaning of 

section 355(a)(1)(D)) if they are 

effectuated pursuant to the plan of 

reorganization. Relatedly, stakeholders 

have recommended that the proposed 

regulations employ the same standard 

(that is, the same level of proximate 

relationship) in considering whether a 

transaction is ‘‘part of the distribution’’ 

and ‘‘in pursuance of a plan of 

reorganization.’’ Stakeholders have 

further requested confirmation in the 

proposed regulations that the ‘‘no tax 

avoidance purpose’’ requirement in 

section 355(a)(1)(D)(ii) applies only to 

the extent a delayed distribution fails to 

qualify under the operative provisions. 

Based on their analogy to their view 

of the ‘‘plan of reorganization’’ concept, 

these stakeholders have contended that 

the ‘‘as part of the distribution’’ 

requirement in section 355(a)(1)(D) 

provides substantial flexibility to the 

distributing corporation regarding the 

timing and manner of dispositions of 

controlled corporation stock (for 

example, in a delayed distribution of 

controlled corporation stock to 

shareholders of the distributing 

corporation). In this regard, stakeholders 

have recommended that the phrase ‘‘as 

part of the distribution’’ be interpreted 

to provide section 355 qualification for 

situations in which the distributing 

corporation contemplates—but provides 

no further level of commitment to—a 

spectrum of potential dispositions of 

controlled corporation stock, so long as 

the distributing corporation eventually 

achieves one or more of those 

contemplated possibilities or related 

variants. As described by such 

stakeholders, the distributing 

corporation need not identify the timing 

of those dispositions (regardless of 

whether they span multiple taxable 

years of the distributing corporation), 

the potential recipients of controlled 

corporation stock (for example, creditors 

of the distributing corporation), or the 

method of disposing of that stock. 

The stakeholder input described in 

the foregoing paragraphs ultimately 

focuses on two aspects of the IRS 

private letter ruling program for section 

355 transactions: (i) the requirement set 

forth in section 3.03(3)(a)(ii) of Rev. 

Proc. 2024–24 (the so-called ‘‘pick a 

lane’’ requirement); and (ii) the 

elimination under that revenue 

procedure of so-called ‘‘backstop 

retention rulings.’’ 

With regard to the ‘‘pick a lane’’ 

requirement, these stakeholders read 

section 3.03(3)(a)(ii) of Rev. Proc. 2024– 

24 as providing that the IRS will 

entertain a request for rulings that: (i) a 

delayed distribution of controlled 

corporation stock or securities will be, 

as applicable, ‘‘part of the distribution’’ 

(within the meaning of section 

355(a)(1)(D)) or ‘‘in pursuance of the 

plan of reorganization’’ (within the 

meaning of section 361); and (ii) a 

retention of controlled corporation stock 

or securities that is not included in a 

ruling request described in clause (i) of 

this sentence will not be in pursuance 

of a plan having as one of its principal 

purposes the avoidance of Federal 

income tax (within the meaning of 

section 355(a)(1)(D)(ii)). Stakeholders 

have further stated that, to comply with 

the so-called ‘‘pick a lane’’ requirement, 

a taxpayer must specify the portions of 

controlled corporation stock remaining 

after the control distribution (i) to which 

the taxpayer intends section 361(c) to 

apply, and (ii) which the taxpayer 

intends to retain and not dispose of 

under section 361(c). See section 

3.03(3)(d) of Rev. Proc. 2024–24. 

In practice, the ‘‘pick a lane’’ 

requirement requires a taxpayer to 

identify to the IRS those transactions 

that the taxpayer intends to carry out as 

part of its plan of reorganization. 

However, stakeholders have contended 

that this requirement is problematic 

because Rev. Proc. 2024–24 also has 

eliminated the availability of ‘‘backstop 

retention rulings,’’ which stakeholders 

have described as ‘‘protective rulings’’ 

affording taxpayers a determination by 

the IRS, before the first step of a divisive 

reorganization, that a retention at no 

point will have failed to satisfy the ‘‘no 

tax avoidance purpose’’ requirement in 

section 355(a)(1)(D)(ii). 

Stakeholders have contended that 

these changes in private letter ruling 

policy, combined with the requirement 

that all controlled corporation stock or 

securities be distributed within 12 

months of the date of the first 

distribution (first distribution date) to 

receive a ruling that the distribution 

qualifies for nonrecognition treatment 

under section 355 (see section 

3.03(2)(b)(ii) of Rev. Proc. 2024–24), 

have created an unnecessary risk for 

taxpayers that an intended divisive 

reorganization could fail to qualify 

under section 355 (section 

355(a)(1)(D)(ii) risk). For purposes of 

these proposed regulations, the term 

‘‘first distribution’’ means the earliest 

distribution in a series of distributions 

made pursuant to the plan of 

distribution or plan of reorganization, as 

appropriate. 

Specifically, these stakeholders have 

asserted that, because transactions 

intended to qualify for nonrecognition 

treatment under section 361(c) often 

require most of a year to complete, tax 

advisors now are faced with three 

undesirable options. First, tax advisors 

could recommend the premature 


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termination of such transactions, which 

otherwise would have been effectuated 

for bona fide business purposes for 

corporate taxpayers. Second, tax 

advisors could attempt, in an 

unreasonably short timeframe, to 

receive from the IRS a supplemental 

private letter ruling that the ‘‘springing 

retention’’ (that is, a retention that arises 

unexpectedly during the 12-month 

period) satisfies the ‘‘no tax avoidance 

purpose’’ requirement. Third, tax 

advisors could provide an opinion that 

the springing retention satisfies the ‘‘no 

tax avoidance purpose’’ requirement, 

notwithstanding the lack of 

authoritative guidance on that issue. 

C. Proposed Regulations 

Consistent with the statement in 

section 2.02(2) of Notice 2024–38, 

proposed § 1.355–10(c)(1) would reflect 

the presumption that a retention is 

pursuant to a plan having as one of its 

principal purposes the avoidance of 

Federal income tax. However, the 

Treasury Department and the IRS 

appreciate the views of stakeholders 

regarding delayed distributions and 

retentions. In particular, the Treasury 

Department and the IRS are sensitive to 

the potential negative impacts of the 

‘‘pick a lane’’ requirement and related 

requirements in Rev. Proc. 2024–24 on 

divisive reorganizations, and to the lack 

of clear, authoritative guidance 

regarding the ‘‘no tax avoidance 

purpose’’ requirement of section 

355(a)(1)(D)(ii). Therefore, and 

consistent with the compliance, 

increased certainty, and transaction 

facilitation objectives of these proposed 

regulations, the Treasury Department 

and the IRS have proposed rules to 

address the uncertainty highlighted by 

stakeholders in a manner that facilitates 

the ability of (i) taxpayers to carry out 

bona fide section 355 transactions, and 

(ii) the IRS to ensure that such 

transactions comply with all 

requirements of the Code. 

1. Proposed Safe Harbor To Address 

Section 355(a)(1)(D)(ii) Risk 

a. Overview 

In response to stakeholder concerns 

regarding the section 355(a)(1)(D)(ii) 

risk, these proposed regulations would 

provide a safe harbor that incorporates 

objectively verifiable conditions for 

retentions not to be treated as pursuant 

to a plan having as one of its principal 

purposes the avoidance of Federal 

income tax (qualifying retentions). The 

Treasury Department and the IRS have 

proposed this safe harbor to enable 

taxpayers to satisfy the requirements of 

section 355(a)(1)(D)(ii) with greater 

certainty even in the absence of a 

private letter ruling from the IRS— 

thereby achieving an increased certainty 

and transaction facilitation objectives. 

For taxpayers that do not satisfy the 

requirements of the proposed safe 

harbor, the proposed regulations would 

provide for a general facts-andcircumstances 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 factsand-circumstances test in proposed 

§ 1.355–10(c)(2)(ii) for a qualifying 

retention if all six of the following 

conditions are satisfied. First, the 

distributing corporation must have a 

specific corporate business purpose for 

the retention as of the date of adoption 

of the plan of distribution or plan of 

reorganization, as appropriate, and at all 

times during the period of retention. 

Second, stock of the controlled 

corporation must be widely held during 

the period of retention after the first 

distribution date. Third, any overlap 

between the officers, directors, or key 

employees of the DSAG and of the 

CSAG must be limited in the manner 

described in proposed § 1.355– 

10(c)(3)(iv). Fourth, any continuing 

arrangements between the distributing 

corporation and the controlled 

corporation during the period of 

retention either (i) must be negotiated 

on and reflect arm’s-length terms, or (ii) 

within two years after the first 

distribution date, must be terminated or 

renegotiated to reflect arm’s-length 

terms. Fifth, the plan of distribution or 

plan of reorganization, as appropriate, 

must reflect a definite intent in the 

official records of the distributing 

corporation that the distributing 

corporation dispose of all retained 

controlled corporation stock (or 

securities) by the end of the five-year 

period beginning on the first 

distribution date. Sixth, the disposition 

of retained controlled corporation stock 

(or securities) must not result in less 

Federal income tax to the distributing 

corporation (determined based on the 

fair market value and adjusted basis of 

that stock (or securities) as of the first 

distribution date) than if that stock (or 

securities) had been distributed in the 

first distribution. The distributing 

corporation must include in its plan of 

distribution or plan of reorganization (as 

applicable) a description of each 

agreement and transaction that 

establishes the satisfaction of the 

foregoing six conditions. 

c. Rationale for Section 355(a)(1)(D)(ii) 

Safe Harbor 

The safe harbor in proposed § 1.355– 

10(c)(3) is intended to balance 

taxpayers’ need for certainty with the 

IRS’s need to ensure taxpayer 

compliance with section 355(a)(1)(D)(ii). 

As discussed in part IV of the 

Background, TIGTA recommended that 

the IRS consider amending the filing 

criteria and information required in 

current forms to develop useful 

compliance tools. The inclusion of 

objective requirements in the section 

355(a)(1)(D)(ii) safe harbor is consistent 

with both TIGTA’s recommendation and 

the compliance, increased certainty, and 

transaction facilitation objectives for 

guidance described in section 2.01 of 

Notice 2024–38. 

Moreover, under proposed § 1.355–5 

and new IRS Form 7216 (see part V of 

the Background), and consistent with 

the recommendation in the TIGTA 

Report, a taxpayer would be required to 

report key information that would 

enable the IRS to ensure that the 

taxpayer, during each taxable year of the 

retention period, continues to comply 

with the requirements of the section 

355(a)(1)(D)(ii) safe harbor. Thus, the 

section 355(a)(1)(D)(ii) safe harbor, 

coupled with the enhanced reporting 

requirements for section 355 

transactions, would increase taxpayer 

certainty (by reducing the so-called 

section 355(a)(1)(D)(ii) risk) and would 

facilitate IRS administration of section 

355(a)(1)(D)(ii). The Treasury 

Department and the IRS are of the view 

that these two proposals would 

significantly help achieve all three 

objectives of these proposed regulations. 

The proposed regulations would not 

incorporate the stakeholders’ 

recommendation that the requirements 

of section 355(a)(1)(D)(ii) be treated as 

satisfied so long as the distributing 

corporation disposes of all controlled 

corporation stock pursuant to the plan 

of reorganization. Such an approach 

would conflict with long-standing 

§ 1.355–2(e)(2), which requires the 

consideration of factors aside from the 

manner in which the distributing 

corporation disposes of its retained 

controlled corporation stock (for 

example, if the distribution would be 

treated to any extent as a distribution of 

‘‘other property’’ under section 356). 

The stakeholders’ recommendation 

would not be consistent with section 

355(a)(1)(D)(ii), because that 

recommendation, by itself, would not 

ensure a genuine separation. 

In addition, the proposed regulations 

would not incorporate stakeholders’ 

recommendation that a strong corporate 


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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 longstanding 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 completedistribution requirement under section 

355(a)(1)(D)(i), and that the exception 

for retentions originated through a 

subsequent Senate amendment. See H.R. 

Rep. No. 83–1337, at A121 (1954); S. 

Rep. No. 83–1622, at 266 (1954). Indeed, 

Treasury regulations that predated the 

enactment of section 355(a)(1)(D), and 

that tax advisors have acknowledged as 

the basis for section 355(a)(1)(D), 

provided that the business reasons 

supporting a distribution of controlled 

corporation stock ordinarily required 

the distribution of all controlled 

corporation stock owned by the 

distributing corporation. See 

§ 29.112(b)(11)–2(c) of Regulation 111 

(issued under section 112(b)(11) of the 

1939 Code, the predecessor to section 

355 of the 1954 Code); see also § 1.355– 

2(e)(2), which continues to reflect this 

language). Long-standing revenue 

rulings and general counsel memoranda 

also reflect the view that, under the 

plain reading of section 355(a)(1)(D)(ii), 

Congress intended to subject retentions 

to heightened scrutiny to ensure that the 

section 355 transaction effectuates a 

genuine separation of the distributing 

corporation and the controlled 

corporation. See Rev. Rul. 75–469; Rev. 

Rul. 75–321; see also G.C.M. 32136 (Oct. 

23, 1961). 

2. Facts-and-Circumstances Test for 

Determining Compliance With Section 

355(a)(1)(D)(ii) 

If a taxpayer fails to satisfy the 

requirements of the section 

355(a)(1)(D)(ii) safe harbor in proposed 

§ 1.355–10(c)(3), the taxpayer may 

establish compliance with section 

355(a)(1)(D)(ii) through satisfaction of 

the facts-and-circumstances test in 

proposed § 1.355–10(c)(2)(ii). As with 

qualification for the proposed section 

355(a)(1)(D)(ii) safe harbor, satisfaction 

of the proposed facts-and-circumstances 

test would require a determination that 

the distributing corporation and the 

controlled corporation have genuinely 

separated, among other requirements. 

This proposed facts-and-circumstances 

approach combined with the proposed 

safe harbor would provide taxpayers 

and the IRS with increased certainty 

regarding the application of section 

355(a)(1)(D)(ii). 

Under the facts-and-circumstances 

approach of proposed § 1.355– 

10(c)(2)(ii), the distributing corporation 

first must establish that the distribution 

resulted in a genuine separation of the 

DSAG and the CSAG. Second, the 

distributing corporation must establish 

that the retention does not allow the 

DSAG to retain any practical control 

over the CSAG. Third, there must be a 

sufficient corporate business purpose 

for the retention as of the date the plan 

of distribution or the plan of 

reorganization (as applicable) is 

adopted. Fourth, there must be a 

sufficient corporate business purpose 

for the retention at all times during the 

period of retention. Fifth, the 

disposition of retained controlled 

corporation stock (or securities) must 

not result in less Federal income tax to 

the distributing corporation (determined 

based on the fair market value and 

adjusted basis of that stock (or 

securities) as of the first distribution 

date) than if that stock (or securities) 

had been distributed in the first 

distribution. 

Consistent with the views set forth in 

section 2.02(2) of Notice 2024–38, the 

existence of (i) overlapping officers, 

directors, or key employees between the 

DSAG and the CSAG, and (ii) nonarm’s-length continuing contractual 

agreements between the DSAG and the 

CSAG, would be facts and 

circumstances indicating that the 

retention fails the requirements under 

section 355(a)(1)(D)(ii). For purposes of 

proposed § 1.355–10(c)(2)(ii), the 

relative weight of those indicia would 

depend upon all facts and 

circumstances, including the corporate 

business purpose for the section 355 

transaction. For example, such 

continuing relationships particularly 

would weigh against a determination 

that the retention satisfies the 

requirements under section 

355(a)(1)(D)(ii) if the purported 

corporate business purpose for the 

section 355 transaction is so-called ‘‘fit 

and focus’’ (that is, a separation to 

enhance the success of the separated 

businesses by resolving management, 

systemic, or other problems that arise by 

virtue of the distributing corporation’s 

operation of different businesses within 

a single corporation or affiliated group). 

3. Consistent Voting Requirements 

Regardless of whether a section 355 

transaction qualifies for the section 

355(a)(1)(D)(ii) safe harbor, if the section 

355 transaction involves a retention, 

proposed § 1.355–10(c)(2)(iii) would 

require the DSAG to vote any retained 

controlled corporation stock in 

proportion to the votes cast by the 

controlled corporation’s other 

shareholders (other than persons related 

to the distributing corporation). This 

proposed requirement is consistent with 

the long-standing position of the 

Treasury Department and the IRS with 

regard to section 355(a)(1)(D)(ii), as 

expressed through several revenue 

rulings, revenue procedures, and other 

sub-regulatory guidance. 

4. Plan of Distribution 

Consistent with long-standing 

guidance, the Treasury Department and 

the IRS continue to agree with 

stakeholders that the plan of 

reorganization is relevant for 

determining the applicability of the 

definitional and operative provisions 

under subchapter C to dispositions of 

controlled corporation stock. Compare 

Rev. Rul. 2002–85, 2002–2 C.B. 986 

(concluding that an acquiring 

corporation’s contribution of a target 

corporation’s assets to a subsidiary 

corporation subsequent to a transaction 

otherwise qualifying as a reorganization 

under section 368(a)(1)(D) was 

‘‘pursuant to the plan of 

reorganization’’; therefore, the 

continuity of business enterprise 

(COBE) requirement was not violated); 

Rev. Rul. 69–142, 1969–1 C.B. 107 

(concluding that an acquiring 

corporation’s exchange of its debentures 

for those held by bondholders of the 

target corporation was not part of the 

reorganization exchange; therefore, the 

‘‘solely for voting stock’’ requirement in 

section 368(a)(1)(B) was satisfied). In 

this regard, the ‘‘plan of reorganization’’ 

concept provides a useful analogy for 

distinguishing distributions to which 

section 355 should apply from those to 


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which other sections of the Code (such 

as section 311) should apply. 

Accordingly, proposed § 1.355–4 

would set forth a series of provisions 

pursuant to which a taxpayer would 

establish its plan of distribution for 

distributions to which section 355(c) is 

purported to apply. These proposed 

rules generally would parallel the 

proposed plan of reorganization 

provisions in proposed § 1.368–4, as 

discussed in more detail in part III.C of 

this Explanation of Provisions. 

Specifically, under the proposed 

rules, section 355 would apply to those 

distributions that are properly included 

in the plan of distribution and, 

therefore, are treated as ‘‘part of the 

distribution’’ within the meaning of 

section 355(a)(1)(D). Thus, for example, 

proposed § 1.355–4(d)(2)(iii) would 

provide that distributions that are 

carried out in close temporal proximity 

with a section 355(c) distribution are 

not properly included in the plan of 

distribution and therefore would not 

qualify for nonrecognition treatment 

under section 355 unless Federal 

income tax principles (including the 

step transaction doctrine) would apply 

to determine that those distributions are 

in substance part of the plan of 

distribution for the section 355(c) 

distribution. 

Additionally, a distribution that is 

merely one of several (if not more) 

contemplated possibilities would not be 

properly included in the plan of 

distribution. Instead, proposed § 1.355– 

4(d)(1) would require the distributing 

corporation to evidence a definite intent 

to carry out the distribution through a 

written commitment in one or more 

official records that substantiate the 

plan of distribution. As previously 

discussed in part I.B of this Explanation 

of Provisions, the Treasury Department 

and the IRS disagree with the 

stakeholders’ view that a plan of 

distribution should reflect mere 

transactional possibilities under a ‘‘wait 

and see’’ approach. Adoption of this 

stakeholder recommendation would 

conflict with the requirement of section 

355(a)(1)(D)(ii) that the non-tax 

avoidance nature of a retention be 

‘‘established to the satisfaction of the 

Secretary,’’ because it would not be 

possible for the Secretary to establish 

the actual nature of a hypothetical 

transaction. In addition, adopting this 

stakeholder recommendation would 

both significantly compromise the IRS’s 

ability to administer and enforce the 

requirements of section 355 and reduce 

certainty regarding section 355 

qualification. 

Under proposed § 1.355–4(a)(2)(i) and 

(b)(1), the term ‘‘plan of distribution’’ 

generally would mean a plan of 

distribution established by a 

distributing corporation that satisfies all 

requirements set forth in proposed 

§ 1.355–4(c) and that is filed with the 

IRS pursuant to proposed § 1.355–5. 

Proposed § 1.355–4(a)(2)(iii) and (b)(2) 

would provide that a plan of 

distribution also may be established 

based on corrections to the taxpayerfiled plan by the Commissioner based 

on all relevant facts and circumstances, 

all relevant provisions of the Code, and 

general principles of Federal income tax 

law (including the step transaction 

doctrine). If the taxpayer fails to file a 

plan of distribution under proposed 

§ 1.355–5, proposed § 1.355–4(a)(2)(iv) 

and (b)(2) would provide that the 

Commissioner may identify a plan of 

distribution for the transaction. 

Consistent with the objectives for 

guidance described in section 2.01 of 

Notice 2024–38, the proposed plan of 

distribution provisions are intended to 

facilitate taxpayer certainty in 

identifying distributions to which 

section 355 properly should be applied. 

See, for example, proposed § 1.355– 

4(c)(3)(i)(B) (providing a safe harbor 

presumption for timely prosecuting the 

plan of distribution) and (d) (providing 

rules for determining whether a 

distribution is properly included in the 

plan of distribution). 

In addition, the plan of distribution 

would provide the IRS with a single, 

timely document that identifies all 

relevant distributions necessary to 

determine the appropriate Federal 

income tax treatment of the purported 

section 355(c) distribution. This 

proposal, combined with the enhanced 

reporting requirements for section 355 

transactions under proposed § 1.355–5, 

would reestablish an appropriate line of 

sight for the IRS into taxpayer 

compliance under section 355, thereby 

helping to achieve the compliance and 

increased certainty objectives. Compare 

former § 1.355–5 (effective from 

November 26, 1960, to May 29, 2006) 

(requiring the taxpayer to ‘‘attach to its 

return for the year of the distribution a 

detailed statement setting forth such 

data as may be appropriate in order to 

show compliance with the provisions of 

[section 355]’’). 

5. Treatment of Delayed Distributions 

and Retentions 

The Treasury Department and the IRS 

appreciate the feedback received from 

stakeholders regarding the similarities 

between delayed distributions and 

retentions. The Treasury Department 

and the IRS agree with stakeholders 

that, because a section 355 transaction 

requires the distribution of controlled 

corporation stock by the distributing 

corporation, each of the following could 

apply to the same transaction: (i) the 

‘‘part of the distribution’’ requirement in 

section 355(a)(1)(D); (ii) the ‘‘in 

pursuance of the plan of reorganization’’ 

requirement in section 361; and (iii) the 

retention requirements in section 

355(a)(1)(D)(ii). 

In particular, the Treasury 

Department and the IRS share the 

stakeholders’ view that, if the 

distributing corporation does not 

distribute all its controlled corporation 

stock in the first distribution, the 

‘‘delayed distribution’’ and ‘‘retention’’ 

labels give rise to a distinction without 

a difference in determining the 

existence of a genuine separation 

between the distributing corporation 

and the controlled corporation. In this 

respect, proposed § 1.355–2(e)(2)(iii) 

would focus on whether a genuine 

separation has occurred, without regard 

to whether the controlled corporation 

stock not distributed as part of the first 

distribution is disposed of through a 

distribution or transfer under section 

361(c) or a taxable sale under section 

1001. 

However, the Treasury Department 

and the IRS continue to view the ‘‘part 

of the distribution’’ requirement in 

section 355(a)(1)(D), the ‘‘in pursuance 

of the plan of reorganization’’ 

requirement in section 361, and the ‘‘no 

tax avoidance purpose’’ requirement in 

section 355(a)(1)(D)(ii) as discrete 

requirements that address discrete 

issues reflective of discrete policies. The 

‘‘part of the distribution’’ requirement in 

section 355(a)(1)(D) serves as a scoping 

provision for the applicability of section 

355(a)(1)(D)(i) and (ii) to distributions of 

controlled corporation stock. As 

discussed in parts I.C.4 and III.C of this 

Explanation of Provisions, the proposed 

plan of distribution and plan of 

reorganization rules would facilitate the 

determination of which distributions are 

‘‘part of the distribution.’’ 

As reflected in the legislative history 

of section 361, the ‘‘in pursuance of the 

plan of reorganization’’ requirement 

serves in large part to limit the 

application of the operative provisions 

in subchapter C to those transactions 

with a sufficiently proximate 

relationship with transactions that 

qualify under a definitional provision in 

subchapter C. See part II.A of the 

Background. 

Lastly, the ‘‘no tax avoidance 

purpose’’ requirement in section 

355(a)(1)(D)(ii) serves to ensure there is 

a genuine separation of the distributing 

corporation and the controlled 

corporation in situations in which the 

distributing corporation continues to 


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hold controlled corporation stock 

following the first distribution. This 

requirement applies regardless of 

whether that controlled corporation 

stock is disposed of pursuant to the plan 

of reorganization under section 361(c). 

6. Timing Requirement for Control 

Distribution 

Consistent with the Supreme Court’s 

decision in Gordon (discussed in part 

I.D.2 of the Background), proposed 

§ 1.355–2(e)(2) would require a 

distributing corporation, pursuant to a 

plan of distribution or plan of 

reorganization, as appropriate, to 

distribute an amount of stock of the 

controlled corporation constituting 

control (within the meaning of section 

368(c)) either (i) within a single taxable 

year, or (ii) over two taxable years, but 

only if all distributions up to and 

including the control distribution are 

effectuated pursuant to a binding 

commitment that is described in the 

plan of distribution or plan of 

reorganization (as applicable). A twoyear limitation for distributing control 

would provide taxpayers with 

additional transactional flexibility while 

facilitating the IRS’s ability to 

administer and enforce the requirements 

of section 355. This approach would 

help achieve the increased certainty and 

transaction facilitation objectives of 

these proposed regulations. 

7. Requirements for Nonrecognition 

Treatment 

In accordance with the foregoing 

discussion in this part I.C, these 

proposed regulations would revise 

§ 1.355–2(e) to provide that a 

distribution does not qualify for 

nonrecognition treatment under section 

355(a)(1) unless the following 

requirements are satisfied. First, 

proposed § 1.355–2(e)(2)(i) and (ii) 

would provide that the distributing 

corporation must distribute an amount 

of stock of the controlled corporation 

constituting control (within the meaning 

of section 368(c)) either (i) within a 

single taxable year, or (ii) during two 

taxable years, subject to the ‘‘binding 

commitment’’ requirement described in 

part I.C.6 of this Explanation of 

Provisions. Second, proposed § 1.355– 

2(e)(2)(iii) would provide that any 

controlled corporation stock not 

distributed as part of the first 

distribution must satisfy the 

requirements for a qualifying retention 

in proposed § 1.355–10(c). 

As previously discussed in parts I.C.1 

through 3 of this Explanation of 

Provisions, to satisfy the requirements 

for a qualifying retention (and to thereby 

rebut the presumption of a tax 

avoidance purpose for the retention), 

the distributing corporation must: (i) 

either qualify for the section 

355(a)(1)(D)(ii) safe harbor in proposed 

§ 1.355–10(c)(3) or satisfy the facts-andcircumstances test in proposed § 1.355– 

10(c)(2)(ii); and (ii) vote any retained 

controlled corporation stock in 

proportion to votes cast by the 

controlled corporation’s other 

shareholders (other than distributing 

corporation related persons). See 

proposed § 1.355–10(c)(2)(iii). 

II. Non-Substantive Modifications to 

Section 355 Regulations 

These proposed regulations would 

make certain non-substantive revisions 

to current §§ 1.355–1 and 1.355–4. For 

example, these proposed regulations 

would modify current § 1.355–1 by 

adding general definitions that apply for 

purposes of the section 355 regulations, 

incorporating the rules in current 

§ 1.355–4 as proposed § 1.355–1, and 

moving the applicability dates from 

current § 1.355–1(a) to proposed 

§ 1.355–1(e). These revisions are not 

intended to make any substantive 

change. 

III. Plan of Reorganization; Party to a 

Reorganization 

A. Notice 2024–38 

As stated in section 2.02(4) of Notice 

2024–38, the Treasury Department and 

the IRS understand that confusion and 

disagreement exists regarding the 

application of the ‘‘plan of 

reorganization’’ requirement to divisive 

reorganizations. For example, some 

stakeholders view the applicability of 

the ‘‘plan of reorganization’’ 

requirement to be potentially obviated 

by the temporal requirements set forth 

in section 3.04(6) of Rev. Proc. 2018–53 

(concerning delayed satisfaction of 

distributing corporation debt). It is the 

view of the Treasury Department and 

the IRS that this is incorrect. 

Section 2.02(4) of Notice 2024–38 

further states that, although the ‘‘plan of 

reorganization’’ requirement 

incorporates a degree of transactional 

flexibility, such flexibility is limited by 

current §§ 1.368–1(c) and 1.368–2(g), 

and the Treasury Department and the 

IRS view this requirement as helpful to 

ensure that delayed distributions are not 

used to avoid the repeal of the General 

Utilities doctrine (see part I.A.2 of the 

Background). 

B. Stakeholder Input 

The Treasury Department and the IRS 

have received a broad spectrum of 

feedback from stakeholders regarding 

the ‘‘plan of reorganization’’ 

requirement. However, consistent with 

the view of the Treasury Department 

and the IRS set forth in Notice 2024–38, 

stakeholders uniformly have contended 

that this requirement should be applied 

in a flexible manner. 

Certain stakeholders have described 

the guidance in current § 1.368–2(g) 

regarding the meaning and scope of the 

‘‘plan of reorganization’’ requirement as 

circular and incomplete. Those 

stakeholders similarly have described 

§ 1.368–1(c) as providing only 

conceptual guidance as to which 

transactions are properly included in a 

plan of reorganization. These 

stakeholders also have described 

§ 1.368–3(a) as requiring each party to 

the reorganization to adopt that plan but 

then failing to provide any guidance on 

how such parties are to satisfy that 

requirement. Stakeholders have aptly 

noted that Notice 2024–38 provided 

little additional clarity regarding the 

‘‘plan of reorganization’’ requirement. 

Additionally, certain stakeholders 

have noted that few cases address the 

meaning and scope of the ‘‘plan of 

reorganization’’ concept, and that, even 

within such cases, courts often have 

applied the step transaction doctrine 

and the substance-over-form doctrine to 

determine the existence of a plan of 

reorganization. For example, one 

stakeholder highlighted King 

Enterprises, Inc. v. United States, 418 

F.2d 511 (Ct. Cl. 1969), in which the 

U.S. Court of Federal Claims applied the 

step transaction doctrine to treat the 

acquisition of stock of a target 

corporation (Tenco), followed by the 

merger of the target corporation into the 

acquiring corporation (Minute Maid), as 

a reorganization qualifying under 

section 368(a)(1)(A). The court 

identified the threshold issue as 

‘‘whether the transfer of Tenco stock to 

Minute Maid is to be treated for tax 

purposes as an independent transaction 

of sale, or as a transitory step in a 

transaction qualifying as a corporate 

reorganization,’’ which dictated the 

resolution of the central issue of 

‘‘whether the initial exchange of stock 

was a step in a unified transaction 

pursuant to a ‘plan of reorganization’.’’ 

King Enterprises, 418 F.2d at 514–15. 

Based on an analysis of the ‘‘operative 

facts in this case,’’ the court applied the 

step transaction doctrine to conclude 

that the two transactions comprised a 

single, unified transaction. Id. at 515– 

16, 519. Even though no formal plan of 

reorganization existed, the court relied 

on those facts and that analysis to 

identify a plan of reorganization for that 

unified transaction. Id. at 519 n.11 

(relying on Redfield v. Commissioner, 

34 B.T.A. 967 (1936), for the proposition 


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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 firststep tender offer made by a subsidiary 

of an acquiring corporation (DuPont 

Tenderor and DuPont, respectively), and 

(ii) a subsequent merger of Conoco into 

DuPont Tenderor. The court 

acknowledged that the tender offer and 

subsequent merger each possessed 

independent significance, and that the 

subsequent merger was subject to 

several contingencies. Seagram, 104 

T.C. at 93–94. However, the court 

emphasized that DuPont and DuPont 

Tenderor ‘‘were under a binding and 

irrevocable commitment to complete the 

culminating merger—the second step— 

upon the successful completion of the 

DuPont tender offer—the first step.’’ Id. 

at 98. Based on all facts and 

circumstances of the tender offer and 

subsequent merger, including official 

records of DuPont and DuPont 

Tenderor, the court identified the 

existence of a plan of reorganization, 

reasoning that, ‘‘because DuPont was 

contractually committed to undertake 

and complete the second-step merger 

once it had undertaken and completed 

the first-step tender offer, these carefully 

integrated transactions together 

constituted a plan of reorganization 

within the contemplation of section 

354(a).’’ Id. at 98–99 (relying principally 

on, and noting satisfaction of, the 

Supreme Court’s binding commitment 

standard in Gordon). 

Stakeholders also have noted that the 

Tax Court in Seagram characterized the 

‘‘plan of reorganization’’ concept 

expressed in § 1.368–2(g) as one of 

‘‘substantial elasticity,’’ relying on the 

court’s prior observations on that 

concept in Int’l Telephone. Seagram, 

104 T.C. at 96. (In Int’l Telephone, the 

Tax Court noted that § 1.368–2(g) ‘‘is 

imbued with qualities of flexibility and 

vagueness, with the result that it does 

not present precise self-executing 

guidelines.’’ 77 T.C. at 75.) The Tax 

Court in Seagram also relied on 

scholarly commentary for the 

proposition that, even though § 1.368– 

2(g) at that time required a plan of 

reorganization to be filed with the IRS, 

it was self-evident that the IRS and the 

courts could identify the existence of a 

plan of reorganization in the event the 

taxpayer either did not file one or filed 

one that was inaccurate. See Seagram, 

104 T.C. at 96 (quoting Peter L. Faber, 

The Use and Misuse of the Plan of 

Reorganization Concept, 38 Tax L. Rev. 

515, 523 (1982–1983)). 

Stakeholders also have commented on 

temporal considerations relating to 

plans of reorganization. Stakeholders 

have contended that the length of time 

between transactions effectuating a plan 

of reorganization should not prevent 

any particular transaction from being 

considered part of the plan. Conversely, 

these stakeholders have contended that 

the temporal proximity of one 

transaction to another transaction that is 

properly included in a plan of 

reorganization should not be 

determinative as to whether the other 

transaction is properly included in the 

plan. Stakeholders also have contended 

that imposing a time limitation for 

completing a plan of reorganization 

would be inappropriate. 

Additionally, some stakeholders have 

recommended granting taxpayers the 

flexibility to either execute the steps 

identified in the plan of reorganization 

or change them at any time, based on 

each taxpayer’s judgment on how best to 

achieve the objectives of their 

transaction. However, other 

stakeholders have recommended 

clarifying that entering into a new 

transaction not contemplated by the 

plan, even in the alternative, is not 

treated as pursuant to the plan of 

reorganization. 

In sum, stakeholders uniformly have 

described the current regulations 

addressing the ‘‘plan of reorganization’’ 

requirement as lacking sufficient clarity 

and comprehensiveness. Accordingly, 

some stakeholders have requested 

guidance regarding the metrics needed 

for a taxpayer to establish a plan of 

reorganization. Specifically, 

stakeholders have requested guidance 

regarding (i) the means by which parties 

to a reorganization can adopt a plan of 

reorganization (in particular, some 

stakeholders have recommended 

allowing actions of a corporation’s 

authorized representatives, and not just 

formal written actions of the board, to 

be taken into account for this purpose), 

(ii) transactions that may occur at a 

future time, are contingent, or are in the 

alternative, and (iii) transactions that 

may develop as a result of events arising 

after the plan of reorganization is 

adopted. 

The stakeholder input received has 

highlighted not only the deficiencies in 

authoritative guidance regarding the 

meaning and scope of the ‘‘plan of 

reorganization’’ requirement, but also 

the importance of this requirement in 

determining whether the operative 

provisions of subchapter C apply to a 

particular transaction. 

C. Proposed Regulations 

1. Overview 

The Treasury Department and the IRS 

agree with stakeholders that the current 

guidance regarding the ‘‘plan of 

reorganization’’ requirement is 

inadequate and creates significant 

confusion. Consistent with stakeholder 

recommendations, the proposed 

regulations would clarify, among other 

items, (i) the metrics needed for a 

taxpayer to establish a plan of 

reorganization, (ii) the manner whereby 

parties to a reorganization can adopt a 

plan of reorganization, and (iii) the 

requirements for prosecuting a plan of 

reorganization (including in the event of 

a change in circumstances following 

adoption of the plan). In proposing this 

guidance, the Treasury Department and 

the IRS have endeavored to balance the 

importance of providing taxpayers with 

transactional flexibility to effectuate 

bona fide business transactions with the 

need to facilitate IRS administration of 

the reorganization provisions of 

subchapter C. Accordingly, the Treasury 

Department and the IRS believe that this 

guidance would help achieve the 

compliance, increased certainty, and 

transaction facilitation objectives of 

these proposed regulations. (See the 

discussion of the objectives for guidance 

in part VI of the Background; see also 

the discussion of the TIGTA Report in 

part IV of the Background.) 

2. Proposed Rules Regarding Plan of 

Reorganization 

a. Purpose and Effect of Plan of 

Reorganization 

The Treasury Department and the IRS 

view a plan of reorganization as serving 

two related purposes. First, a plan of 

reorganization serves to identify those 

transactions to which the definitional 

and operative provisions of subchapter 

C apply. Second, a plan of 

reorganization serves to distinguish 

transactions the Federal income tax 

treatment of which is governed by the 

reorganization provisions of subchapter 

C from transactions to which the general 

recognition provisions of the Code (such 

as section 1001) apply. 

However, under the proposed 

regulations, a taxpayer’s failure to set 

forth a plan of reorganization in a single, 

comprehensive document neither would 

be determinative as to the existence or 

scope of a plan of reorganization for a 

transaction nor would govern the 

application of any definitional or 

operative provision to that transaction. 

See proposed § 1.368–4(a)(3). 


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b. Determination of Plan of 

Reorganization 

The proposed regulations would 

permit a plan of reorganization to be 

determined in several different 

manners. Under the manner preferred 

by the Treasury Department and the 

IRS, a taxpayer would prepare a single, 

comprehensive document that satisfies 

all requirements set forth in proposed 

§ 1.368–4(d) and file that document 

with the IRS as required by proposed 

§ 1.368–3(a)(5) (taxpayer-filed plan of 

reorganization). See proposed § 1.368– 

4(b)(1). The taxpayer-filed plan of 

reorganization would contain the 

information required by prior and 

current § 1.368–3(a) and incorporate 

recommendations of the TIGTA Report. 

Specifically, proposed § 1.368–4(d) 

would set forth the following 

requirements. First, the proposal would 

require the taxpayer-filed plan of 

reorganization to identify (i) all parties 

to the reorganization (as required by 

current § 1.368–3(a)), (ii) all transactions 

properly included in the plan of 

reorganization (as required by prior 

§ 1.368–3(a)), and (iii) all liabilities 

(including debt) to be assumed by the 

acquiring corporation and the obligees 

(or creditors) of those liabilities, and (iv) 

all debt of the target corporation that 

will be satisfied with section 361 

consideration and the creditors of that 

debt. Second, the proposal would 

require such plan to describe the 

intended Federal income tax treatment 

of those transactions (which would 

facilitate implementing the 

recommendations of the TIGTA Report). 

Third, the proposal would require such 

plan to describe the corporate business 

purpose for each transaction (consistent 

with current § 1.368–2(g)). Lastly, the 

proposal would require such plan to 

establish that each transaction facilitates 

the continuance of the business of a 

corporation a party to the reorganization 

(consistent with current § 1.368–2(g)). 

See proposed § 1.368–4(d)(1). 

The proposed regulations would 

reflect a preference that taxpayers will 

timely file a complete and accurate plan 

of reorganization. See proposed § 1.368– 

4(c)(1). Accordingly, the Federal income 

tax consequences of the subject 

transactions generally would be 

determined in accordance with that 

plan. See proposed § 1.368–4(a)(2)(i). 

Throughout the duration of the 

transaction or series of transactions, 

which potentially could span several 

taxable years, the IRS would possess the 

ability to monitor the taxpayer’s 

execution of that plan of reorganization 

(for example, through the taxpayer’s 

annual filing of Form 7216 for divisive 

transactions). The Treasury Department 

and the IRS intend the proposed 

approach (i) to increase taxpayer 

certainty regarding the Federal income 

tax treatment of transactions properly 

included in a plan of reorganization, 

and (ii) to facilitate IRS administration 

of the reorganization provisions of 

subchapter C. 

However, if a taxpayer files a plan of 

reorganization with the IRS that fails to 

satisfy any requirement set forth in 

proposed § 1.368–4(d), or if the taxpayer 

fails to file a plan of reorganization with 

the IRS in accordance with proposed 

§ 1.368–3(a)(5), proposed § 1.368– 

4(c)(2)(i) recognizes that the 

Commissioner may correct or identify a 

plan of reorganization. Under proposed 

§ 1.368–4(c)(2)(ii), the Commissioner 

may determine that a transaction or 

series of transactions should be 

included in, or excluded from, a plan of 

reorganization based on (i) all facts and 

circumstances regarding the transaction 

or series of transactions, and (ii) all 

relevant provisions of the Code and 

general principles of Federal income tax 

law, including the step transaction 

doctrine. 

The proposed approach is consistent 

with long-standing caselaw indicating 

that the existence and proper scope of 

a plan of reorganization can be 

determined in the absence of formal 

documentation. See, for example, 

Redfield, 34 B.T.A. at 973 (‘‘It is not 

necessary, however, that such a plan of 

reorganization be evidenced by a formal 

written document, such as a contract or 

corporate minutes. It is sufficient if the 

circumstances indicate that the various 

steps taken were pursuant to a definite 

plan of reorganization.’’); Fry v. Comm’r, 

5 T.C. 1058, 1070 (1945) (similar). The 

proposed regulations would reflect this 

long-standing position because 

conditioning the applicability of the 

definitional and operative provisions of 

subchapter C on whether a plan of 

reorganization formally was prepared 

and filed would, in particular and 

contrary to law, make the reorganization 

regime entirely elective. 

Nonetheless, the Treasury Department 

and the IRS are of the view that formal 

documentation requirements for 

taxpayer-filed plans of reorganization 

are necessary to facilitate the IRS’s 

administration of the reorganization 

provisions of subchapter C. See part III 

of the Background. Moreover, the 

preference for complete and accurate 

taxpayer-filed plans of reorganization 

under proposed § 1.368–4(c)(1) requires 

adequate substantiation with the IRS, 

which would be provided by objectively 

verifiable, official corporate documents. 

Accordingly, proposed § 1.368–4(d) 

would enhance the current reporting 

requirements for plans of 

reorganization. 

c. Agreement by Parties to Plan of 

Reorganization; Beginning of Plan of 

Reorganization 

Proposed § 1.368–4(d)(2) would 

provide that, prior to the first step of a 

reorganization, the plan of 

reorganization or an original plan of 

reorganization that becomes the 

amended plan of reorganization, as 

applicable, must be finalized and 

adopted by the party to the 

reorganization. Taxpayers would 

demonstrate satisfaction of this 

requirement through (i) the acts of duly 

authorized officers and directors of the 

corporation, and (ii) the official records 

of the party to the reorganization. 

The Treasury Department and the IRS 

are of the view that the proposed 

approach would provide greater 

taxpayer certainty regarding the means 

by which parties to a reorganization can 

adopt a plan of reorganization than 

current § 1.368–3(a), which provides 

only that ‘‘[t]he plan of reorganization 

must be adopted by each of the 

corporations that are parties thereto.’’ 

As previously discussed in part III.B of 

this Explanation of Provisions, the 

current regulations have created 

significant uncertainty due to the lack of 

guidance on what constitutes an 

‘‘adoption’’ by the parties. The proposed 

regulations would address this 

uncertainty in a manner consistent with 

prior § 1.368–3(a) and statutory law. See 

section 806(g)(3) of the Tax Reform Act 

of 1976 (Public Law 94–455, 90 Stat. 

1520, 1606) (describing how a 

corporation is considered to have 

adopted a plan of reorganization for 

purposes of determining the effective 

date of certain modifications to sections 

382 and 383). 

In addition, the proposed 

substantiation requirements would 

facilitate the IRS’s administrative 

function by marking the beginning of 

the taxpayer’s plan of reorganization—a 

feature that the Tax Court also views as 

important. See Seagram, 104 T.C. at 98 

(emphasizing in its plan of 

reorganization analysis that the DuPont/ 

Conoco Agreement ‘‘provides a discrete 

start and finish’’). 

d. Timing Requirement for Completion 

of Plan of Reorganization 

i. General ‘‘Expeditious Completion’’ 

Requirement 

Proposed § 1.368–4(d)(3)(i)(A) and 

(ii)(A) would require that, taking into 

account all facts and circumstances 

(including the one or more corporate 


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business purposes for a reorganization), 

all parties to the reorganization must 

complete the plan of reorganization as 

expeditiously as practicable, and in the 

manner described in that plan. The 

proposed approach takes into account 

taxpayers’ need for transactional 

flexibility and reflects the long-standing 

principle that the passage of time is not 

determinative of whether a transaction 

is part of a plan of reorganization. See, 

for example, Wilson v. Comm’r, T.C. 

Memo. 1961–135 (‘‘The mere lapse of 

time is not decisive. The important 

thing is that the steps which are taken 

evidence a consistent performance of 

the reorganization plan and purpose.’’). 

ii. Presumption of Satisfaction if 

Completion Within 24 Months 

However, the Treasury Department 

and the IRS are concerned that the lack 

of a time limitation for completing a 

plan of reorganization raises 

administrability concerns for the IRS. 

Accordingly, the Treasury Department 

and the IRS are (i) issuing proposed 

§ 1.355–5, and (ii) introducing new 

Form 7216, to provide the IRS with 

information regarding divisive 

transactions that span multiple tax 

years. See part V of the Background. 

Additionally, temporal guidelines 

would provide greater certainty to 

taxpayers. In this regard, stakeholders 

have requested the inclusion of safe 

harbors in these proposed regulations to 

mitigate uncertainty arising from 

conceptual rules and facts-andcircumstances determinations. Based on 

this feedback, proposed § 1.368– 

4(d)(3)(i)(B) would provide that the 

‘‘expeditious completion’’ requirement 

is presumed to be satisfied if all parties 

to a reorganization complete the plan of 

reorganization within the 24-month 

period beginning on the date of the first 

step of the plan of reorganization. This 

increased certainty would help achieve 

the transaction facilitation objective of 

these proposed regulations, and 

providing a 24-month safe harbor would 

help achieve the compliance objective 

of these proposed regulations. 

e. Requirements for Transactions To Be 

Treated as Properly Included in Plan of 

Reorganization 

i. Overview 

Stakeholders have recommended 

various standards and approaches for 

determining whether a transaction is 

properly included in a plan of 

reorganization. As noted by 

stakeholders, neither current guidance 

nor the caselaw regarding the ‘‘plan of 

reorganization’’ requirement adequately 

addresses this issue. The proposed 

regulations would synthesize the 

overarching principles of this caselaw 

into rules that could be applied by 

taxpayers and the IRS with significantly 

greater certainty than under current 

Treasury guidance and the caselaw. 

ii. Definite Intent Requirement 

As a threshold requirement, proposed 

§ 1.368–4(e)(1)(i) would require that, 

prior to the first step of a plan of 

reorganization or an original plan of 

reorganization that becomes the 

amended plan of reorganization, one or 

more parties to the reorganization must 

evidence a definite intent to carry out 

the transaction. This definite intent 

must be evidenced through a written 

commitment in one or more official 

records of the party that substantiate the 

plan of reorganization. Under this 

proposal, the existence of contingencies 

or conditions would not be conclusive 

in determining whether a party to the 

reorganization satisfies this 

requirement. 

The ‘‘definite intent’’ standard is 

intended to provide sufficient 

transactional flexibility to encourage 

bona fide business transactions in a 

manner consistent with long-standing 

caselaw. The origins of the ‘‘definite 

intent’’ standard can be traced back to 

judicial opinions of the Board of Tax 

Appeals (BTA), the predecessor to the 

Tax Court. For example, in Fry v. 

Commissioner, the BTA relied on this 

standard for determining the existence 

of a plan of reorganization from ‘‘what 

appear[ed] on the minutes of the 

meeting of the stockholders and the 

meeting of the board of directors of the 

old bank,’’ which had articulated the 

business objectives and transaction 

steps for the reorganization. 5 T.C. at 

1070; see also Redfield, 34 B.T.A. at 973 

(noting that, although a formal written 

plan of reorganization is not necessary, 

the circumstances evidencing that a 

reorganization occurred need to indicate 

that the various steps taken in 

pursuance thereof were taken ‘‘pursuant 

to a definite plan of reorganization’’) 

(emphasis added); Seagram, 104 T.C. at 

97 (observing that the DuPont/Conoco 

Agreement ‘‘definitively states the terms 

for ‘the acquisition of [Conoco] by 

[DuPont Tenderor and]’ sets out . . . the 

series of transactions which in their 

totality were intended to accomplish a 

section 368 reorganization’’). 

In contrast, courts have determined 

that transactions subject to a lesser 

degree of intent or predominated by 

uncertainty are not properly included in 

a plan of reorganization. For example, in 

National Bank of Commerce in 

Memphis v. United States, 87 F. Supp. 

302 (W.D. Tenn. 1949), the court 

concluded that a transaction 

contemplated prior to the plan of 

reorganization was not properly 

included in that plan because the 

transaction was uncertain and indefinite 

as of the time of the first step of the plan 

of reorganization. 87 F. Supp. at 304. 

The court emphasized that ‘‘[a]n 

element in a plan of reorganization that 

cannot be legally enforced and, in 

addition is fraught with much 

uncertainty, is indefinite and not 

necessary to the reorganization, cannot 

be considered as one of the steps 

resulting in the completed transaction.’’ 

Id. Accordingly, if the parties did not 

anticipate or otherwise contemplate a 

transaction prior to the adoption of the 

plan of reorganization, that transaction 

cannot be included in that plan. See 

Atwood Grain & Supply Co. v. Comm’r, 

60 T.C. 412, 423 (1973) (observing that 

‘‘[t]here [wa]s no evidence that issuance 

of the preferred stock was contemplated 

either in the merger negotiations or in 

the merger agreement,’’ and reasoning 

that, ‘‘[i]n order to include events 

occurring after a merger in the plan of 

merger there must be some anticipation 

of the event in the merger’’). 

Stakeholders have noted that a ‘‘plan 

of reorganization’’ concept that includes 

every possibility considered by any 

taxpayer in connection with a 

reorganization would be overbroad and 

meaningless. Indeed, a commenter 

relied upon by the Tax Court for its 

analysis in Seagram noted that ‘‘[t]he 

contemplated possibility standard is too 

broad. . . . A more appropriate 

standard would be to link the later 

transaction to the earlier one only if 

there is a firm commitment to 

consummate it.’’ Faber, The Use and 

Misuse of the Plan of Reorganization 

Concept, 38 Tax L. Rev. at 547. The 

Treasury Department and the IRS agree 

that such a standard would not be 

appropriate for the proposed 

regulations. Accordingly, proposed 

§ 1.368–4(e)(1)(iii)(A) would provide 

that mere contemplation that a 

transaction may be carried out would 

not be sufficient to satisfy the ‘‘definite 

intent’’ requirement, regardless of 

whether that contemplated transaction 

is included in an official record of the 

party. 

However, the Treasury Department 

and the IRS recognize that the 

‘‘contemplated possibility’’ standard is 

relevant for certain plan of 

reorganization determinations. 

Accordingly, proposed § 1.368– 

4(e)(1)(iii)(B) would provide that a 

party’s mere contemplation of a 

transaction may be relevant for purposes 

of the correction or identification of a 

plan of reorganization by the 


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Commissioner. As previously discussed 

in part III.C.2.b. of this Explanation of 

Provisions, the Commissioner’s 

determination under proposed § 1.368– 

4(c)(2)(ii) would be based on all facts 

and circumstances pertaining to the 

transaction and the application of all 

relevant Code provisions and Federal 

income tax principles, including the 

step transaction doctrine. 

Permitting the IRS to determine the 

outer reaches of the scope of 

transactions potentially includable in a 

plan of reorganization through an 

analysis of all facts and circumstances 

and Federal income tax principles 

would be consistent with judicial 

authorities that have applied a 

‘‘contemplated possibility’’ test. For 

example, in Anheuser-Busch, Inc. v. 

Commissioner, 40 B.T.A. 1100 (1939), 

the BTA relied on substance-over-form 

principles to determine the scope of 

transactions included in a plan of 

reorganization, based on its 

determination that a first-step transfer to 

a parent corporation was ‘‘transitory and 

without real substance.’’ 40 B.T.A. at 

1106. As part of its analysis, the court 

observed that the parent had 

‘‘contemplated,’’ but was not obligated 

to carry out, the immediate transfer of 

the property received to its subsidiary, 

and the court expanded the scope of the 

plan of reorganization to include that 

second-step transfer. Id. at 1106–07 

(relying on the substance-over-form 

analysis of Helvering v. Bashford, 302 

U.S. 454, 458 (1938)). Other judicial 

opinions similarly have used the 

existence of a contemplated possibility 

in this manner. See, for example, Avco 

Mfg. Corp. v. Comm’r, 25 T.C. 975, 984– 

85 (1956) (noting that a ‘‘subsequent 

transfer of the property . . . was a 

contemplated possibility under the plan 

that actually eventuated’’ and was 

properly included within the scope of 

the plan of reorganization under the 

mutual interdependence test); Transport 

Products Corp. v. Comm’r, 25 T.C. 853, 

857–58 (1956). 

Once a definite intent is established, 

the existence of contingencies and other 

conditions that could affect prosecution 

of the plan of reorganization are not 

treated as diminishing that level of 

intent. See, for example, Seagram, 104 

T.C. at 96 (‘‘DuPont had an indisputable 

legal obligation to complete the Merger 

with Conoco, notwithstanding the 

possibility of intervening legal 

impediments, or contingencies, which 

in fact, never materialized’’). 

Accordingly, proposed § 1.368–4(e) 

would provide that, for purposes of 

determining whether a party to a 

reorganization satisfies the ‘‘definite 

intent’’ requirement, the existence of 

contingencies or conditions is not 

conclusive. 

Section 355 transactions would be 

subject to a special definite intent 

requirement under proposed §§ 1.355– 

4(d)(1)(ii) and 1.368–4(e)(1)(ii). 

Specifically, if a control distribution 

occurs in a later taxable year than the 

first distribution, the distributing 

corporation would not be treated as 

establishing a definite intent unless all 

distributions up to and including the 

control distribution are effectuated 

pursuant to a binding commitment. This 

proposed special ‘‘definite intent’’ 

requirement would reflect the Supreme 

Court’s decision in Gordon. See also the 

discussion in part I.D.2 of the 

Background. 

iii. Proximate Relationship Requirement 

(a) Overview 

The proposed regulations would set 

forth standards for determining whether 

a transaction shares a sufficient 

relationship with other transactions to 

which a definitional or operative 

provision applies. To reflect the distinct 

purposes for, and requirements of, the 

definitional provisions and the 

operative provisions in subchapter C, 

the proposed regulations would set forth 

two different sets of proximate 

relationship requirements. 

(b) Necessary or Integral Test for 

Qualification Under Definitional 

Provisions 

Under proposed § 1.368–4(e)(2)(i)(A), 

a transaction would be treated as part of 

the plan of reorganization for a 

reorganization to which a definitional 

provision can apply only if, on its own 

or as part of a series of transactions, the 

transaction either (i) is necessary to 

satisfy one or more requirements of the 

definitional provision, or (ii) is an 

integral part of a series of transactions 

carried out to satisfy the requirements of 

the definitional provision. In practice, 

the ‘‘integral part’’ test generally would 

be relevant for transactions that are not 

‘‘necessary to satisfy’’ one or more 

requirements of a definitional provision. 

The proposed regulations would require 

satisfaction of either condition to be 

evidenced by a written commitment in 

one or more official records of the party 

to the reorganization. See proposed 

§ 1.368–4(e)(2)(i)(A). 

The ‘‘necessary to satisfy’’ condition 

is intended to convey, with more 

precision, a requirement set forth in 

current § 1.368–2(g). Section 1.368–2(g) 

states, in part, that ‘‘[t]he term plan of 

reorganization has reference to a 

consummated transaction specifically 

defined as a reorganization under 

section 368(a).’’ In addition, current 

§ 1.368–2(g) provides that ‘‘[t]he term is 

not to be construed as broadening the 

definition of ‘reorganization’ as set forth 

in section 368(a).’’ The Treasury 

Department and the IRS view the 

‘‘necessary to satisfy’’ condition as 

already clear (given that the definitional 

provisions in section 368(a)(1) describe 

the steps necessary for qualification) but 

have rearticulated this standard to 

eliminate the circularity and vagueness 

that courts and stakeholders have 

identified in current § 1.368–2(g). See 

Int’l Telephone, 77 T.C. at 75 (noting 

such vagueness); Seagram, 104 T.C. at 

96 (highlighting the Tax Court’s 

observation in Int’l Telephone). 

The ‘‘integral part’’ condition also is 

embedded in current § 1.368–2(g), 

which provides that the term ‘‘plan of 

reorganization’’ is to be taken as limiting 

the nonrecognition of gain or loss to 

‘‘such exchanges or distributions as are 

directly a part of the transaction 

specifically described as a 

reorganization in section 368(a)’’ 

(emphasis added). The Treasury 

Department and the IRS view this 

‘‘directly a part’’ standard as less 

stringent than the ‘‘necessary to satisfy’’ 

standard but nonetheless view it as 

mandating that a transaction must be 

essential to qualifying a series of 

transactions as a reorganization. 

Accordingly, the proposed regulations 

would replace the phrase ‘‘directly a 

part of the transaction’’ with an 

‘‘integral part’’ standard. 

The proposed ‘‘integral part’’ standard 

is intended to reflect the structure of 

section 368(a)(1) and the long-standing 

position of the IRS and the courts. For 

example, a distributing corporation that 

retains controlled corporation stock may 

qualify under section 355—and 

therefore ultimately may satisfy a 

condition in section 368(a)(1)(D)— 

through multiple types of dispositions 

of controlled corporation stock. In each 

instance, such disposition may be 

viewed as integral to section 

368(a)(1)(D) qualification. (See also the 

requirements for qualifying retentions 

previously discussed in part I.C of this 

Explanation of Provisions.) 

The foregoing principle is reflected in 

Rev. Rul. 57–518, 1957–2 C.B. 253, 

which addressed whether a transaction 

satisfied a prior version of section 

368(a)(1)(C) that did not yet impose a 

liquidation requirement. In Rev. Rul. 

57–518, a target corporation transferred 

70 percent of its assets to an acquiring 

corporation for acquiring corporation 

voting stock. The target corporation then 

disposed of all its remaining assets in 

recognition transactions (that is, not 

under the operative nonrecognition 


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provisions of subchapter C) and 

liquidated. Although the liquidation 

was not described in, or required by, 

that prior version of section 368(a)(1)(C), 

the IRS concluded that the liquidation 

was part of the plan of reorganization. 

Like the disposition by a distributing 

corporation of retained controlled 

corporation stock in a transaction to 

which section 1001 applies, the target 

corporation liquidation was not 

necessary to achieve qualification under 

section 368(a)(1), but it was an integral 

part of a series of transactions carried 

out to satisfy the requirements of that 

definitional provision. 

(c) But for, or Integral to, Test for 

Application of Operative Provision 

Under proposed § 1.368–4(e)(2)(i)(B), 

a transaction would be treated as part of 

the plan of reorganization to which an 

operative provision can apply only if, 

on its own or as part of a series of 

transactions, the transaction either (i) 

would not have occurred but for the 

reorganization that is covered by the 

plan of reorganization, or (ii) is an 

integral part of a series of transactions 

carried out to satisfy the requirements of 

the definitional provision intended to 

apply to the reorganization. The 

proposed regulations would require 

satisfaction of either condition to be 

evidenced by a written commitment in 

one or more official records of the party 

to the reorganization. Both of these 

conditions are intended to replace the 

‘‘directly a part of’’ standard set forth in 

current § 1.368–2(g) with standards that 

are clearer and more reflective of the 

purpose and requirements of the 

operative provisions in subchapter C. 

The proposed ‘‘but for’’ condition is 

embedded within the ‘‘directly a part 

of’’ requirement in current § 1.368–2(g). 

Among other objectives, this proposed 

condition is intended to help clarify the 

determination of whether an operative 

provision applies to a distribution that 

occurs within close temporal proximity 

to one or more transactions that are 

properly included in a plan of 

reorganization. For example, in 

determining whether section 361(b) 

should apply to a distribution by a 

distributing corporation to its 

shareholders in close temporal 

proximity to a divisive reorganization, 

the proposed ‘‘but for’’ test would 

clarify that section 361(b) treatment 

would be applicable only if that 

distribution would not have occurred 

‘‘but for’’ the divisive reorganization. 

See the examples in proposed § 1.361– 

3(f)(2) through (5). 

An ‘‘integral part’’ standard also 

would increase taxpayer certainty as 

compared to the current ‘‘directly a part 

of’’ standard, particularly because courts 

historically have applied an ‘‘integral 

part’’ standard. For example, in Sheldon 

v. Commissioner, 6 T.C. 510 (1946), the 

Tax Court found that a transaction was 

integral to a merger even though the 

transaction was not necessary for 

qualification for a definitional provision 

under section 368(a)(1). In Sheldon, the 

Tax Court considered whether a premerger distribution should be included 

in the plan of reorganization for the 

merger. 6 T.C. at 517–18. The court 

emphasized that the pre-merger 

distribution was made to equalize 

values of the target corporation and the 

acquiring corporation so that the merger 

could be one of equals, thereby 

satisfying a condition for executing the 

merger. Id. In its analysis, the court 

provided that ‘‘[t]he purpose of this 

distribution, its place in the sequence of 

events, and the surrounding 

circumstances, lead to but one 

conclusion. They all demonstrate that it 

was an integral part of the 

reorganization transaction as a whole 

and must be treated in connection with 

it.’’ Id. at 517. See also Int’l Telephone, 

77 T.C. at 76 (noting the absence of ‘‘a 

binding agreement or other factors 

indicating that conversion [of 

debentures] was an integral part of the 

plans of reorganization’’). 

Additionally, the Treasury 

Department and the IRS are of the view 

that replacing the ‘‘directly a part of’’ 

standard in current § 1.368–2(g) with 

the standards in proposed § 1.368– 

4(e)(2)(i)(B) would improve taxpayer 

certainty in determining the 

applicability of an operative provision 

of subchapter C. Proposed § 1.368–4(e) 

would provide additional certainty by 

requiring the ‘‘but for’’ standard to be 

applied in tandem with the ‘‘definite 

intent’’ requirement set forth in 

proposed § 1.368–4(e)(1). In other 

words, a transaction would not be 

properly included in a plan of 

reorganization if the party to the 

reorganization failed to evidence a 

definite intent to carry out that 

transaction, regardless of whether the 

transaction would not have occurred 

‘‘but for’’ the reorganization. 

This implementation of the ‘‘but for’’ 

standard would be consistent with 

judicial authorities, including those 

cited by stakeholders. For example, in 

International Telephone, the Tax Court 

considered exchanges involving 

debentures that could not have occurred 

but for the execution of a reorganization 

that qualified under section 368(a)(1)(C). 

77 T.C. at 72–78. Although the court 

observed the existence of that ‘‘but for’’ 

relationship, the court reasoned that 

‘‘[t]he fact that [the acquiring 

corporation] assumed the conversion 

obligation as part of the plans of 

reorganization does not mean . . . that 

the subsequent conversions and 

retirement of the debentures were also 

part of the reorganizations.’’ Id. at 76. 

Based on the lack of indicia indicating 

satisfaction of the proposed ‘‘direct 

intent’’ requirement, the Tax Court 

concluded that such exchanges were not 

properly included in the plan of 

reorganization. See id. at 76–77 (noting 

the lack of any binding agreement, any 

other type of obligation, or other facts 

that would indicate satisfaction of the 

‘‘direct intent’’ requirement). See also 

Becher v. Comm’r, 22 T.C. 932 (1954) 

(treating a distribution as not part of the 

plan of reorganization under the 

predecessor to section 368(a)(1)(D), and 

therefore not ‘‘boot,’’ based on an 

examination of the facts and 

circumstances of the distribution and 

the transactions comprising the 

reorganization). 

(d) Independent Legal Significance; 

Temporal Proximity 

Proposed § 1.368–4(e)(2)(ii) would 

confirm that the independent 

significance of a transaction (for 

example, the fact that the transaction 

has a separate business motive apart 

from the reorganization) does not 

preclude satisfaction of the proximate 

relationship requirements in proposed 

§ 1.368–4(e)(2)(i)(A) and (B). The 

Treasury Department and the IRS view 

this approach as consistent with 

established caselaw (see Seagram, 104 

T.C. at 91–93) and reflective of the 

realities of bona fide business 

transactions. It has long been the 

understanding of the Treasury 

Department and the IRS that a 

transaction could be included in the 

plan of reorganization even though it 

may have separate business motives, or 

separate and permanent legal, 

economic, and business consequences, 

apart from the reorganization. 

Additionally, proposed § 1.368– 

4(e)(2)(iii) would provide that a 

transaction occurring in close temporal 

proximity to one or more other 

transactions is not properly included in 

a plan of reorganization unless Federal 

income tax principles (including the 

step transaction doctrine) would apply 

to determine that the transaction was, in 

substance, part of the plan of 

reorganization. 

iv. Business Purpose Consistency 

Requirement 

Lastly, in order for a transaction to be 

treated as properly included in a plan of 

reorganization, proposed § 1.368–4(e)(3) 

would require the transaction (on its 


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own, or as part of a series of 

transactions) to be consistent with, and 

directly related to, one or more 

corporate business purposes for the 

reorganization (for example, the 

transaction directly furthers one or more 

corporate business purposes for the 

reorganization). 

The Treasury Department and the IRS 

view the proposed corporate business 

purpose consistency requirement as 

reflective of established caselaw. See 

Seagram, 104 T.C. at 83, 97 (noting that 

the tender offer and the merger shared 

the same corporate business purpose of 

enabling DuPont to acquire all the stock 

of Conoco). In addition, the Treasury 

Department and the IRS view this 

proposed rule as conceptually grounded 

in current § 1.368–2(g), which provides 

that ‘‘the readjustments involved in the 

exchanges or distributions effected in 

the consummation [of the 

reorganization] must be undertaken for 

reasons germane to the continuance of 

the business of a corporation a party to 

the reorganization.’’ 

f. Amended Plan of Reorganization 

The Treasury Department and the IRS 

recognize that, in certain circumstances, 

taxpayers may need to amend their 

plans of reorganization. Accordingly, 

proposed § 1.368–4(f)(1) would provide 

that, if a taxpayer amends a plan of 

reorganization after the first step of the 

original plan (amended plan of 

reorganization), those amendments do 

not cause the taxpayer to fail to satisfy 

the ‘‘plan of reorganization’’ 

requirements set forth in proposed 

§ 1.368–4(d) only if the following 

requirements are satisfied. First, the 

amendments to the plan must be in 

direct response to an identifiable, 

unexpected, and material change in 

market or business conditions that 

occurs after the date on which the 

original plan of reorganization is 

adopted by the party to the 

reorganization. Second, the 

amendments must be necessary to 

effectuate the reorganization. Third, the 

amended plan of reorganization must 

satisfy all requirements set forth in 

proposed § 1.368–4(d) to qualify as a 

plan of reorganization. 

If the taxpayer satisfies the 

requirements in proposed § 1.368– 

4(f)(1), proposed § 1.368–4(f)(2)(i) would 

provide that the definitional and 

operative provisions described in 

proposed § 1.368–1(c)(2)(i) and (ii) 

would apply to the transactions 

identified in, and carried out pursuant 

to, the amended plan of reorganization. 

In other words, the proposed regulations 

would confirm that the Federal income 

tax consequences of all transactions 

properly included in the amended plan 

of reorganization would be determined 

based on that plan of reorganization 

(and not on the original plan of 

reorganization). However, proposed 

§ 1.368–4(f)(2)(ii) would provide that, if 

the amended plan of reorganization fails 

to satisfy the requirements in proposed 

§ 1.368–4(f)(1), the Commissioner may 

correct or identify the amended plan of 

reorganization. 

3. Proposed Rules Regarding Party to a 

Reorganization 

In addition to providing rules 

regarding the determination, adoption, 

and prosecution of a plan of 

reorganization, the proposed regulations 

would revise current § 1.368–2(f) to 

further clarify (i) which persons are 

parties to a reorganization, and (ii) the 

consequences of determining that a 

person is (or is not) a party to a 

reorganization. 

Proposed § 1.368–2(f)(1) generally 

would provide that the definitional and 

operative provisions described in 

§ 1.368–1(c)(2)(i) and (ii), respectively, 

apply solely to a transaction that is 

carried out by, between, or among one 

or more parties to a reorganization. For 

purposes of determining the scope of 

transactions to which those provisions 

apply, the term ‘‘party to a 

reorganization’’ would be limited under 

proposed § 1.368–2(f)(2) through (4) 

solely to a corporation that (i) engages 

in a transaction or series of transactions 

that satisfies a definitional provision set 

forth in section 368(a)(1), and (ii) is 

determined to be a party to a 

reorganization, as further described in 

the following paragraph. 

In general, proposed § 1.368–2(f)(4)(i) 

would provide that a corporation’s 

status as a party to a reorganization is 

established solely by the inclusion and 

identification of the corporation as a 

party to the reorganization in a plan of 

reorganization filed with the IRS 

pursuant to proposed § 1.368–3(a)(5). 

However, proposed § 1.368–2(f)(4)(ii) 

would provide that the corporation’s 

status as a party to a reorganization may 

be determined by the Commissioner 

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 tax law, including the step 

transaction doctrine. 

Proposed § 1.368–2(f)(3)(ii) would 

retain the rules in current § 1.368–2(f) 

regarding the impact of certain transfers 

of assets or stock in a reorganization on 

a person’s status as a party to the 

reorganization. 

IV. Application of Substance-OverForm, Agency, and Other Relevant 

Theories to Intermediated Exchanges 

and Direct Issuance Transactions 

A. Notice 2024–38 

In section 2.02(5) of Notice 2024–38, 

the Treasury Department and the IRS 

announced that they are continuing to 

study the application of the Code, as 

well as general principles of Federal 

income tax law (including substanceover-form, agency, or other relevant 

theories), to monetization transactions 

involving section 361 consideration. In 

particular, this study continues to focus 

on intermediated exchanges, which 

occur through (i) the acquisition by an 

intermediary (such as an investment 

bank) of historical distributing 

corporation debt from holders of that 

debt, and (ii) the subsequent satisfaction 

of that debt by the distributing 

corporation using section 361 

consideration. 

As capital market transactions have 

evolved, this study also has focused 

increasingly on direct issuance 

transactions, which typically occur 

through: (i) the issuance of new debt by 

a distributing corporation to an 

intermediary for cash in anticipation of 

a divisive reorganization; (ii) the use of 

that cash by the distributing corporation 

to satisfy historical distributing 

corporation debt, during a potentially 

indefinite period; and (iii) the 

satisfaction of that new debt by the 

distributing corporation through the 

transfer of section 361 consideration to 

the intermediary. 

This study reflects the long-standing 

position of the Treasury Department and 

the IRS that general principles of 

Federal income tax law (including 

substance-over-form, agency, or other 

relevant theories) apply to determine 

the Federal income tax consequences of 

all transactions, including such 

monetization transactions. See United 

States v. Fruehauf Corp., 577 F.2d 1038, 

1068 (6th Cir. 1978) (‘‘The incidence of 

federal taxation has always depended 

upon the substance of transactions 

. . .’’). Indeed, this position is 

consistent with nearly a century of 

Supreme Court precedent beginning 

with the Court’s decision in Gregory v. 

Helvering, which established that the 

application of the Code to a transaction 

(or series of transactions) turns on the 

substance of the transaction. See 

Gregory, 293 U.S. at 467–70 (concluding 

that the ‘‘reorganization attempted was 

without substance and must be 

disregarded [and] [t]o hold otherwise 

would be to exalt artifice above reality 

and to deprive the statutory provision in 

question of all serious purpose’’); 


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United States v. Iles, 906 F.2d 1122, 

1127 (6th Cir. 1990) (‘‘The Supreme 

Court has recognized, at least as far back 

as Gregory v. Helvering . . . that 

substance over form governs federal 

taxation.’’) (citations omitted). 

The application of substance-overform and similar doctrines can affect 

qualification for nonrecognition 

treatment under section 361. Notice 

2024–38 conveyed the long-standing 

view of the Treasury Department and 

the IRS that the application of agency 

principles to an intermediated exchange 

involving so-called ‘‘old and cold’’ 

distributing corporation debt could 

cause that transaction to be 

recharacterized for Federal income tax 

purposes such that the distributing 

corporation would not be treated as 

transferring section 361 consideration to 

a creditor in satisfaction of distributing 

corporation debt. In other words, if the 

intermediary were found to be acting on 

behalf of the distributing corporation 

under agency principles, transfers of 

section 361 consideration to the 

intermediary would not satisfy the 

requirements for nonrecognition under 

section 361. With respect to a direct 

issuance transaction in which the 

distributing corporation issues and 

redeems the new debt in close temporal 

proximity, the Treasury Department and 

the IRS are of the view that the 

transaction could be recast under 

general principles of Federal income tax 

law such that the nonrecognition 

requirements under section 361 are not 

satisfied. 

B. Stakeholder Input 

1. Intermediated Exchanges 

Stakeholders have contended that 

intermediated exchanges should not be 

subject to recharacterization, provided 

that the distributing corporation 

establishes the intermediary’s status as 

a creditor acting for its own account 

under agency principles. Stakeholders 

have stated that this approach would be 

consistent with Rev. Rul. 2017–9, 2017– 

21 I.R.B. 1244, because intermediated 

exchanges (i) do not conflict with the 

underlying policy of section 361(c)(3), 

(ii) do not avoid the result intended by 

section 361(c)(3) (that is, the 

reallocation of historical distributing 

corporation liabilities to the controlled 

corporation), and (iii) do 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-bycase 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. Stakeholders uniformly 

have contended that the proposed 

regulations should recast or 

recharacterize a direct issuance 

transaction only if the transaction 

presents an abuse within the meaning of 

section 361(b)(3). In addition, 

stakeholders consistently have 

contended that the policy of section 361 

confirms that direct issuance 

transactions satisfy the requirements for 

nonrecognition treatment under section 

361. Although one stakeholder has 

acknowledged that, in some 

circumstances, the Treasury Department 

and the IRS may have a legitimate 

concern that a direct issuance 

transaction should be treated as a sale 

of controlled corporation stock to the 

intermediary, the stakeholder has noted 

that delineating the exact bounds of an 

abusive transaction as it relates to 

section 361(b)(3) and (c)(3) would be 

difficult. Accordingly, stakeholders 

generally have recommended that the 

Treasury Department and the IRS 

continue to address the section 361 

qualification of direct issuance 

transactions through the IRS’s private 

letter ruling program rather than 

through Treasury regulations. 

Alternatively, stakeholders have 

recommended that the proposed 

regulations set forth specific safe 

harbors for direct issuance transactions 

that, after adequately taking into 

account commercial considerations 

(which one stakeholder has referred to 

as ‘‘commercially grounded carveouts’’), 

clearly would not present evidence of 

abuse. One stakeholder has 

recommended that a direct issuance 

transaction be respected as a borrowing 

if: (i) the newly issued debt qualifies as 

debt for Federal income tax purposes; 

(ii) the new debt issuance and the 

exchange agreement with the 

intermediary (regarding satisfaction of 

the newly issued debt with controlled 

corporation stock or securities) are 

pursuant to two legally separate 

agreements; (iii) the distributing 

corporation is not under economic 

compulsion to satisfy the newly issued 

debt with controlled corporation stock 

or securities at the time of issuance 

because the distributing corporation has 

sufficient other resources to repay the 

debt; (iv) the newly issued debt is 

satisfied with controlled corporation 

stock or securities having a fair market 

value equal to the principal amount and 

unpaid interest on the debt; and (v) the 

distributing corporation retains tax 

ownership of the controlled corporation 

stock or securities until the time of 

repayment. 

Another stakeholder 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. 


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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. 

With regard to the application of 

section 361 to intermediated exchanges, 

the Treasury Department and the IRS 

note that concerns regarding agency and 

substance over form date back decades 

to a series of technical advice 

memoranda that considered the 

application of a prior version of section 

108 of the Code to conceptually similar 

intermediated exchanges of stock and 

securities. 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). The so-called 

‘‘5/14 standard’’ in corporate private 

letter rulings developed out of concerns 

similar to those discussed in those 

memoranda. (Under this standard, 

rulings generally would be issued by the 

IRS if: (i) the intermediary purchased 

distributing corporation debt; (ii) after at 

least five days, the intermediary and the 

distributing corporation entered into an 

agreement to exchange the purchased 

distributing corporation debt for section 

361 consideration; and (iii) the 

exchange occurred at least 14 days after 

the intermediary purchased the 

distributing corporation debt.) 

With regard to the application of 

section 361 to direct issuance 

transactions, the Treasury Department 

and the IRS have expressed similar 

concerns for more than a decade. In 

particular, the Treasury Department and 

the IRS ceased considering certain 

private letter ruling requests under 

section 361 in part due to this type of 

section 361 monetization transaction. 

See section 5.01(10) of Rev. Proc. 2013– 

3, 2013–1 I.R.B. 113. As explained by 

Treasury Department and IRS officials at 

that time, these transactions raised 

issues concerning the application of 

general principles of Federal income 

tax, including the substance-over-form 

doctrine. Stakeholders also raised 

similar issues at that time. 

In addition, certain stakeholders have 

mischaracterized the concerns of the 

Treasury Department and the IRS as 

focused principally on (i) whether the 

new debt should be respected as a debt 

instrument for Federal income tax 

purposes, or (ii) temporal proximity. 

With regard to the former point, certain 

stakeholders have provided feedback on 

Notice 2024–38 emphasizing debtequity factors or have noted that, 

outside of Federal income tax (for 

example, under securities law), new 

debt issued by a distributing corporation 

in a direct issuance transaction would 

be treated as debt. 

However, as previously discussed in 

this part IV.C.1, the Treasury 

Department and the IRS are concerned 

with the application of the Code and 

Federal income tax principles—not 

commercial law or other non-Federal 

income tax law—to intermediated 

exchanges and direct issuance 

transactions. In particular, as expressed 

in Notice 2024–38, the concern 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-andcircumstances 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-overform 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). In addition, ‘‘[e]ach revenue 

ruling represents the conclusion of the 

Service as to the application of the law 

to the entire statement of facts 

involved,’’ as opposed to an application 

outside of that entire statement of 

relevant facts. Section 

601.601(d)(2)(v)(d) (codifying section 

7.01(6) of Rev. Proc. 89–14). Based on 

these limitations, ‘‘taxpayers, Service 

personnel, and others concerned are 

cautioned against reaching the same 

conclusion in other cases unless the 

facts and circumstances are 

substantially the same.’’ Section 

601.601(d)(2)(v)(e). 

Another reason is that, in almost all 

instances, the facts and circumstances 

set forth in the revenue rulings 

mentioned by stakeholders are not 

substantially the same as the transaction 

facts considered by the Treasury 

Department and the IRS in developing 

these proposed regulations. See Rev. 

Rul. 2017–9 (providing that ‘‘[t]his 

revenue ruling provides guidance 

regarding the federal tax treatment of 

certain transactions referred to as ‘northsouth’ transactions,’’ rather than 

intermediated exchanges or direct 

issuance transactions); Rev. Rul. 59– 

197, 1959–1 C.B. 77 (considering the 

potential effect of a ‘‘cash sale to the key 

employee’’ of the distributing 

corporation on section 355 qualification, 

rather than an intermediated exchange 

or a direct issuance transaction). 

Accordingly, those revenue rulings 

address entirely different provisions of 

the Code. See Rev. Rul. 2017–9 

(addressing the application of, and 

qualification under, sections 301, 351, 

355, and 361(b)(1) and (2) (not section 

361(b)(3) and (c)(3)); Rev. Rul. 59–197 

(addressing the application of the device 


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and continuity of interest requirements 

under section 355, not section 361(b)(3) 

and (c)(3)). 

However, the Treasury Department 

and the IRS are of the view that the facts 

and analysis set forth in Rev. Rul. 79– 

258 are relevant for purposes of 

developing proposed regulations under 

section 357(b). Accordingly, based on a 

de novo consideration of the analysis set 

forth in that revenue ruling, proposed 

§ 1.357–3(d)(4)(ii)(B) would incorporate 

that analysis into proposed rules 

regarding the assumption by a 

controlled corporation of distributing 

corporation debt issued in close 

proximity to a divisive reorganization. 

See the discussion in part VIII.C.3.b of 

this Explanation of Provisions. For the 

reasons discussed in this part IV.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. General Requirements for Deemed 

Distribution Treatment 

Proposed § 1.361–5 would implement 

section 361(b)(3) and (c)(3) by setting 

forth requirements that, if satisfied, 

would cause a transfer of section 361 

consideration by the distributing 

corporation to its creditor to be treated 

as a distribution by the distributing 

corporation to its shareholders pursuant 

to the plan of reorganization. First, the 

creditor of the distributing corporation 

must be a qualifying creditor, as 

determined under proposed § 1.361– 

5(b). Second, the distributing 

corporation debt that is satisfied with 

section 361 consideration must 

constitute eligible distributing 

corporation debt, as determined under 

proposed § 1.361–5(c)(2). Third, the 

amount of distributing corporation debt 

that can be eliminated under the safe 

harbors of section 361(b)(3) and (c)(3) 

cannot exceed a maximum amount, as 

determined under proposed § 1.361– 

5(d). Lastly, the transfer by the 

distributing corporation of section 361 

consideration in exchange for eligible 

distributing corporation debt must be 

carried out as part of a qualifying debt 

elimination transaction, as determined 

under proposed § 1.361–5(e). 

Notwithstanding the satisfaction of 

the foregoing requirements, proposed 

§ 1.361–5(f)(1)(i) would provide that the 

amount of section 361 consideration 

treated as transferred by the distributing 

corporation to a creditor of the 

distributing corporation in a qualifying 

debt elimination transaction is reduced 

by the amount of distributing 

corporation debt that is transitorily 

eliminated. See the discussion in part 

VII.C of this Explanation of Provisions 

regarding transitorily eliminated 

distributing corporation debt. 

b. Qualifying Creditors 

Proposed § 1.361–5(b)(1) would 

require each creditor to which the 

distributing corporation transfers 

section 361 consideration in a divisive 

reorganization to be a creditor that holds 

eligible distributing corporation debt (as 

described in proposed § 1.361–5(c)). 

Additionally, proposed § 1.361–5(b)(1) 

and (b)(2)(i) generally would prohibit 

the distributing corporation from 

satisfying eligible distributing 

corporation debt held by a person 

related (within the meaning of section 

267(b) or section 707(b)(1)) (see 

proposed § 1.361–1(b)(47)) to the 

distributing corporation (distributing 

corporation related person), the 

controlled corporation (controlled 

corporation related person), or a related 

person with regard to a distributing 

corporation related person or a 

controlled corporation related person 

(collectively, non-qualifying creditors). 

Creditors that hold eligible distributing 

corporation debt, and that are not 

otherwise disqualified as non-qualifying 

creditors under proposed § 1.361– 

5(b)(2), are referred to as ‘‘qualifying 

creditors.’’ 

Proposed § 1.361–5(b)(2)(ii) would 

provide an exception to the general 

related-creditor prohibition in proposed 

§ 1.361–5(b)(2)(i) for a creditor that is a 

distributing corporation related person 

or a related person with regard to a 

distributing corporation related person 

if three requirements are satisfied. First, 

as part of the plan of reorganization, 

proposed § 1.361–5(b)(2)(ii)(A) would 

provide that the section 361 

consideration must be transferred to a 

creditor that is neither a distributing 

corporation related person nor a related 

person with regard to a distributing 

corporation related person (unrelated 

ultimate creditor). Specifically, if the 

section 361 consideration is money or 

other property, proposed § 1.361– 

5(b)(2)(ii)(A)(1) would provide that it 

must be transferred to an unrelated 

ultimate creditor pursuant to the plan of 

reorganization no later than the end of 

the 12-month period beginning on the 

date the distributing corporation 

receives the money or other property (as 

appropriate). If the section 361 

consideration is qualified property (as 

defined in proposed § 1.361–1(b)(43)), 

proposed § 1.361–5(b)(2)(ii)(A)(2) would 

provide that it must be transferred to an 

unrelated ultimate creditor in an 

expeditious manner pursuant to the 

plan of reorganization under proposed 

§ 1.368–4(d)(3). Second, proposed 

§ 1.361–5(b)(2)(ii)(B)(1) would provide a 

general provision that all debt for which 

section 361 consideration is exchanged 

must be in existence as of the earliest 

applicable date. Proposed § 1.361– 

5(b)(2)(ii)(B)(2) would provide that 

distributing corporation debt held 

directly by a distributing corporation 

related person or a related person with 

regard to a distributing corporation 

related person must qualify as historical 

distributing corporation debt described 

in proposed § 1.361–5(c)(2)(i). Third, 

proposed § 1.361–5(b)(2)(ii)(C) would 

provide that each transaction (including 

each intermediate and unrelated 

ultimate creditor transfer), creditor 

(including the unrelated ultimate 


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creditor), and debt satisfied with section 

361 consideration must be identified 

and described in the plan of 

reorganization with regard to the 

divisive reorganization. 

For purposes of the requirements in 

proposed § 1.361–5(b)(2)(ii)(A), 

proposed § 1.361–5(b)(2)(ii)(A)(3) would 

permit one or more intermediate 

transfers of section 361 consideration 

between or among distributing 

corporation related persons or related 

persons with regard to distributing 

corporation related persons to satisfy 

debts (including the initial distributing 

corporation debt) if those intermediate 

transfers culminate in a transfer of 

section 361 consideration to an 

unrelated ultimate creditor. Under 

proposed § 1.361–5(b)(2)(iii), a person’s 

status as a distributing corporation 

related person or a controlled related 

person, or as a related person with 

regard to any 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. 

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. 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. 

(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. 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 


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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 longstanding, 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. 

(a) Aggregate Amount of Distributing 

Corporation Debt 

Under proposed § 1.361–5(c)(3)(ii), 

the aggregate amount of distributing 

corporation debt would include solely 

the amounts described in proposed 

§ 1.361–5(c)(3)(ii)(A) through (E), as 

applicable, taking into account any 

reduction required by proposed 

proposed § 1.361–5(c)(3)(iii) (that is, 

offsetting debts). Specifically, proposed 

§ 1.361–5(c)(3)(ii)(A) would provide that 

the aggregate amount of historical 

distributing corporation debt would 

equal the aggregate remaining principal 

amount, as of the earliest applicable 

date, of all historical distributing 

corporation debt other than historical 

distributing corporation debt that is 

eliminated as part of a qualifying direct 

issuance transaction. With regard to 

refinanced distributing corporation 

debt, proposed § 1.361–5(c)(3)(ii)(B) 

would provide that, if the distributing 

corporation relies on the refinancing 

exception for historical distributing 

corporatrion debt under proposed 

§ 1.361–5(c)(2)(ii), 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). 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-quarterlyaverage 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. 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. 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 


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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. 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. 

Accordingly, proposed § 1.361– 

5(e)(3)(v)(C) would prohibit the 

intermediary from entering into a 

variable pricing agreement or similar 

arrangement with the distributing 

corporation, the controlled corporation, 

or any distributing corporation related 

person or controlled corporation related 

person (for example, agreements 

between the intermediary and the 

distributing corporation requiring ‘‘trueup’’ payments would be prohibited). 

Finally, proposed § 1.361–5(e)(3)(vi) 

would require the intermediary to hold 

the historical distributing corporation 

debt for a period of not less than 30 days 

ending on the control distribution date. 

Based on feedback from stakeholders, 

the Treasury Department and the IRS 

are of the view that providing a brightline rule would help achieve the 

transaction 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. 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 nonqualification as an exchange. The 

strength of evidence provided by the 

factors is determined based on an 

analysis of all relevant facts and 

circumstances. 

(a) Prescribed Factors for Facts-andCircumstances Test 

First, proposed § 1.361– 

5(e)(4)(ii)(B)(1) would provide that an 

exchange of section 361 consideration 

by the distributing corporation with a 

creditor occurs pursuant to an 

arrangement that comprises part of a 

prearranged, integrated plan is 

substantial evidence of nonqualification, whereas, an exchange that 

does not occur pursuant to an 

arrangement that comprises part of a 

prearranged, integrated plan is evidence 

of qualification. 

Second, proposed § 1.361– 

5(e)(4)(ii)(B)(2)(i) would provide that, if 

any one of the following requirements 

are not met, the failure of any one 

requirement is evidence of nonqualification: (1) an exchange of section 

361 consideration for refinanced 

historical distributing corporation debt 

between the distributing corporation 

and the creditor must be effectuated 

based on arm’s-length terms and 

conditions; (2) neither the distributing 

corporation, controlled corporation, nor 

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 of the creditor 

gained 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 


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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 nonqualification. 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 nonqualification. 

(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 satisfaction of the refinanced 

historical distributing corporation debt. 

For purposes of the proceeding 

requirement, proposed § 1.361– 

5(e)(4)(iv) would provide that the 

creditor is not treated as bearing the risk 

of loss with respect to the refinanced 

historical distributing corporation debt 

if the creditor enters into a variable 

pricing or similar arrangement with the 

distributing corporation (or a controlled 

corporation, distributing corporation 

related person, or controlled corporation 

related person) with regard to any 

section 361 consideration. 

V. Federal Income Tax Treatment and 

Consequences of Post-Distribution 

Payments 

A. Notice 2024–38 

As stated in section 2.02(6) of Notice 

2024–38, the Treasury Department and 

the IRS are considering the application 

of the Code to post-distribution 

payments. Proposed § 1.361–1(b)(42) 

would define a ‘‘post-distribution 

payment’’ as a transfer of money or 

other property by the controlled 

corporation to the distributing 

corporation (or vice versa) after the 

control distribution date pursuant to the 

plan of reorganization. 

In Notice 2024–38, the Treasury 

Department and the IRS expressed the 

view that a post-distribution payment is 

treated as section 361 consideration 

only if the taxpayer establishes 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 postdistribution 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. 

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 


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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. In General 

If proposed § 1.361–2(a) would apply 

to an exchange between a target 

corporation and an acquiring 

corporation but for the fact that the 

target corporation receives money or 

other property in addition to stock and 

securities of the acquiring corporation 

(or of a corporation controlling the 

acquiring corporation), then proposed 

§ 1.361–3 would govern the exchange. 

See §§ 1.361–2(b) and 1.361–3(a)(1). 

In general, proposed § 1.361–3(b)(1) 

and (2) would provide that, in an 

acquisitive reorganization, the target 

corporation does not recognize gain on 

the receipt of money or other property 

provided that, pursuant to the plan of 

reorganization, the target corporation 

distributes the money or other property 

to its shareholders or transfers that 

property to a creditor in satisfaction of 

target corporation debt. 

Additional requirements would apply 

in the case of a divisive reorganization. 

In that case, proposed § 1.361–3(c)(1) 

would provide that the distributing 

corporation does not recognize gain on 

the exchange if, pursuant to the plan of 

reorganization, (i) the distributing 

corporation deposits the money 

received in the exchange in a segregated 

account, and (ii) the distributing 

corporation distributes the money or 

other property received in the exchange 

to the distributing corporation’s 

shareholders no later than the end of the 

12-month period beginning on the date 

of the exchange. Under proposed 

§ 1.361–3(c)(2)(i), similar rules would 

apply with respect to transfers of the 

money or other property received in the 

exchange to creditors of the distributing 

corporation in satisfaction of 

distributing corporation debt. 

However, under proposed § 1.361– 

3(c)(2)(ii), the aggregate amount of 

money and the fair market value of 

other property transferred to creditors 

that is treated as distributed to 

shareholders would be limited to the 

amount by which the aggregate adjusted 

basis of the assets transferred by the 

distributing corporation to the 

controlled corporation exceeds the 

aggregate amount of distributing 

corporation liabilities assumed by the 

controlled corporation. Moreover, 

transfers to creditors of the distributing 

corporation would be subject to the 

requirements set forth in proposed 

§ 1.361–5. See the prior discussion in 

part IV.C.3 of this Explanation of 

Provisions. Consistent with the Treasury 

Department’s and the IRS’s efforts to 

encourage taxpayers to undertake bona 

fide corporate reorganizations by 

providing sufficient transactional 

flexibility, the proposed regulations 

governing transfers of section 361 

consideration to creditors would be 

based in part on whether such transfers 

occur pursuant to a target corporation’s 

(including a distributing corporation’s) 

plan of reorganization. See the prior 

discussion in part III.C of this 

Explanation of Provisions. 

Under proposed § 1.361–3(d), the 

failure to distribute the money or other 

property received in the exchange in the 

manner set forth in proposed § 1.361– 

3(b) or (c) would result in the 

recognition of gain by the target 

corporation. The amount of gain 

recognized would not exceed the sum of 

(i) the amount of money received but 

not distributed, and (ii) the fair market 

value of the other property received but 

not distributed. Consistent with section 

361(b)(2), proposed § 1.361–3(e) would 

provide that the target corporation does 

not recognize a loss if it receives money 

or other property in addition to stock or 

securities of the acquiring corporation. 

b. Treatment of Post-Distribution 

Payments 

i. In General 

Proposed § 1.361–3(c)(3) would 

provide that, in a divisive 

reorganization in which the distributing 

corporation receives a post-distribution 

payment, the distributing corporation 

does not recognize any gain under 

proposed § 1.361–3(c)(1) or (2) only if 

three conditions are satisfied. First, the 

post-distribution payment constitutes 

section 361 consideration for Federal 

income tax purposes. Second, the 

distributing corporation places the postdistribution payment in a segregated 

account pursuant to the plan of 

reorganization. Third, pursuant to the 

plan of reorganization, the distributing 

corporation distributes the postdistribution payment to its shareholders 

or to its creditors (in satisfaction of 

distributing corporation debt in a 

transfer meeting the requirements set 

forth in proposed § 1.361–5) by the later 

of (i) 90 days after the date on which the 

distributing corporation receives the 

post-distribution payment, or (ii) the 

end of the 12-month period beginning 

on the date of the exchange described in 

proposed § 1.361–3(a)(1). 

For purposes of proposed § 1.361– 

3(c)(3), a post-distribution payment 

would constitute section 361 

consideration (and not, for example, a 

separate payment for goods or services) 

for Federal income tax purposes only if 

the three requirements in proposed 

§ 1.361–3(c)(3)(i) are satisfied. First, the 

payment must properly be characterized 

for Federal income tax purposes as 

consideration that the distributing 

corporation receives in the exchange 

described in proposed § 1.361–3(a)(1). 

See generally Arrowsmith, 344 U.S. 6. 

Second, the fair market value of the 

distributing corporation’s right to 

receive the post-distribution payment 

must not be reasonably ascertainable as 

of the exchange date. See generally 

Burnet, 283 U.S. 404. Third, the 

distributing corporation must properly 

account for the payment upon receipt, 

in accordance with the plan of 

reorganization. 

Similar rules would apply to the 

receipt of a post-distribution payment 

by a controlled corporation. In this 

respect, proposed § 1.361–3(c)(4) would 

provide that, if a controlled corporation 

receives a post-distribution payment, 

the aggregate adjusted basis of the assets 

transferred by the distributing 

corporation to the controlled 

corporation is increased for purposes of 

proposed § 1.361–3(c)(2)(ii) only if three 

requirements similar to those described 

in the prior paragraph are satisfied. 


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ii. Treatment of Payments Under 

Indemnification Agreements 

These proposed regulations would not 

treat payments made in respect of 

indemnification agreements as postdistribution payments in certain 

circumstances. Instead, proposed 

§ 1.357–2(e)(2)(iii)(A) would treat (i) the 

underlying liability as having been 

assumed by the controlled corporation, 

and (ii) the receipt of the 

indemnification payment as not within 

the legal or practical dominion or 

control of the distributing corporation 

for purposes of proposed § 1.357– 

2(e)(1). See the discussion in part 

VIII.B.3.b of this Explanation of 

Provisions. 

3. Treatment of Distributions 

a. Qualified Property 

Consistent with section 361(c)(1), 

proposed § 1.361–4(a)(1) generally 

would provide that a target corporation 

(including a distributing corporation) 

recognizes no gain or loss on a 

distribution of qualified property to its 

shareholders pursuant to a plan of 

reorganization. Proposed § 1.361– 

4(a)(2)(i) would provide that the target 

corporation in an acquisitive 

reorganization is treated as distributing 

qualified property to its shareholders for 

purposes of proposed § 1.361–4(a)(1) if 

the target corporation transfers qualified 

property 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. Notice 2024–38 

As stated in section 2.02(7) of Notice 

2024–38, the Treasury Department and 

the IRS are considering the impact of 

the application of general Federal 

income tax principles (including the 

substance-over-form doctrine and other 

relevant theories) to acquisitions of a 

controlled corporation following the 

control distribution date that result in a 

modification of the controlled 

corporation’s securities. For example, 

the Treasury Department and the IRS 

are considering whether general Federal 

income tax principles could preclude 

qualification under section 361(c)(3) if 

(i) the controlled corporation issued 

securities that were treated by the 

distributing corporation as section 361 

consideration that could be used to 

satisfy its creditors, and (ii) the 

controlled corporation subsequently 

merged into an acquiring corporation in 

a transaction resulting in the 

modification of those securities. In 

response to feedback received following 

the publication of Rev. Proc. 2018–53, 

Notice 2024–38 stated the view of the 

Treasury Department and the IRS that 

Rev. Rul. 98–27, 1998–1 C.B. 1159, is 

not relevant for determining whether 

any such transaction or series of 

transactions should cause the divisive 

reorganization to be recast, because that 

revenue ruling addresses solely whether 

the controlled corporation was a 

‘‘controlled corporation’’ under section 

355(a) immediately before the 

distribution. See also generally Rev. Rul. 

98–44, 1998–2 C.B. 315. 

B. Stakeholder Input 

Stakeholders have suggested that the 

focus on debt instrument modifications 

in Notice 2024–38 is directed toward 

transactions involving a postdistribution merger of a controlled 

corporation into a third-party 

corporation and whether the purported 

controlled corporation debt should be 

treated as qualified property for 

purposes of section 361(c)(2)(B). 

Stakeholders have requested 

clarification that controlled corporation 

debt will not be treated as non-qualified 

property to the extent that (i) 

modifications of such debt are not 

‘‘significant modifications’’ within the 

meaning of § 1.1001–3 (disregarded 

modifications), or (ii) the modifications 

are a ‘‘significant modification’’ under 

§ 1.1001–3 as a result of which the 

holder of such debt is treated as 

receiving a new debt instrument in a 

nonrecognition transaction 

(nonrecognition modifications). 

Stakeholders also have recommended 

that a deemed or unplanned transaction 

occurring after the distribution should 

not cause the controlled corporation’s 

debt to be treated as something other 

than controlled corporation debt for 

purposes of section 361(c). 

Additionally, stakeholders have asserted 

that (i) step transaction principles 

should not be applied to the extent the 

result of the transaction is consistent 

with the policies of section 361, and (ii) 

a recast of the transaction would be at 

odds with the provisions of § 1.1001–3 

applicable to nonrecognition 

modifications. 

Stakeholders have recommended that, 

if guidance is issued on this topic, safe 

harbors should be provided with respect 

to both disregarded modifications and 

nonrecognition modifications to allow 

controlled corporation debt to be treated 

as qualified property under section 

361(c). 

C. Proposed Regulations 

The Treasury Department and the IRS 

anticipate providing proposed guidance 

on this topic as part of a guidance 

package that includes the finalization of 

these proposed regulations. The 

Treasury Department and the IRS 

believe that additional study and 

stakeholder feedback would be 

appropriate, rather than the publication 

of proposed rules at this time. It is the 

position of the Treasury Department and 

the IRS that the series of transactions 

described in section 2.02(7) of Notice 

2024–38 merit additional scrutiny but, 

until the completion of this study, 

should be addressed by the IRS on a 

case-by-case basis. With regard to 

additional stakeholder feedback on this 

topic, the Treasury Department and the 

IRS particularly would welcome 

suggestions on appropriate bright-line 


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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-overform 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. 

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 deleveraging 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. 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 postdistribution 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. 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 releveraging 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 releveraging). 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 


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distributing corporation related person 

expects or is committed to, directly or 

indirectly, before that date. For this 

purpose, relatedness to the distributing 

corporation would be determined by 

examining all relevant relationships 

immediately after the earliest applicable 

date. 

The proposed regulations would set 

forth the earliest applicable date as the 

relevant date for examining the issuance 

of distributing debt that potentially 

could give rise to a transitory 

elimination of eligible distributing 

corporation debt. Principally, the 

Treasury Department and the IRS have 

selected the earliest applicable date as 

the relevant date for purposes of these 

proposed rules because that date also 

would serve generally under these 

proposed regulations as the bright line 

for determining whether distributing 

corporation debt qualifies as historical 

distributing corporation debt. Therefore, 

a proposed rule that focused on 

distributing corporation borrowings 

after that date, and which the 

distributing corporation expected or was 

committed to before that date, would 

connect logically to the proposed 

earliest applicable date for determining 

historical distributing corporation debt. 

Connecting such proposed rules to a 

single relevant date (that is, the earliest 

applicable date) is intended to help 

achieve the increased certainty objective 

of 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 longstanding 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. 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. First, 

proposed § 1.361–5(f)(2)(ii)(A) would 

require that a borrowing after the 

earliest applicable date must result from 

an event unrelated to the divisive 

reorganization and not in the ordinary 

course of business of the distributing 

corporation. Second, proposed § 1.361– 

5(f)(2)(ii)(B) would require that the 

borrowing must result from changed 

circumstances not expected prior to the 

control distribution date. The Treasury 

Department and the IRS are proposing 

this exception to provide increased 

certainty and facilitate bona fide 

transactions by reinforcing that a 

borrowing not in the ordinary course of 

business also should be excepted from 

application of the general rule, provided 

that the distributing corporation 

establishes that such borrowing results 

from an event that could not have been 

related to the divisive reorganization. 

In formulating the foregoing proposed 

rules, the Treasury Department and the 

IRS have relied on the same standard 

employed by the section 355(e) 

regulations for determining the 

existence of a plan. See § 1.355– 

7(b)(4)(ii) (‘‘In the case of an acquisition 

after a distribution, there was an 

identifiable, unexpected change in 

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 


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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). 

The Treasury Department and the IRS 

are considering additional rules 

regarding the amount of a liability a 

transferee corporation is treated as 

assuming in connection with a transfer 

of property and certain tax 

consequences that result from such an 

assumption. The Treasury Department 

and the IRS request comments regarding 

these issues and rules. See REG– 

100818–01, Liabilities Assumed in 

Certain Transactions, 68 FR 23931 (May 

6, 2003). 

a. Recourse Liabilities 

Proposed § 1.357–2(d)(1)(i) would 

provide that a recourse liability (or 

portion thereof) of a transferor is treated 

as having been assumed by the 

transferee corporation if, as determined 

based on all facts and circumstances, 

the transferee corporation has agreed to, 

and is expected to, satisfy the liability 

(or portion thereof), whether or not the 

transferor has been relieved of the 

liability (or portion thereof). 

b. Nonrecourse Liabilities 

Proposed § 1.357–2(d)(1)(ii)(A) 

generally would provide that a 

nonrecourse liability of a transferor is 

treated as having been assumed by the 

transferee corporation to which any 

asset subject to that liability is 

transferred. However, proposed § 1.357– 

2(d)(1)(ii)(B) would provide that the 

amount of any nonrecourse liability of 

a transferor treated as assumed is 

reduced by the lesser of (i) the amount 

of that liability that an owner of other 

assets not transferred to the transferee 

corporation and also subject to that 

liability has agreed with the transferee 

corporation to, and is expected to, 

satisfy, or (ii) the fair market value of 

such other assets (determined without 

regard to section 7701(g) of the Code). 

3. Legal or Practical Dominion or 

Control Over Payment of Assumed 

Liability 

a. General Rule 

Proposed § 1.357–2(e)(1) would apply 

if a transferee corporation (or, in the 

case of a divisive reorganization, a 

member of the CSAG) makes a payment 

to satisfy an assumed liability, and if the 

transferor (or, in the case of a divisive 

reorganization, a member of the DSAG) 

has legal or practical dominion or 

control over any part of the payment. If 

proposed § 1.357–2(e)(1) applies, then 

(i) that part of the payment is treated as 

money or other property received by the 

transferor, (ii) the rules in section 351(b) 

or 361(b) (as applicable) apply to 

determine the Federal income tax 

consequences of the receipt of that 

money or other property by the 

transferor, and (iii) the rules in 

proposed §§ 1.357–2 through 1.357–4 

(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 factsand-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. 

Under proposed § 1.357– 

2(e)(2)(iii)(B), a payment not made 

pursuant to an indemnification 

agreement would not be treated as 

within the transferor’s legal or practical 

dominion or control if (i) the payment 

is dedicated to the satisfaction of a 

liability of the transferor that is 

identified in an agreement or the plan 

of reorganization, (ii) the payment is 

made to an independent trustee or 

escrow agent that is not affiliated with 

the transferor, (iii) the payment is not 

made to any account of the transferor 

(or, in the case of a divisive 

reorganization, a member of the DSAG) 

or any person through which the 

transferor (or, in the case of a divisive 

reorganization, a member of the DSAG) 

could direct the payment, (iv) the 

transferor and transferee corporation 

treat any income, gain, or loss on the 

payment proceeds as income, gain, or 

loss of the transferee corporation, and 

(v) any excess of the payment account 

(and any income or gain thereon) over 


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the amount paid in satisfaction of the 

liability reverts to the transferee 

corporation. 

C. Tax Avoidance Purpose Under 

Section 357(b) 

1. Principal Purpose Standard 

These proposed regulations would 

revise and redesignate current § 1.357– 

1(c) (concerning tax avoidance purpose) 

as proposed § 1.357–3(a) through (c). 

Consistent with section 357(b), 

proposed § 1.357–3(a)(1) would provide 

that § 1.357–2(a) does not apply to any 

exchange involving the assumption of a 

liability if the principal purpose of the 

transferor with respect to the 

assumption is either (i) to avoid Federal 

income tax on the exchange, or (ii) not 

a bona fide business purpose. In 

accordance with caselaw and the longstanding view of the Treasury 

Department and the IRS, proposed 

§ 1.357–3(a)(2) also would clarify that a 

principal purpose described in 

proposed § 1.357–3(a)(1) is presumed to 

exist if the transferee corporation 

assumes a liability of the transferor that 

was not incurred in the ordinary course 

of a business of the transferor. See Bryan 

v. Comm’r, 281 F.2d 238 (4th Cir. 1960); 

Rev. Proc. 96–30, 1996–1 C.B. 696, 

superseded by Rev. Proc. 2024–24 

(continuing to require a similar 

representation); Rev. Proc. 83–59, 1983– 

2 C.B. 575. 

Consistent with section 357(b)(1) and 

current § 1.357–1(c), proposed § 1.357– 

3(b) would provide that, for purposes of 

determining the amount of gain 

recognized upon an exchange described 

in proposed § 1.357–3(a)(1), the total 

amount of liabilities assumed or 

acquired pursuant to the exchange (and 

not merely a particular liability with 

respect to which the tax avoidance or 

non-business purpose existed) is treated 

as money or other property received by 

the transferor upon the exchange. 

Consistent with section 357(b)(2) and 

current § 1.357–1(c), proposed § 1.357– 

3(c) would provide that, if the 

Commissioner determines that the 

transferor’s principal purpose with 

respect to the assumption of a liability 

was to avoid Federal income tax on the 

exchange or was not a bona fide 

business purpose, the burden is on the 

transferor to prove by a clear 

preponderance of the evidence that the 

liability assumption should not be 

treated as the receipt of money or other 

property. 

2. Eligible Distributing Corporation 

Liabilities 

With respect to divisive 

reorganizations, the Treasury 

Department and the IRS view the 

allocation of distributing corporation 

liabilities as a fundamental aspect of 

separating one or more businesses. 

These proposed regulations are 

intended to facilitate the assumption of 

a distributing corporation’s liabilities in 

bona-fide divisive reorganizations in a 

manner that balances the objectives of 

complying with section 357 while 

providing certainty to taxpayers and the 

IRS. 

Accordingly, as a threshold matter, 

proposed § 1.357–3(d)(2) generally 

would permit solely eligible distributing 

corporation liabilities to be assumed. In 

other words, these proposed 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. Exceptions to Requirement That 

Eligible Distributing Corporation Debt 

be Historical 

To facilitate the bona-fide allocation 

of distributing corporation debt in 

divisive reorganizations and to provide 

certainty to taxpayers and the IRS, 

proposed § 1.357–3(d)(4)(ii) would 

provide several exceptions to the 

requirement that the distributing 

corporation debt must qualify as 

historical distributing corporation debt. 

First, proposed § 1.357–3(d)(4)(ii)(A) 

would provide that any trade payables 

(as defined in proposed § 1.357– 

1(b)(19)) of the distributing corporation 

that meet the requirements set forth in 

proposed § 1.357–3(d)(3) (that is, the 

general requirements for distributing 

corporation liabilities eligible to be 

assumed) are not required to qualify as 

historical distributing corporation debt. 

Second, proposed § 1.357– 

3(d)(4)(ii)(B) would provide that, if a 

controlled corporation assumes 

refinanced distributing corporation debt 

(as defined in proposed § 1.357– 

1(b)(17)), that refinanced distributing 

corporation debt is treated as historical 

distributing corporation debt if all the 

following requirements are met: (i) the 

distributing corporation has a direct 

business purpose for the controlled 

corporation’s assumption of the 

refinanced 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 


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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. 

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. 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 shortterm 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 shortterm 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 

reorganization in a filing with the IRS 

under § 1.368–3. 

In addition, the following liabilities 

generally would be excluded under 

proposed § 1.357–4(a)(3)(i) for purposes 

of applying the general rule in proposed 

§ 1.357–4(a)(1): (i) a liability the 

payment of which would give rise to a 

deduction; (ii) a liability the payment of 

which would give rise to the creation of, 

or increase in, the basis of any property; 

and (iii) a liability the payment of which 

would be described in section 736(a) of 

the Code. However, such liabilities 

would not be excluded under proposed 

§ 1.357–4(a)(3)(i) to the extent (i) the 

incurrence of the liability resulted in a 

deduction, (ii) the incurrence of the 

liability resulted in the creation of, or an 

increase in, the basis of any property, or 

(iii) the liability is not incurred in the 

ordinary course of business or 

associated with any assets transferred. 

IX. Solvency and Continued Viability of 

Distributing Corporation and 

Controlled Corporation 

A. Notice 2024–38 

Section 2.02(3) of Notice 2024–38 

stated the view of the Treasury 

Department and the IRS that 

qualification under section 355 is 

limited to transactions after which the 

distributing corporation and the 

controlled 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). 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 


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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). 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 

of a court) in a title 11 or similar case, 

only if the taxpayer was a debtor in a 

case before such court; or (5) the date a 

ruling request is submitted to the IRS. 

Proposed §§ 1.355–2(e), 1.355–4, and 

1.355–10 would be applicable to section 

355 transactions occurring after the 

general applicability date. Proposed 

§§ 1.357–1 through 1.357–4 would be 

applicable to assumptions of liabilities 

in transactions intended to qualify 

under section 351 or section 361 

occurring after the general applicability 

date. Proposed §§ 1.361–1 through 

1.361–5 would be applicable to 

exchanges under section 361 occurring 

after the general applicability date. 

Proposed §§ 1.368–1(c), 1.368–2(f), 

1.368–3(a)(5), and 1.368–4 would be 

applicable to transactions occurring 

after the general applicability date. 

Effect on Other Documents 

The following revenue rulings are 

proposed to be obsoleted for 

transactions occurring after the date of 

publication of final regulations in the 

Federal Register: Rev. Rul. 2007–8, 

2007–1 C.B. 469; Rev. Rul. 95–74, 1995– 

2 C.B. 36; Rev. Rul. 79–258, 1979–2 C.B. 

143; Rev. Rul. 75–469, 1975–2 C.B. 126; 

Rev. Rul. 75–321, 1975–2 C.B. 123; Rev. 

Rul. 57–518, 1957–2 C.B. 253. 

Special Analyses 

I. Regulatory Planning and Review 

Pursuant to the Memorandum of 

Agreement, Review of Treasury 

Regulations under Executive Order 

12866 (June 9, 2023), tax regulatory 

actions issued by the IRS are not subject 

to the requirements of section 6 of 

Executive Order 12866, as amended. 

Therefore, a regulatory impact 

assessment is not required. 

II. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(44 U.S.C. 3501–3520) (PRA) generally 

requires that a Federal agency obtain the 

approval of the Office of Management 

and Budget (OMB) before collecting 

information from the public, whether 

such collection of information is 

mandatory, voluntary, or required to 

obtain or retain a benefit. An agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless the 

collection of information displays a 

valid control number. 

The general recordkeeping 

requirements mentioned within these 

proposed regulations are considered 

general tax records under § 1.6001–1(e). 

In connection with a reorganization, 

these records should include 

information regarding the amount, basis, 

and fair market value of all transferred 

property, and relevant facts regarding 

any liabilities assumed or extinguished 

as part of such reorganization. For PRA 

purposes, these general tax records are 

already approved under OMB control 

number 1545–0123. 

The reporting requirements set forth 

in proposed §§ 1.355–5(a)(2) and 1.368– 

3(a)(5) require parties to a section 355(c) 

distribution or a corporate 

reorganization to attach a statement to 

their return that includes a copy of the 

plan of distribution or the plan of 

reorganization satisfying the 

requirements set forth in proposed 

§§ 1.355–4 or 1.368–4, respectively. The 

burden for these requirements will be 

approved by OMB, in accordance with 

5 CFR 1320.10, under OMB control 

number 1545–0123 for business entities. 

III. Regulatory Flexibility Act 

Pursuant to the Regulatory Flexibility 

Act (5 U.S.C. chapter 6), it is hereby 

certified that these proposed regulations 

would not have a significant economic 

impact on a substantial number of small 

entities. This certification is based on 

the fact that the situations to which 

these proposed regulations would apply 

are primarily section 355 transactions 

and acquisitive reorganizations. Such 

transactions primarily are engaged in by 

publicly traded corporations, which 

tend to be larger businesses. 

Specifically, the Research, Applied 

Analytics, and Statistics Division of the 

IRS estimates that, based on the most 

recent complete data available, fewer 

than one percent of small businesses 

with gross receipts under $25 million 

would be subject to the requirements of 

these regulations annually. To the 

extent that transactions qualifying under 

section 351 or 368(a)(1) also are 

included, the percentage of small 

businesses impacted remains fewer than 

one percent of small businesses with 

gross receipts under $25 million. In 

addition, the reporting burden in these 

proposed regulations is an incremental, 

additional obligation on small entities to 

a currently existing collection of 

information. Moreover, the economic 

impact of these proposed regulations 

will not be significant. 

Therefore, these proposed regulations 

would not create significant additional 

obligations for, or impose any 

meaningful economic impact on, a 

substantial number of small entities. 

Accordingly, the Secretary certifies that 

the proposed regulations would not 

have a significant economic impact on 

a substantial number of small entities 

and a regulatory flexibility analysis 

under the Regulatory Flexibility Act is 

not required. 

IV. Section 7805(f) 

Pursuant to section 7805(f) of the 

Code, the proposed regulations have 

been submitted to the Chief Counsel for 

the Office of Advocacy of the Small 


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Business Administration for comment 

on its impact on small business. 

V. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

requires that agencies assess anticipated 

costs and benefits and take certain other 

actions before issuing a final rule that 

includes any Federal mandate that may 

result in expenditures in any one year 

by a State, local, or Tribal government, 

in the aggregate, or by the private sector, 

of $100 million in 1995 dollars, updated 

annually for inflation. 

These proposed regulations do not 

include any Federal mandate that may 

result in expenditures by State, local, or 

Tribal governments, or by the private 

sector, in excess of that threshold. 

VI. Executive Order 13132: Federalism 

Executive Order 13132 (Federalism) 

prohibits an agency from publishing any 

rule that has federalism implications if 

the rule either imposes substantial, 

direct compliance costs on State and 

local governments, and is not required 

by statute, or preempts State law, unless 

the agency meets the consultation and 

funding requirements of section 6 of the 

Executive order. This proposed rule 

does not have federalism implications 

and does not impose substantial direct 

compliance costs on State and local 

governments or preempt State law 

within the meaning of the Executive 

order. 

Comments and Public Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

comments that are submitted timely to 

the IRS as prescribed in the preamble 

under the ADDRESSES heading. The 

Treasury Department and the IRS 

request comments on all aspects of the 

proposed regulations. All commenters 

are strongly encouraged to submit 

comments electronically. The Treasury 

Department and the IRS will publish for 

public availability any comment 

submitted electronically or on paper to 

its public docket on https://

www.regulations.gov. 

A public hearing will be scheduled if 

requested in writing by any person who 

timely submits electronic or written 

comments. Requests for a public hearing 

also are encouraged to be made 

electronically. If a public hearing is 

scheduled, notice of the date and time 

for the public hearing will be published 

in the Federal Register. 

Statement of Availability of IRS 

Documents 

Guidance cited in this preamble is 

published in the Internal Revenue 

Bulletin and is available from the 

Superintendent of Documents, U.S. 

Government Publishing Office, 

Washington, DC 20402, or by visiting 

the IRS website at https://www.irs.gov. 

Drafting Information 

The principal author of these 

proposed regulations is Justin R. Du 

Mouchel of the Office of Associate Chief 

Counsel (Corporate). However, other 

personnel from the Treasury 

Department and the IRS participated in 

their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, the Treasury Department 

and the IRS propose to amend 26 CFR 

part 1 as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding entries 

in numerical order for §§ 1.355–2(e), 

1.355–4, 1.355–5, 1.355–10, 1.361–1 

through 1.361–5, and 1.368–1 through 

1.368–4, and removing the entry for 

§ 1.355–2T(g) and (i) to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

* * * * * 

Section 1.355–2(e) also issued under 26 

U.S.C. 337(d). 

* * * * * 

Section 1.355–4 also issued under 26 

U.S.C. 337(d). 

Section 1.355–5 also issued under 26 

U.S.C. 337(d). 

* * * * * 

Section 1.355–10 also issued under 26 

U.S.C. 337(d). 

* * * * * 

Section 1.361–1 also issued under 26 

U.S.C. 337(d). 

Section 1.361–2 also issued under 26 

U.S.C. 337(d). 

Section 1.361–3 also issued under 26 

U.S.C. 337(d) and 361(b)(3). 

Section 1.361–4 also issued under 26 

U.S.C. 337(d) and 361(b)(3). 

Section 1.361–5 also issued under 26 

U.S.C. 337(d) and 361(b)(3). 

* * * * * 

Section 1.368–1 also issued under 26 

U.S.C. 337(d). 

Section 1.368–2 also issued under 26 

U.S.C. 337(d). 

Section 1.368–3 also issued under 26 

U.S.C. 337(d). 

Section 1.368–4 also issued under 26 

U.S.C. 337(d). 

* * * * * 

■ Par. 2. Section 1.355–1 is revised and 

republished to read as follows: 

§ 1.355–1 Distribution of stock and 

securities of a controlled corporation. 

(a) Application of section 355—(1) 

Overview—(i) In general. Section 355 of 

the Code provides for the separation, 

without recognition of gain or loss to (or 

the inclusion in income of) the 

shareholders and security holders, of 

one or more existing businesses 

formerly operated, directly or indirectly, 

by a single distributing corporation. 

Section 355 applies only to the 

separation of existing businesses that 

have been in active operation for at least 

five years (or to the division of a 

business that has been in active 

operation for at least five years into 

separate businesses), and that, in 

general, have been owned, directly or 

indirectly, for at least five years by the 

distributing corporation. A separation is 

achieved through the distribution by the 

distributing corporation of stock, or of 

stock and securities, of one or more 

controlled corporations (which may be 

pre-existing or newly created 

subsidiaries) to the distributing 

corporation’s shareholders with respect 

to its stock or to its security holders in 

exchange for its securities. Section 355 

contemplates the continued operation of 

the business or businesses existing prior 

to the separation. 

(ii) Scope. Paragraph (a)(2) of this 

section provides general definitions that 

apply for purposes of the section 355 

regulations. Paragraph (b) of this section 

describes types of distributions that may 

qualify under section 355, including pro 

rata distributions and non pro rata 

distributions. Paragraphs (c) and (d) of 

this section provide rules regarding 

stock rights and nonqualified preferred 

stock, respectively. Paragraph (e) of this 

section provides applicability dates for 

certain sections of the section 355 

regulations. 

(2) Definitions. Except as otherwise 

provided in the section 355 regulations, 

the following definitions apply for 

purposes of the section 355 regulations: 

(i) Code. The term Code means the 

Internal Revenue Code of 1986, as 

amended. 

(ii) Commissioner. The term 

Commissioner means the Commissioner 

of Internal Revenue. 

(iii) Control distribution. The term 

control distribution means a distribution 

of controlled corporation stock, or of 

controlled corporation stock and 

securities, that results in the 

distribution by the distributing 


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corporation of an amount of controlled 

corporation stock constituting control 

(within the meaning of section 368(c) of 

the Code). 

(iv) Control distribution date. The 

term control distribution date means the 

date of the control distribution. 

(v) Controlled corporation. The term 

controlled corporation means the 

controlled corporation described in 

section 355(a)(1)(A). 

(vi) Distributing corporation. The term 

distributing corporation means the 

distributing corporation described in 

section 355(a)(1)(A). 

(vii) Distribution. Unless the context 

indicates otherwise, the term 

distribution means— 

(A) With regard to a section 355(c) 

distribution, a single distribution or 

series of distributions of controlled 

corporation stock and securities (if any) 

carried out pursuant to a plan of 

distribution to qualify the distribution 

or series of distributions under section 

355; or 

(B) With regard to a divisive 

reorganization, a single distribution or 

series of distributions of controlled 

corporation stock and securities (if any) 

carried out pursuant to a plan of 

reorganization to qualify the 

distribution or series of distributions 

under section 355. 

(viii) Divisive reorganization. The 

term divisive reorganization means a 

series of transactions carried out 

pursuant to a plan of reorganization that 

qualify as a reorganization described in 

sections 355 and 368(a)(1)(D) or (G). 

(ix) Final distribution. The term final 

distribution means, with respect to a 

series of distributions, the last 

distribution that is made by the 

distributing corporation pursuant to the 

plan of distribution or plan of 

reorganization (as appropriate). 

(x) First distribution. The term first 

distribution means, with respect to a 

series of distributions, the earliest 

distribution that is made by the 

distributing corporation pursuant to the 

plan of distribution or plan of 

reorganization (as appropriate). 

(xi) First distribution date. The term 

first distribution date means the date of 

the first distribution. 

(xii) IRS. The term IRS means the 

Internal Revenue Service. 

(xiii) Plan of distribution. The term 

plan of distribution has the meaning 

provided in § 1.355–4. 

(xiv) Plan of reorganization. The term 

plan of reorganization has the meaning 

provided in § 1.368–4. 

(xv) SEC. The term SEC means the 

U.S. Securities and Exchange 

Commission. 

(xvi) Section 355 regulations. The 

term section 355 regulations means this 

section and §§ 1.355–2 through 1.355– 

10. 

(xvii) Section 355 transaction. The 

term section 355 transaction means 

either a section 355(c) distribution or a 

divisive reorganization. 

(xviii) Section 355(c) distribution. The 

term section 355(c) distribution means a 

distribution that qualifies under section 

355(a) (or so much of section 356 of the 

Code as relates to section 355) and 

section 355(c). 

(b) Non pro rata distributions—(1) In 

general. Section 355 provides for 

nonrecognition of gain or loss with 

respect to a distribution whether or 

not— 

(i) The distribution is pro rata with 

respect to all shareholders of the 

distributing corporation; 

(ii) The distribution is pursuant to a 

plan of reorganization within the 

meaning of section 368(a)(1)(D); or 

(iii) The shareholders surrender stock 

in the distributing corporation. 

(2) Controlled corporation stock. 

Under section 355, the stock of a 

controlled corporation may consist of 

common stock or preferred stock. (See, 

however, section 306 of the Code and 

the regulations under section 306.) 

(3) Section 355 not applicable to mere 

exchanges of stock or securities. Section 

355 does not apply if the substance of 

a transaction is merely an exchange 

between shareholders or security 

holders of stock or securities in one 

corporation for stock or securities in 

another corporation. For example, if two 

individuals, A and B, each own directly 

50 percent of the stock of corporation X 

and 50 percent of the stock of 

corporation Y, section 355 would not 

apply to a transaction in which A and 

B transfer all of their stock of X and Y 

to a new corporation Z for all of the 

stock of Z, and Z then distributes the 

stock of X to A and the stock of Y to B. 

(c) Stock rights. Except as provided in 

§ 1.356–6, for purposes of section 355, 

the term securities includes rights 

issued by the distributing corporation or 

the controlled corporation to acquire the 

stock of that corporation. For purposes 

of this section and section 356(d)(2)(B), 

a right to acquire stock has no principal 

amount. For this purpose, the term 

rights to acquire stock has the same 

meaning as it does under sections 305 

and 317(a) of the Code. Other Code 

provisions governing the treatment of 

rights to acquire stock also may apply to 

certain distributions occurring in 

connection with a transaction described 

in section 355. See, for example, 

sections 83 and 421 through 424 of the 

Code and the regulations under sections 

83 and 421 through 424. 

(d) Nonqualified preferred stock. See 

§ 1.356–7(a) and (b) for the treatment of 

nonqualified preferred stock (as defined 

in section 351(g)(2) of the Code) 

received in certain exchanges for (or in 

certain distributions with respect to) 

nonqualified preferred stock or 

preferred stock. See § 1.356–7(c) for the 

treatment of the receipt of preferred 

stock in certain exchanges for (or in 

certain distributions with respect to) 

common or preferred stock described in 

section 351(g)(2)(C)(i)(II). 

(e) Applicability dates—(1) Section 

1.355–1—(i) In general. This section 

applies to section 355 transactions for 

which the earliest of the following dates 

occurs after [DATE OF PUBLICATION 

OF FINAL REGULATIONS IN THE 

FEDERAL REGISTER] (general 

applicability date): 

(A) The date of the first public 

announcement (as defined in § 1.355– 

7(h)(10)) of the section 355 transaction. 

(B) The date of entry by the 

distributing corporation into a written 

agreement to engage in the section 355 

transaction. 

(C) The date of approval of the section 

355 transaction by the board of directors 

of the distributing corporation. 

(D) The date of a court order (or a plan 

confirmed, or a sale approved, by order 

of a court) in a title 11 or similar case 

(as defined in section 368(a)(3)(A)), but 

only if the taxpayer was a debtor in a 

case before such court. 

(E) The date a ruling request for the 

section 355 transaction is submitted to 

the IRS. 

(ii) Transactions occurring on or 

before general applicability date. For 

section 355 transactions occurring on or 

before the general applicability date, see 

26 CFR 1.355–1 and 1.355–4 (revised as 

of April 1, 2024). 

(2) Sections 1.355–2 and 1.355–3—(i) 

In general. Except as otherwise 

provided in this paragraph (e)(2), 

§§ 1.355–2 and 1.355–3 apply to section 

355 transactions occurring after 

February 6, 1989. For section 355 

transactions occurring on or before that 

date, see 26 CFR 1.355–2 and 1.355–3 

(revised as of April 1, 1988). 

(ii) Section 1.355–2(e). Section 1.355– 

2(e) applies to section 355 transactions 

for which the earliest of the dates listed 

in paragraphs (e)(1)(i)(A) through (E) of 

this section occurs after [DATE OF 

PUBLICATION OF FINAL 

REGULATIONS IN THE FEDERAL 

REGISTER]. 

(iii) Section 1.355–2(g). Sections 

1.355–2(g) applies to section 355 

transactions occurring after October 20, 

2011. For rules regarding section 355 


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transactions occurring on or before 

October 20, 2011, see § 1.355–2T(i), as 

contained in 26 CFR part 1, revised as 

of April 1, 2011. 

(3) Section 1.355–4. Section 1.355–4 

applies to section 355 transactions for 

which the earliest of the dates listed in 

paragraphs (e)(1)(i)(A) through (E) of 

this section occurs after [DATE OF 

PUBLICATION OF FINAL 

REGULATIONS IN THE FEDERAL 

REGISTER]. 

(4) [Reserved] 

(5) Section 1.355–10. Section 1.355– 

10 applies to section 355 transactions 

for which the earliest of the dates listed 

in paragraphs (e)(1)(i)(A) through (E) of 

this section occurs after [DATE OF 

PUBLICATION OF FINAL 

REGULATIONS IN THE FEDERAL 

REGISTER]. 

■ Par. 3. Section 1.355–2 is amended 

by: 

■ 1. Revising paragraph (e); and 

■ 2. Removing paragraph (i). 

The revision reads as follows: 

§ 1.355–2 Limitations. 

* * * * * 

(e) Stock and securities distributed— 

(1) Overview. To qualify under section 

355, a distributing corporation, as part 

of the distribution (within the meaning 

of section 355(a)(1)(D)), must distribute 

stock, or stock and securities, of the 

controlled corporation. 

(2) Requirements. A distribution does 

not qualify under section 355 unless, 

pursuant to a plan of distribution (as 

described in § 1.355–4) or a plan of 

reorganization (within the meaning of 

§ 1.368–4), the distributing corporation 

satisfies the requirements set forth in 

either paragraph (e)(2)(i) or (ii) of this 

section in addition to satisfying the 

requirements set forth in paragraph 

(e)(2)(iii) of this section. 

(i) The distributing corporation 

distributes at least an amount of stock 

of the controlled corporation that 

constitutes a control distribution within 

a single taxable year of the distributing 

corporation. 

(ii) The distributing corporation 

distributes stock of the controlled 

corporation as part of a control 

distribution during two taxable years of 

the distributing corporation, but only if 

all distributions up to and including the 

control distribution are made pursuant 

to a binding commitment that is 

described in, as appropriate— 

(A) The plan of distribution; or 

(B) The plan of reorganization. 

(iii) Any stock of the controlled 

corporation not distributed as part of the 

first distribution satisfies all 

requirements for a qualifying retention 

(as described in § 1.355–10(c)). 

* * * * * 

■ Par. 4. Section 1.355–4 is revised to 

read as follows: 

§ 1.355–4 Plan of distribution. 

(a) Plan of distribution—(1) Scope 

and purpose. This section sets forth 

requirements and procedures for the 

determination of a plan of distribution, 

including the scope of distributions 

properly included within that plan. This 

section applies solely to a section 355(c) 

distribution. Accordingly, this section 

does not apply to a reorganization 

described in section 368(a)(1)(D) or (G) 

of the Code. 

(2) Definition. For purposes of section 

355 of the Code and the section 355 

regulations, the term plan of 

distribution means— 

(i) A plan of distribution of the 

distributing corporation that— 

(A) Satisfies all requirements set forth 

in paragraph (c) of this section; and 

(B) Is filed with the IRS pursuant to 

§ 1.355–5(a)(2); 

(ii) A plan of distribution of the 

distributing corporation that results 

from the Commissioner correcting a 

plan of distribution of a distributing 

corporation; or 

(iii) A plan of distribution of the 

distributing corporation that results 

from the Commissioner identifying a 

plan of distribution for a distributing 

corporation (in the event of a failure to 

file a plan of distribution with the IRS 

pursuant to § 1.355–5(a)(2)). 

(3) Failure to satisfy requirements. 

The failure of a distributing corporation 

to comply with any particular 

requirement or procedure set forth in 

this section (including the failure to file 

a plan of distribution with the IRS 

pursuant to § 1.355–5(a)(2)) does not, on 

its own, prevent a transaction or series 

of transactions from being considered 

part of the plan of distribution. 

(b) Determination of plan of 

distribution—(1) Status generally based 

on plan of distribution filed by 

distributing corporation. Except as 

provided in paragraph (b)(2) of this 

section, a distributing corporation 

establishes the plan of distribution for a 

transaction or series of transactions 

solely by— 

(i) Satisfying all requirements set forth 

in paragraph (c) of this section; and 

(ii) Filing the plan of distribution with 

the IRS pursuant to § 1.355–5(a)(2). 

(2) Correction or identification of plan 

of distribution due to distributing 

corporation’s failure to file a complete 

plan of distribution—(i) In general. If a 

distributing corporation files a plan of 

distribution with the IRS that fails to 

satisfy any requirement set forth in 

paragraph (c) of this section, or if the 

distributing corporation fails to file any 

plan of distribution with the IRS, the 

Commissioner may correct or identify a 

plan of distribution in accordance with 

paragraph (b)(2)(ii) of this section. 

(ii) Status of distributions as part of 

a plan of distribution. The 

Commissioner may determine that a 

distribution or series of distributions 

should be included in, or excluded 

from, a plan of distribution described in 

paragraph (b)(2)(i) of this section based 

on— 

(A) All facts and circumstances 

regarding the distribution or series of 

distributions; and 

(B) All relevant provisions of the Code 

and general principles of Federal 

income tax law, including the step 

transaction doctrine. 

(c) Requirements for a plan of 

distribution. To qualify as a plan of 

distribution described in paragraph 

(a)(2)(i) of this section, the distributing 

corporation must satisfy all 

requirements set forth in paragraphs 

(c)(1) through (3) of this section. For 

purposes of this paragraph (c) and 

paragraph (d) of this section, the term 

official records includes a contract or 

other agreement to which the 

distributing corporation is a party, a 

resolution or other document authorized 

by the distributing corporation’s board 

of directors, or other document filed 

with the SEC or other Federal regulatory 

agency. 

(1) Documentation requirement. The 

plan of distribution is provided in a 

single, comprehensive document that— 

(i) Identifies the distributing 

corporation and each controlled 

corporation; 

(ii) Identifies all distributions 

properly included in the plan of 

distribution (as determined pursuant to 

paragraph (d) of this section); 

(iii) Describes the intended Federal 

income tax treatment of the 

distributions described in paragraph 

(c)(1)(ii) of this section; and 

(iv) Describes the corporate business 

purpose for each distribution. 

(2) Adoption of plan of distribution. 

Prior to the first distribution, the plan of 

distribution described in paragraph 

(a)(2)(i) of this section or an original 

plan of distribution that becomes the 

amended plan of distribution (within 

the meaning of paragraph (e) of this 

section), as applicable, is finalized and 

adopted by the distributing corporation, 

as established by— 

(i) The acts of the distributing 

corporation’s duly authorized officers 

and directors; and 


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(ii) The distributing corporation’s 

official records. 

(3) Completion of plan of 

distribution—(i) Expeditious 

prosecution of plan of distribution—(A) 

General rule. In accordance with 

paragraph (c)(3)(ii) of this section, 

taking into account all facts and 

circumstances (including the one or 

more corporate business purposes for 

each distribution), the distributing 

corporation completes the plan of 

distribution as expeditiously as 

practicable. 

(B) 24-month presumption. The 

requirement in paragraph (c)(3)(i)(A) of 

this section is presumed to be satisfied 

if, in accordance with paragraph 

(c)(3)(ii) of this section, the distributing 

corporation completes the plan of 

distribution within the 24-month period 

beginning on the first distribution date. 

(ii) Completion of entire plan of 

distribution—(A) General rule. All 

distributions included in a plan of 

distribution must be carried out in the 

manner described in the plan of 

distribution. 

(B) Failure to complete entire plan of 

distribution. Except as provided in 

paragraph (e) of this section, if the 

requirement of paragraph (c)(3)(ii)(A) of 

this section is not satisfied, section 355 

does not apply to any distribution 

unless the Commissioner determines the 

existence of a plan of distribution. 

(d) Requirements for distributions to 

be treated as properly included in plan 

of distribution. The requirements set 

forth in this paragraph (d) must be 

satisfied for a distribution to be treated 

as properly included in a plan of 

distribution. The existence of 

contingencies or conditions is not 

conclusive in determining whether a 

requirement of this paragraph (d) is 

satisfied. 

(1) Definite intent requirement—(i) 

General rule. Prior to the first step of the 

plan of distribution or of an original 

plan of distribution that becomes the 

amended plan of distribution (within 

the meaning of paragraph (e) of this 

section), the distributing corporation 

evidences a definite intent to carry out 

the distribution through a written 

commitment in one or more official 

records of the distributing corporation 

that substantiate the plan of 

distribution. 

(ii) Section 355 transactions. With 

regard to a control distribution that 

occurs in the next taxable year after the 

first distribution, the distributing 

corporation does not establish a definite 

intent under paragraph (d)(1)(i) of this 

section unless all distributions up to 

and including the control distribution 

are effectuated pursuant to a binding 

commitment of the distributing 

corporation. See § 1.355–2(e)(2)(ii). 

(iii) Relevancy of contemplated 

possibilities—(A) Contemplation 

irrelevant to distributing corporation’s 

determination. The contemplation by 

the distributing corporation that it may 

carry out a distribution is not sufficient 

for the distributing corporation to 

establish a definite intent to carry out 

that distribution, regardless of whether 

that contemplated distribution is 

included in an official record. 

(B) Contemplation relevant to 

Commissioner’s determination. The 

distributing corporation’s contemplation 

of a distribution may be relevant for 

purposes of the correction or 

identification of a plan of distribution 

by the Commissioner pursuant to 

paragraph (b)(2) of this section. 

(2) Proximate relationship 

requirement—(i) General rule. Taking 

into account paragraphs (d)(2)(ii) and 

(iii) of this section, a distribution is part 

of the plan of distribution to which the 

provisions of section 355 apply only if, 

on its own or as part of a series of 

distributions, the distribution is 

necessary to satisfy one or more 

requirements of section 355, or is an 

integral part of a series of distributions 

carried out to satisfy the requirements of 

section 355, as evidenced by a written 

commitment in one or more official 

records of the distributing corporation. 

(ii) Existence of independent 

significance not determinative. The 

independent significance of a 

distribution (for example, the fact that a 

distribution has a separate business 

motive apart from one or more other 

distributions) does not preclude the 

satisfaction of the requirements under 

paragraph (d)(2)(i) of this section. 

(iii) Temporal proximity. A 

distribution that takes place in close 

temporal proximity to one or more other 

distributions is not properly included in 

a plan of distribution under paragraph 

(d)(2)(i) of this section unless Federal 

income tax principles (including the 

step transaction doctrine) would apply 

to determine that the distribution was in 

substance part of the plan of 

distribution. 

(3) Corporate business purpose 

consistency requirement. A distribution, 

on its own or as part of a series of 

distributions, is consistent with, and 

directly related to, one or more 

corporate business purposes for the one 

or more other distributions (for 

example, the distribution directly 

furthers one or more corporate business 

purposes for the one or more other 

distributions). 

(e) Amended plan of distribution—(1) 

Conditions. If the distributing 

corporation amends a plan of 

distribution described in paragraph 

(a)(2)(i) of this section (original plan of 

distribution) after the first step of the 

original plan of distribution (amended 

plan of distribution), those amendments 

will not cause the distributing 

corporation to fail to satisfy the 

requirements set forth in paragraph (c) 

of this section only if— 

(i) Those amendments are in direct 

response to an identifiable, unexpected, 

and material change in market or 

business conditions that occurs after the 

date on which the original plan of 

distribution is adopted by the 

distributing corporation in the manner 

described in paragraph (c)(2) of this 

section; 

(ii) Those amendments are necessary 

to achieve the one or more corporate 

business purposes for the distribution; 

and 

(iii) The amended plan of distribution 

satisfies all requirements set forth in 

paragraph (c) of this section. 

(2) Consequences of plan of 

distribution amended due to changed 

circumstances—(i) Qualifying amended 

plan of distribution. If the requirements 

set forth in paragraph (e)(1) of this 

section are satisfied, the provisions set 

forth in section 355 will apply to 

distributions identified in, and carried 

out pursuant to, the amended plan of 

distribution. That is, the Federal income 

tax consequences of all distributions 

included in the amended plan of 

distribution will be determined based 

on that plan of distribution (and not on 

the original plan of distribution). 

(ii) Non-qualifying amended plan of 

distribution. If an amended plan of 

distribution fails to satisfy all 

requirements set forth in paragraph 

(e)(1) of this section, the Commissioner 

may correct the amended plan of 

distribution or may identify an amended 

plan of distribution. 

(f) Examples. The following examples 

illustrate the application of the rules of 

this section. For purposes of these 

examples, unless otherwise provided: a 

distributing corporation (Distributing) 

owns all the stock of an existing 

controlled corporation (Controlled); 

Distributing properly files a plan of 

distribution with the IRS pursuant to 

§ 1.355–5 that satisfies all requirements 

set forth in paragraph (c) of this section, 

including providing the corporate 

business purpose for each distribution 

and the intended Federal income tax 

treatment of those distributions (that is, 

a section 355(c) distribution, as defined 

in § 1.355–1(a)(2)(xviii)) and completing 

the plan of distribution as expeditiously 

as practicable; Distributing satisfies all 

requirements for qualification under 


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section 355; and with regard to any 

retained controlled corporation stock (as 

defined in § 1.355–10(b)(7)), the 

requirements set forth in § 1.355–10(c) 

are satisfied. 

(1) Example 1: Status of distributions 

as part of the plan of distribution—(i) 

Facts. Official records of Distributing 

provide that Distributing will distribute, 

in a single distribution, an amount of 

Controlled stock constituting control 

(control distribution) to Distributing’s 

shareholders during Distributing’s 2025 

taxable year. Such records also provide 

that, during Distributing’s 2026 taxable 

year, Distributing will distribute, in a 

single distribution, the remaining 20 

percent of Controlled stock to 

Distributing’s shareholders (the final 

distribution; together with the control 

distribution, the separation). Official 

records of Distributing also provide that, 

during Distributing’s 2026 taxable year, 

Distributing will distribute an 

appreciated asset (Asset 1) to its 

shareholders (Asset 1 distribution). 

However, the official records express 

only a contemplated possibility that 

Distributing will distribute another 

appreciated asset (Asset 2) to its 

shareholders during Distributing’s 2026 

taxable year (Asset 2 distribution). As 

reflected in official records of 

Distributing, the control and final 

distributions, and the Asset 1 and Asset 

2 distributions, will enable Distributing 

to focus on its retained, core businesses 

(that is, a fit-and-focus corporate 

business purpose). 

(ii) Analysis—(A) Distribution of 

Controlled stock. Each of the control 

distribution and the final distribution is 

properly included in the plan of 

distribution for the separation. First, as 

reflected in official records, Distributing 

evidences a definite intent, prior to the 

first step of the plan of distribution, to 

carry out, through a written 

commitment in those official records, 

the control distribution and the final 

distribution. See paragraph (d)(1)(i) of 

this section. Second, each of these 

distributions is necessary to satisfy the 

requirements for qualification under 

section 355, as evidenced by the official 

records of Distributing, which impose a 

written commitment on Distributing to 

make both distributions. See paragraph 

(d)(2)(i) of this section. Third, the 

control distribution and the final 

distribution are consistent with, and 

directly relate to, the fit-and-focus 

corporate business purpose for the 

distributions. See paragraph (d)(3) of 

this section. Accordingly, based on the 

correct and properly filed plan of 

distribution, the Federal income tax 

consequences of the control and final 

distributions are determined under 

section 355. 

(B) Distribution of Asset 1. The 

analysis is the same as in paragraph 

(f)(1)(ii)(A) of this section. Accordingly, 

because the Asset 1 distribution is 

properly included in the plan of 

distribution for the separation, 

Distributing recognizes gain on its 

distribution of Asset 1 under section 

355(c)(2) (as opposed to section 311(b) 

of the Code). 

(C) Distribution of Asset 2. The Asset 

2 distribution is not properly included 

in the plan of distribution for the 

separation because not all requirements 

set forth in paragraph (d) of this section 

are satisfied. Specifically, as evidenced 

by official records of Distributing, 

Distributing treats the Asset 2 

distribution as a contemplated 

possibility, thereby failing to evidence a 

definite intent to carry out the 

transaction. See paragraph (d)(1)(iii)(A) 

of this section. Accordingly, 

Distributing recognizes gain on its 

distribution of Asset 2 under section 

311(b) (as opposed to section 355(c)(2)). 

(2) Example 2: Identifiable, 

unexpected change in market or 

business conditions—(i) Facts. The facts 

are the same as in paragraph (f)(1)(i) of 

this section (Example 1), except for the 

following. Following the date of 

adoption of Distributing’s plan of 

distribution for the separation, and 

before the intended date of the final 

distribution, market conditions 

unexpectedly deteriorate to such an 

extent that, in the judgment of 

Distributing and its advisors, the final 

distribution should be postponed. In 

response, Distributing amends its plan 

of distribution during its 2026 taxable 

year to reflect Distributing’s definite 

intent to make the final distribution 

when market conditions sufficiently 

improve, in the judgment of Distributing 

and its advisors. During Distributing’s 

2027 taxable year, market conditions 

improve sufficiently to permit the final 

distribution, and Distributing 

accordingly makes the final distribution 

during that taxable year. 

(ii) Analysis. The final distribution is 

properly included in the plan of 

distribution for the separation. See the 

analysis in paragraph (f)(1)(ii)(A) of this 

section (Example 1). Distributing’s 

amendment of its original plan of 

distribution (amended plan of 

distribution) does not cause Distributing 

to fail to satisfy the requirements under 

paragraph (c) of this section for the 

following reasons. First, the 

amendments are in direct response to an 

identifiable, unexpected, and material 

change in market or business conditions 

that occurs after the date of adoption of 

the original plan of reorganization. See 

paragraph (e)(1)(i) of this section. 

Second, those amendments are 

necessary to achieve the fit-and-focus 

corporate business purpose for the 

separation. See paragraph (e)(1)(ii) of 

this section. Third, Distributing’s 

amended plan of distribution satisfies 

all other requirements set forth in 

paragraph (c) of this section. See 

paragraph (e)(1)(iii) of this section. 

Consequently, all the requirements set 

forth in paragraph (e)(1) of this section 

are satisfied and therefore the final 

distribution will be treated as carried 

out pursuant to the amended plan of 

distribution. That is, the Federal income 

tax consequences of the control 

distribution and final distribution, 

which are included in the amended 

plan of distribution, will be determined 

based on that amended plan of 

distribution (and not on the original 

plan of distribution). See paragraph 

(e)(2)(i) of this section. 

■ Par. 5. Section 1.355–5 is revised to 

read as follows: 

§ 1.355–5 Information reporting and record 

retention requirements. 

(a) Reporting of transaction 

information—(1) [Reserved] 

(2) Plan of distribution. With regard to 

a section 355(c) distribution, the 

distributing corporation must include, 

with its return for the taxable year of the 

first distribution, a copy of its plan of 

distribution for the section 355(c) 

distribution satisfying the requirements 

of § 1.355–4. 

(3) Plan of reorganization. With 

regard to a divisive reorganization, see 

§ 1.368–3(a). 

(b) [Reserved] 

(c) [Reserved] 

(d) Applicability date—(1) [Reserved] 

(2) Paragraphs (a)(2) and (3). 

Paragraphs (a)(2) and (3) of this section 

apply to section 355 transactions for 

which the earliest of the following dates 

occurs after [date of publication of final 

regulations in the Federal Register]: 

(i) The date of the first public 

announcement (as defined in § 1.355– 

7(h)(10)) of the section 355 transaction. 

(ii) The date of entry by the 

distributing corporation into a written 

agreement to engage in the section 355 

transaction. 

(iii) The date of approval of the 

section 355 transaction by the board of 

directors of the distributing corporation. 

(iv) The date of a court order (or a 

plan confirmed, or a sale approved, by 

order of a court) in a title 11 or similar 

case (as defined in section 368(a)(3)(A) 

of the Code), but only if the taxpayer 

was a debtor in a case before such court. 


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(v) The date a ruling request for the 

section 355 transaction is submitted to 

the IRS. 

■ Par. 6. Section 1.355–10 is added to 

read as follows: 

§ 1.355–10 Qualifying retentions of 

controlled corporation stock or securities. 

(a) Overview. For a distribution to 

qualify as a section 355 transaction, 

there must be a genuine separation of 

the DSAG and the CSAG. In the case of 

a retention, the distributing corporation 

must establish 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. 

(b) Definitions. The following 

definitions apply for purposes of this 

section: 

(1) CSAG—(i) In general. Except as 

provided in paragraph (b)(1)(ii) of this 

section, the term CSAG means the 

separate affiliated group (as defined in 

section 355(b)(3)(B) of the Code) of 

which the controlled corporation is the 

common parent. 

(ii) Controlled corporation not 

common parent. If the controlled 

corporation is not the common parent of 

a separate affiliated group, the term 

CSAG refers to the controlled 

corporation. 

(2) Distributing corporation related 

person. The term distributing 

corporation related person means a 

person that is related to a distributing 

corporation within the meaning of 

section 267(b) or 707(b)(1) of the Code, 

determined immediately before the 

control distribution date. 

(3) DSAG—(i) In general. The term 

DSAG means the separate affiliated 

group (as defined in section 

355(b)(3)(B)) of which the distributing 

corporation is the common parent. 

(ii) Distributing corporation not 

common parent. If the distributing 

corporation is not the common parent of 

a separate affiliated group, the term 

DSAG means the distributing 

corporation. 

(4) Key employee. The term key 

employee means, with regard to a 

business of the DSAG or CSAG, an 

employee— 

(i) Who possesses specialized and 

unique expertise with regard to that 

business and applies that expertise in a 

manner that significantly preserves or 

improves the strength of that business 

(for example, through innovation or 

other advancement of the business); 

(ii) Whose departure would be 

significantly detrimental to that 

business; and 

(iii) Who would be difficult to replace 

due to the attributes described in 

paragraph (b)(4)(i) of this section. 

(5) Option. The term option means a 

call option, a warrant, a convertible 

obligation, a conversion feature of 

convertible stock, a put option, a 

redemption agreement (including the 

right to cause the redemption of stock), 

any other instrument that provides for 

the right or possibility to issue, redeem, 

or transfer stock (including an option on 

an option), or any other similar interest. 

(6) Qualifying retention. The term 

qualifying retention means a retention 

described in paragraph (c)(2) of this 

section. 

(7) Retained controlled corporation 

stock (or securities). The term retained 

controlled corporation stock (or 

securities) means the following 

instruments that the distributing 

corporation continues to hold after the 

first distribution date: 

(i) Stock or securities in a controlled 

corporation or another member of the 

CSAG. 

(ii) Options to acquire stock or 

securities in a controlled corporation or 

another member of the CSAG. 

(iii) Stock or securities in a controlled 

corporation or another member of the 

CSAG acquired upon the exercise of an 

option. 

(8) Retention. The term retention 

means the continued ownership of 

retained controlled corporation stock (or 

securities) by a distributing corporation 

after the first distribution date. 

(c) General rule—(1) Presumption of 

tax avoidance. A retention is treated as 

pursuant to a plan having as one of its 

principal purposes the avoidance of 

Federal income tax unless the retention 

is a qualifying retention. 

(2) Qualifying retention—(i) In 

general. A qualifying retention is a 

retention that— 

(A) Satisfies all requirements set forth 

in paragraphs (c)(2)(ii) and (iii) of this 

section; or 

(B) Satisfies the requirements set forth 

in paragraph (c)(2)(iii) of this section 

and meets the safe harbor set forth in 

paragraph (c)(3) of this section. 

(ii) Facts-and-circumstances test. A 

distributing corporation establishes to 

the satisfaction of the Commissioner, 

based on all facts and circumstances 

(including the extent to which the safe 

harbor requirements described in 

paragraph (c)(3) of this section are 

satisfied), that the requirements set forth 

in each of paragraphs (c)(2)(ii)(A) 

through (E) of this section are satisfied. 

(A) The distribution resulted in a 

genuine separation of the DSAG and the 

CSAG. 

(B) The retention does not allow the 

DSAG to retain any practical control 

over the CSAG. 

(C) There is a sufficient corporate 

business purpose for the retention as of 

the date on which the plan of 

distribution or the plan of 

reorganization (as applicable) is adopted 

in accordance with § 1.355–4(c)(2) or 

1.368–4(d)(2), respectively. 

(D) There is a sufficient corporate 

business purpose for the retention at all 

times during the period of retention. 

(E) The disposition of retained 

controlled corporation stock (or 

securities) would not result in less 

Federal income tax to the distributing 

corporation (determined based on the 

fair market value and adjusted basis of 

such stock or securities on the first 

distribution date) than if that retained 

controlled corporation stock (or 

securities) had been distributed in the 

first distribution. 

(iii) Proportionate voting requirement. 

The DSAG votes any retained controlled 

corporation stock in proportion to the 

votes cast by the controlled 

corporation’s other shareholders (other 

than distributing corporation related 

persons). 

(3) Safe harbor for rebutting tax 

avoidance presumption—(i) General 

rule. A distributing corporation is 

considered to have met the 

requirements of the facts-andcircumstances test set forth in paragraph 

(c)(2)(ii) of this section if the 

distributing corporation satisfies all 

requirements described in paragraphs 

(c)(3)(ii) through (vii) of this section and 

either— 

(A) With regard to a section 355(c) 

distribution, includes in its plan of 

distribution a description of each 

agreement and transaction that 

establishes the satisfaction of the 

requirements described in paragraphs 

(c)(3)(ii) through (vii) of this section; or 

(B) With regard to a divisive 

reorganization, includes in its plan of 

reorganization a description of each 

agreement and transaction that 

establishes the satisfaction of the 

requirements described in paragraphs 

(c)(3)(ii) through (vii) of this section. 

(ii) Corporate business purpose. The 

distributing corporation has a specific 

corporate business purpose for the 

retention— 

(A) As of the date on which the plan 

of distribution or the plan of 

reorganization (as applicable) is adopted 

in accordance with § 1.355–4(c)(2) or 

1.368–4(d)(2), respectively; and 

(B) At all times during the period of 

retention. 

(iii) Controlled corporation stock is 

widely held. Stock of the controlled 

corporation (including a successor to 

the controlled corporation (within the 

meaning of § 1.355–8(c)(2))) is widely 


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held during the period of retention after 

the first distribution date. For example, 

stock of the controlled corporation is 

considered to be widely held if it is 

traded on an established securities 

market (within the meaning of § 1.7704– 

1(b)). 

(iv) Overlapping officers, directors, or 

key employees. No officers, directors, or 

key employees of a member of the 

DSAG serve as an officer, a director, or 

a key employee of a member of the 

CSAG during the period of retention, 

unless— 

(A) The officer, director, or key 

employee of a member of the DSAG 

serves as an officer, a director, or a key 

employee of a member of the CSAG 

solely to accommodate the CSAG’s 

business needs; 

(B) The overlapping directors do not 

constitute a majority of the CSAG 

member’s board; and 

(C) The duration of the overlap for 

officers, directors, and key employees is 

for an identified, limited period of time, 

not in excess of two years after the first 

distribution date. 

(v) Continuing arrangements. Any 

continuing arrangement between the 

distributing corporation and the 

controlled corporation during the period 

of retention— 

(A) Is negotiated on, and reflects, 

arm’s-length terms; or 

(B) If the arrangement is not described 

in paragraph (c)(3)(v)(A) of this section, 

is— 

(1) Terminated within two years after 

the first distribution date; or 

(2) Renegotiated within two years 

after the first distribution date to reflect 

arm’s-length terms. 

(vi) Disposition of retained controlled 

corporation stock (or securities). The 

plan of distribution or plan of 

reorganization, as appropriate, reflects a 

definite intent in the official records of 

the distributing corporation that the 

distributing corporation will dispose of 

all retained controlled corporation stock 

(or securities) by not later than the end 

of the five-year period beginning on the 

first distribution date. For purposes of 

this paragraph (c)(3)(vi) and paragraph 

(d) of this section, the term official 

records includes a contract or other 

agreement to which the distributing 

corporation is a party, a resolution or 

other document authorized by the 

distributing corporation’s board of 

directors, or other document filed with 

the SEC or other Federal regulatory 

agency. 

(vii) Disposition of retained controlled 

corporation stock does not result in less 

Federal income tax. The disposition of 

retained controlled corporation stock (or 

securities) would not result in less 

Federal income tax to the distributing 

corporation (determined based on the 

fair market value and adjusted basis of 

such stock or securities on the first 

distribution date) than if that controlled 

corporation stock (or securities) had 

been distributed in the first distribution. 

(d) Examples. The following examples 

illustrate the application of the rules of 

this section. For purposes of these 

examples: a distributing corporation 

(Distributing) is the common parent of 

a separate affiliated group of 

corporations (DSAG); the DSAG 

includes an existing, wholly owned 

controlled corporation (Controlled) with 

a single class of outstanding stock that 

is directly owned by Distributing; and 

the DSAG operates a banking business 

and a title insurance business, with 

Controlled operating the banking 

business, and the remaining DSAG 

members (including Distributing) 

operating the title insurance business. 

(1) Example 1: Not a qualifying 

retention—(i) Facts. Distributing 

distributes 80 percent of Controlled’s 

stock to Distributing’s shareholders in a 

single distribution on a pro rata basis 

during Distributing’s 2025 taxable year 

(first distribution). Distributing retains 

the remaining 20 percent of the 

Controlled stock (retention). 

Distributing does not evidence any 

definite intent in its official records to 

dispose of the retained Controlled stock 

within the five-year period beginning on 

the first distribution date. The directors 

of Distributing will serve as half of the 

directors of Controlled for a four-year 

period after the first distribution date, 

after which time they can seek 

reelection. One of Distributing’s 

purposes for the retention is to reduce 

the likelihood that new minority 

investors could acquire a substantial 

ownership interest in Controlled, 

thereby reducing Distributing’s 

continued effective control over 

Controlled. Apart from whether the 

retention is a qualifying retention, the 

distribution satisfies all requirements to 

qualify under section 355. 

(ii) Analysis. The retention is treated 

as pursuant to a plan having as one of 

its principal purposes the avoidance of 

Federal income tax unless the retention 

is a qualifying retention. See paragraph 

(c)(1) of this section. To be a qualifying 

retention, the retention must satisfy the 

requirements under either the facts-andcircumstances test set forth in paragraph 

(c)(2)(ii) of this section or the safe 

harbor set forth in paragraph (c)(3) of 

this section, among other requirements. 

See paragraph (c)(2)(i) of this section. 

Distributing does not satisfy the 

requirements for the safe harbor set 

forth in paragraph (c)(3) of this section 

because directors of Distributing will 

serve as directors of Controlled for a 

period that is not limited to two years 

after the first distribution date, and 

Distributing does not evidence any 

definite intent in its official records to 

dispose of the retained Controlled stock 

within the five-year period beginning on 

the first distribution date. See 

paragraphs (c)(3)(iv) and (vi) of this 

section. Distributing also fails the factsand-circumstances test set forth in 

paragraph (c)(2)(ii) of this section 

because the control distribution does 

not result in a genuine separation, 

Distributing retains practical control 

over Controlled, and there is not a 

sufficient corporate business purpose 

for the retention. See paragraphs 

(c)(2)(ii)(A) through (D) of this section. 

Accordingly, Distributing’s retention is 

not a qualifying retention. 

Consequently, the first distribution (and 

any subsequent distribution of 

Controlled stock) does not qualify under 

section 355. See paragraphs (a) and 

(c)(1) of this section and § 1.355– 

2(e)(2)(iii). 

(2) Example 2: Safe harbor—(i) Facts. 

Distributing distributes 95 percent of 

Controlled’s stock to Distributing’s 

shareholders in a single distribution on 

a pro rata basis during Distributing’s 

2025 taxable year (first distribution) and 

retains 5 percent of Controlled stock 

(retention). The corporate business 

purpose for the retention, as of the date 

on which the plan of distribution is 

adopted in accordance with § 1.355– 

4(c)(2) and throughout the period of 

retention, is to enable Distributing to 

have assets of sufficient value (which 

otherwise would not be available absent 

the retention) to serve as collateral for 

needed short-term financing for 

Distributing’s remaining business 

enterprise. The stock of Controlled is 

traded on an established securities 

market (within the meaning of § 1.7704– 

1(b)) throughout the period of retention. 

The plan of distribution reflects a 

definite intent in the official records of 

Distributing that Distributing will 

dispose of the retained Controlled stock 

within five years after the first 

distribution date. No officers, directors, 

or key employees of a member of the 

DSAG will serve as an officer, a director, 

or a key employee of a member of the 

CSAG during the period of retention. 

Any continuing arrangements between 

Distributing and Controlled during the 

period of retention either are negotiated 

on arm’s-length terms or will terminate 

within two years after the first 

distribution date. The disposition of 

retained Controlled stock will not result 

in less Federal income tax to 


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Distributing (determined based on the 

fair market value and adjusted basis of 

such stock on the first distribution date) 

than if that Controlled stock had been 

distributed in the first distribution. The 

plan of distribution describes each of 

the foregoing agreements and 

transactions. Apart from whether the 

retention is a qualifying retention, the 

distribution satisfies all requirements to 

qualify under section 355. 

(ii) Analysis. Distributing satisfies all 

requirements for the safe harbor set 

forth in paragraph (c)(3) of this section. 

However, to have a qualifying retention, 

Distributing also must meet the 

requirement set forth in paragraph 

(c)(2)(iii) of this section. See paragraph 

(c)(2)(i)(B) of this section. 

(3) Example 3: Overlapping 

directors—(i) Facts. The facts are the 

same as in paragraph (d)(2)(i) of this 

section (Example 2), except that 

directors of Distributing that are 

recognized as experts in the banking 

industry will serve as two of the six 

directors of Controlled after the first 

distribution date. Their presence on the 

Controlled board is intended to reassure 

the financial markets by providing a 

sense of continuity. Their terms will 

expire after two years, at which point 

they cannot seek reelection during the 

period of retention. 

(ii) Analysis. The two directors of 

Distributing that will serve as directors 

of Controlled do so solely to 

accommodate Controlled’s business 

needs, do not constitute a majority of 

Controlled’s board, and will not serve as 

directors of Controlled’s board for more 

than two years after the first distribution 

date. See paragraph (c)(3)(iv) of this 

section. Accordingly, Distributing 

satisfies all requirements for the safe 

harbor set forth in paragraph (c)(3) of 

this section. However, to have a 

qualifying retention, Distributing also 

must meet the requirement set forth in 

paragraph (c)(2)(iii) of this section. See 

paragraph (c)(2)(i)(B) of this section. 

(iii) Ability to seek reelection during 

retention period. The facts are the same 

as in paragraph (d)(3)(i) of this section 

(Example 3), except that the two 

directors of Distributing that will serve 

as directors of Controlled after the first 

distribution date may seek reelection 

after their two-year term expires. 

Distributing does not satisfy all 

requirements for the safe harbor set 

forth in paragraph (c)(3) of this section. 

See paragraph (c)(3)(iv)(C) of this 

section. 

(4) Example 4: Safe harbor is not met 

but facts-and-circumstances test is 

met—(i) Facts. The facts are the same as 

in paragraph (d)(2)(i) of this section 

(Example 2), except that Distributing 

must retain the Controlled stock (to 

meet collateral requirements) for at least 

six years after the first distribution date, 

as reflected in the plan of distribution 

and the official records of Distributing. 

(ii) Analysis—(A) Safe harbor 

requirements not satisfied. 

Distributing’s retention of Controlled 

stock does not qualify for the safe harbor 

set forth in paragraph (c)(3) of this 

section because the plan of distribution 

does not reflect a definite intent in the 

official records of Distributing that 

Distributing will dispose of all retained 

Controlled stock within five years of the 

first distribution date. See paragraph 

(c)(3)(vi) of this section. 

(B) Facts-and-circumstances test 

satisfied. The facts-and-circumstances 

test set forth in paragraph (c)(2)(ii) of 

this section is satisfied because the 

control distribution results in a genuine 

separation of Distributing and 

Controlled, the retention does not allow 

Distributing to retain any practical 

control over Controlled, there is a 

sufficient corporate business purpose 

for the retention as of the date on which 

the plan of distribution is adopted in 

accordance with § 1.355–4(c)(2), there is 

a sufficient corporate business purpose 

for the retention at all times during the 

period of retention, and the disposition 

of the retained Controlled stock will not 

result in less Federal income tax to 

Distributing than if Distributing had 

distributed the Controlled stock in the 

first distribution. Accordingly, provided 

Distributing also meets the requirement 

set forth in paragraph (c)(2)(iii) of this 

section, the retention is a qualifying 

retention under paragraph (c)(2)(i)(A) of 

this section. 

(5) Example 5: Not a qualifying 

retention—(i) Facts. The facts are the 

same as in paragraph (d)(2)(i) of this 

section (Example 2), except that 

Distributing owns multiple blocks of 

Controlled stock and the shares of 

retained Controlled stock are 

specifically designated for retention 

because the adjusted basis of that stock 

exceeds its fair market value as of the 

first distribution date. Distributing 

subsequently sells the retained 

Controlled stock in a transaction in 

which Distributing recognizes a loss for 

Federal income tax purposes. 

(ii) Analysis. The retention is treated 

as pursuant to a plan having as one of 

its principal purposes the avoidance of 

Federal income tax unless the retention 

is a qualifying retention. See paragraph 

(c)(1) of this section. Distributing does 

not satisfy the requirements for the safe 

harbor set forth in paragraph (c)(3) of 

this section, because the disposition of 

the retained Controlled stock results in 

less Federal income tax to Distributing 

than if that Controlled stock had been 

distributed in the first distribution. See 

paragraph (c)(3)(vii) of this section. For 

the same reason, the retention does not 

satisfy the facts-and-circumstances test 

set forth in paragraph (c)(2)(ii) of this 

section. See paragraph (c)(2)(ii)(E) of 

this section. Accordingly, the retention 

is not a qualifying retention. See 

paragraph (c)(2)(i) of this section. 

Consequently, the distribution does not 

qualify under section 355. See 

paragraphs (a) and (c)(1) of this section 

and § 1.355–2(e)(2)(iii). 

■ Par. 7. Section 1.357–0 is added to 

read as follows: 

§ 1.357–0 Table of contents. 

This section lists the major captions 

that appear in §§ 1.357–1 through 

1.357–5. 

§ 1.357–1 Assumption of liability. 

(a) Overview. 

(b) Definitions. 

(1) Code. 

(2) Commissioner. 

(3) Contingent liability. 

(4) Controlled corporation. 

(5) CSAG. 

(i) In general. 

(ii) Controlled corporation not a common 

parent. 

(6) Debt. 

(7) Distributing corporation. 

(8) Distributing corporation debt. 

(i) In general. 

(ii) Section 381(a) transactions. 

(9) Distributing corporation liability. 

(10) Divisive reorganization. 

(11) DSAG. 

(i) In general. 

(ii) Distributing corporation not a common 

parent. 

(12) Earliest applicable date. 

(i) In general. 

(ii) Similar transaction. 

(13) Historical distributing corporation 

debt. 

(14) IRS. 

(15) Liability. 

(i) In general. 

(ii) Certain obligations incurred in the 

ordinary course of business. 

(16) Plan of reorganization. 

(17) Refinanced distributing corporation 

debt. 

(18) Section 357 regulations. 

(19) Trade payable. 

(20) Transferee corporation. 

(21) Transferor. 

(22) Traveling note. 

§ 1.357–2 Application of section 357(a). 

(a) In general. 

(b) Amount realized. 

(c) Treatment of traveling notes. 

(d) Determination of amount of liability 

assumed. 

(1) In general. 

(i) Recourse liability. 

(ii) Nonrecourse liability. 

(2) [Reserved] 

(e) Dominion or control over payment of 

assumed liability. 


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(1) General rule. 

(2) Dominion or control. 

(i) In general. 

(ii) Segregated account; related person. 

(iii) No legal or practical dominion or 

control. 

(f) Examples. 

(1) Example 1: Application of general rule. 

(2) Example 2: Dominion or control. 

(3) Example 3: Exception to dominion or 

control. 

§ 1.357–3 Application of section 357(b). 

(a) Principal purpose standard. 

(1) General rule. 

(2) Ordinary course of business 

requirement. 

(b) Amount of gain recognized. 

(c) Burden of proof. 

(d) Eligible distributing corporation 

liabilities. 

(1) Scope. 

(2) In general. 

(3) Eligible assumptions of Distributing 

corporation liabilities. 

(4) Distributing corporation debt. 

(i) In general. 

(ii) Exceptions. 

(e) Examples. 

(1) Example 1: Application of general rule. 

(2) Example 2: Refinanced distributing 

corporation debt. 

(3) Example 3: Traveling note. 

(4) Example 4: Trade payables. 

(5) Example 5: Assumption to avoid 

Federal income tax in a divisive 

reorganization. 

(6) Example 6: Assumption to avoid 

Federal income tax in a section 351 

exchange. 

§ 1.357–4 Application of section 357(c). 

(a) Liabilities in excess of adjusted basis. 

(1) General rule. 

(2) Exceptions. 

(3) Certain liabilities excluded. 

(i) General rule. 

(ii) Exceptions. 

(b) Determination of character of gain of 

multiple capital assets. 

(c) Examples. 

(1) Example 1: Determination of character 

of gain. 

(2) Example 2: Capital and non-capital 

assets. 

(3) Example 3: Liabilities in excess of 

adjusted basis. 

§ 1.357–5 Applicability date. 

(a) Applicability date. 

■ Par. 8. Section 1.357–1 is revised to 

read as follows: 

§ 1.357–1 Assumption of liability. 

(a) Overview. The section 357 

regulations apply to the assumption by 

a transferee corporation of a liability of 

a transferor pursuant to an exchange 

between the transferor and the 

transferee corporation in a transaction 

qualifying under section 351 of the Code 

(relating to a transfer of property to a 

corporation controlled by the transferor) 

or section 361 of the Code (relating to 

the nonrecognition of gain or loss to a 

corporation upon the exchange of 

property pursuant to a plan of 

reorganization). 

(b) Definitions. The following 

definitions apply for purposes of the 

section 357 regulations: 

(1) Code. The term Code means the 

Internal Revenue Code of 1986, as 

amended. 

(2) Commissioner. The term 

Commissioner means the Commissioner 

of Internal Revenue. 

(3) Contingent liability. The term 

contingent liability means a liability 

(other than a debt) that includes one or 

more contingent payments. 

(4) Controlled corporation. The term 

controlled corporation means the 

controlled corporation described in 

section 355(a)(1)(A) of the Code. 

(5) CSAG—(i) In general. Except as 

provided in paragraph (b)(5)(ii) of this 

section, the term CSAG means the 

separate affiliated group (as defined in 

section 355(b)(3)(B)) of which a 

controlled corporation is the common 

parent. 

(ii) Controlled corporation not a 

common parent. If the controlled 

corporation is not the common parent of 

a separate affiliated group, the term 

CSAG refers to the controlled 

corporation. 

(6) Debt. The term debt means a 

liability pursuant to an instrument or a 

contractual arrangement that constitutes 

debt under general principles of Federal 

income tax law. See § 1.1275–1(d). 

(7) Distributing corporation. The term 

distributing corporation means the 

distributing corporation described in 

section 355(a)(1)(A). 

(8) Distributing corporation debt—(i) 

In general. The term distributing 

corporation debt means debt for which 

the distributing corporation is the 

obligor. 

(ii) Section 381(a) transactions. The 

term distributing corporation debt 

includes a debt that satisfies both of the 

following requirements: 

(A) The distributing corporation 

assumed the debt in a transaction to 

which section 381(a) of the Code 

applies; and 

(B) The debt assumed in the 

transaction was incurred prior to the 

earliest applicable date. 

(9) Distributing corporation liability. 

The term distributing corporation 

liability means a liability for which the 

distributing corporation is the obligor. 

(10) Divisive reorganization. The term 

divisive reorganization means a series of 

transactions carried out pursuant to a 

plan of reorganization that qualify as a 

reorganization described in sections 355 

and 368(a)(1)(D) or (G) of the Code. 

(11) DSAG—(i) In general. Except as 

provided in paragraph (b)(11)(ii) of this 

section, the term DSAG means the 

separate affiliated group (as defined in 

section 355(b)(3)(B)) of which the 

distributing corporation is the common 

parent. 

(ii) Distributing corporation not a 

common parent. If the distributing 

corporation is not the common parent of 

a separate affiliated group, the term 

DSAG means the distributing 

corporation. 

(12) Earliest applicable date—(i) In 

general. The term earliest applicable 

date means the date that is the earliest 

of— 

(A) The date of the first public 

announcement (as defined in § 1.355– 

7(h)(10)) of the divisive reorganization 

or a similar transaction; 

(B) The date of entry by the 

distributing corporation into a written 

agreement to engage in the divisive 

reorganization or a similar transaction; 

and 

(C) The date of approval of the 

divisive reorganization or a similar 

transaction by the board of directors of 

the distributing corporation. 

(ii) Similar transaction. For purposes 

of paragraph (b)(12)(i) of this section, 

the term similar transaction means a 

similar acquisition within the meaning 

of § 1.355–7(h)(12) and (13). 

(13) Historical distributing 

corporation debt. The term historical 

distributing corporation debt means a 

debt of the distributing corporation that 

was in existence as of the earliest 

applicable date, 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). 

(14) IRS. The term IRS means the 

Internal Revenue Service. 

(15) Liability—(i) In general. The term 

liability means a debt, a contingent 

liability, or any other fixed or 

contingent obligation, without regard to 

whether the obligation otherwise has 

been taken into account for Federal 

income tax purposes. 

(ii) Certain obligations incurred in the 

ordinary course of business—(A) In 

general. Except as provided in 

paragraph (b)(15)(ii)(B) of this section, 

an obligation incurred in the ordinary 

course of business pursuant to a 

bilateral contract is not a liability. 

(B) Exception regarding financial 

statements. An obligation described in 

paragraph (b)(15)(ii)(A) of this section is 

a liability, in whole or in part, to the 

extent the obligation is reflected in one 

or more financial statements of the 

obligor as a liability, reserve, or similar 

item. 


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(16) Plan of reorganization. The term 

plan of reorganization has the meaning 

provided in § 1.368–4. 

(17) Refinanced distributing 

corporation debt. The term refinanced 

distributing corporation debt means 

debt of a distributing corporation— 

(i) That is incurred on or after the 

earliest applicable date; and 

(ii) The proceeds of which are used to 

satisfy a historical distributing 

corporation debt. 

(18) Section 357 regulations. The term 

section 357 regulations means this 

section and §§ 1.357–2 through 1.357–5. 

(19) Trade payable. The term trade 

payable means debt arising in the 

ordinary course of a business from sales, 

leases, licenses, or the rendition of 

services provided to or for the 

distributing corporation. 

(20) Transferee corporation. The term 

transferee corporation means a 

corporation to which property is 

transferred pursuant to an exchange 

described in section 351 or 361. 

(21) Transferor. The term transferor 

means the person that transfers property 

to a transferee corporation pursuant to 

an exchange described in section 351 or 

361. 

(22) Traveling note. The term 

traveling note means, with regard to an 

exchange described in section 351 or 

361, a debt of the transferor that 

converts, pursuant to its terms, into a 

debt of the transferee corporation. 

■ Par. 9. Section 1.357–2 is revised to 

read as follows: 

§ 1.357–2 Application of section 357(a). 

(a) In general. Except as provided in 

§§ 1.357–3 and 1.357–4, and subject to 

the requirements set forth in paragraph 

(e) of this section, the assumption by a 

transferee corporation of a liability of a 

transferor will not be treated as money 

or other property received by the 

transferor, and will not prevent an 

exchange between the transferee 

corporation and the transferor from 

being within the provisions of section 

351 or 361 of the Code, if— 

(1) The 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 

(2) As part of the consideration, the 

transferee corporation assumes a 

liability of the transferor. 

(b) Amount realized. Neither section 

357(a) of the Code nor this section 

precludes 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 of the 

Code resulting from the exchange 

between the transferor and the 

transferee corporation. 

(c) Treatment of traveling notes. A 

transferee corporation is treated as 

assuming a traveling note with respect 

to which the transferor is the debtor at 

the time at which the debtor on the 

traveling note converts from the 

transferor to the transferee corporation 

under the terms of the note. 

(d) Determination of amount of 

liability assumed—(1) In general. For 

purposes of this section and §§ 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), the rules 

of this paragraph (d) apply in 

determining the amount of liabilities 

assumed by a transferee corporation. 

(i) Recourse liability. A recourse 

liability (or portion thereof) of a 

transferor is treated as having been 

assumed by the transferee corporation 

if, as determined based on all facts and 

circumstances, the transferee 

corporation has agreed to, and is 

expected to, satisfy or indemnify the 

transferor for the liability (or portion 

thereof), whether or not the transferor 

has been relieved of the liability (or 

portion thereof). 

(ii) Nonrecourse liability—(A) In 

general. A nonrecourse liability of a 

transferor is treated as having been 

assumed by the transferee corporation to 

which any asset subject to that liability 

is transferred. 

(B) Limitation on amount of 

nonrecourse liability treated as 

assumed. The amount of any 

nonrecourse liability of a transferor 

treated as assumed under paragraph 

(d)(1)(ii)(A) of this section is reduced by 

the lesser of— 

(1) The amount of that liability that an 

owner of other assets not transferred to 

the transferee corporation and also 

subject to that liability has agreed with 

the transferee corporation to, and is 

expected to, satisfy; or 

(2) The fair market value of the assets 

described in paragraph (d)(1)(ii)(B)(1) of 

this section (determined without regard 

to section 7701(g) of the Code). 

(2) [Reserved] 

(e) Dominion or control over payment 

of assumed liability—(1) General rule. If 

the transferee corporation (or, in the 

case of a divisive reorganization, a 

member of the CSAG) makes a payment 

to satisfy an assumed liability that 

results in the transferor (or, in the case 

of a divisive reorganization, a member 

of the DSAG) having legal or practical 

dominion or control over any part of the 

payment— 

(i) That part of the payment is treated 

as money or other property received by 

the transferor; 

(ii) The rules in section 351(b) or 

361(b) (as applicable) apply to 

determine the Federal income tax 

consequences of the receipt by the 

transferor of the money or other 

property; and 

(iii) The rules in this section and 

§§ 1.357–3 and 1.357–4 do not apply 

(that is, the Federal income tax 

consequences of the payment are not 

determined under section 357). 

(2) Dominion or control—(i) In 

general. Except as provided in 

paragraph (e)(2)(ii) or (iii) of this 

section, the determination of whether a 

payment is within a transferor’s legal or 

practical dominion or control is made 

based on all facts and circumstances. 

(ii) Segregated account; related 

person. For purposes of this paragraph 

(e), a payment is treated as within a 

transferor’s legal or practical dominion 

or control if made to a segregated 

account of the transferor (or, in the case 

of a divisive reorganization, a member 

of the DSAG) or 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. 

(iii) No legal or practical dominion or 

control. For purposes of this paragraph 

(e), a payment is treated as not within 

the legal or practical dominion or 

control of a transferor if all conditions 

set forth in paragraph (e)(2)(iii)(A) or (B) 

of this section (as appropriate) are 

satisfied. 

(A) Indemnification agreements. For 

payments made pursuant to an 

indemnification agreement: 

(1) The transferee corporation is 

legally prohibited from assuming the 

liability (for example, because the 

transferor is prohibited from causing 

any other person to assume the 

liability). 

(2) The indemnification agreement 

requires the transferor to first satisfy the 

obligation that is the subject of the 

indemnification agreement before the 

transferor is permitted to receive 

payment from the transferee 

corporation. 

(3) The transferor is in the same net 

economic position it would have been 

in if the transferee corporation legally 

were allowed to assume the liability. 

(B) Other payments. For any payment 

not made pursuant to an 

indemnification agreement: 

(1) The payment is dedicated to the 

satisfaction of a liability of the transferor 


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identified in an agreement or the plan 

of reorganization. 

(2) The payment is made to an 

independent trustee or escrow agent 

that is not affiliated with the transferor. 

(3) The payment is not made to any 

account of the transferor (or, in the case 

of a divisive reorganization, a member 

of the DSAG) or any person through 

which the transferor (or, in the case of 

a divisive reorganization, a member of 

the DSAG) could direct the payment. 

(4) The transferor and the transferee 

corporation treat any income, gain, or 

loss on the payment proceeds as 

income, gain, or loss to the transferee 

corporation. 

(5) Any excess of the payment amount 

(and any income or gain thereon) over 

the amount paid to satisfy the liability 

reverts to the transferee corporation. 

(f) Examples. The following examples 

illustrate the application of the rules of 

this section. For purposes of these 

examples: the principal purpose of the 

transferor with respect to the 

assumption of liabilities is not to avoid 

Federal income tax on the exchange; 

there is a bona fide business purpose for 

the assumption of liabilities; the amount 

of liabilities assumed by the transferee 

corporation does not exceed the 

adjusted basis of the assets transferred 

to the transferee corporation in the 

exchange; and any liability assumption 

is provided for in an agreement or a 

plan of reorganization entered into 

between the transferor and the 

transferee corporation before the date of 

the exchange. 

(1) Example 1: Application of general 

rule—(i) Facts. In an exchange that 

qualifies under section 351, Individual 

A transfers to a transferee corporation 

property with an adjusted basis of 

$10,000x in exchange for stock of the 

corporation with a fair market value of 

$8,000x, money amounting to $3,000x, 

and the assumption by the corporation 

of a liability of Individual A amounting 

to $4,000x. 

(ii) Analysis. Individual A’s realized 

gain is $5,000x, computed as follows: 

TABLE 1 TO PARAGRAPH (f)(1)(ii) 

Stock received, fair market value $8,000x 

Money received ............................ 3,000x 

Liability assumed by transferee 

corporation ................................ 4,000x 

Total consideration received ........ 15,000x 

Less: Adjusted basis of property 

transferred ................................. 10,000x 

Gain realized ................................ 5,000x 

The gain recognized to Individual A 

is limited to the $3,000x of money 

received, because the assumption of the 

$4,000x liability does not constitute 

money or other property. See paragraph 

(a) of this section and section 351(b). 

(2) Example 2: Dominion or control— 

(i) Facts. A distributing corporation 

(Distributing) transfers one of its 

businesses to a newly formed controlled 

corporation (Controlled) in exchange for 

Controlled stock (contribution). 

Distributing distributes all the 

Controlled stock to its shareholders 

(distribution; together with the 

contribution, the separation). As part of 

the contribution, Controlled agrees to 

assume a contingent liability of 

Distributing. The separation satisfies all 

requirements to qualify as a divisive 

reorganization. In a taxable year 

following the year of the distribution, 

the contingent liability becomes fixed 

and determinable. To satisfy the 

liability, Controlled makes a $200x 

payment to a segregated account 

maintained by Distributing, and 

Distributing uses the $200x in the 

segregated account to make payment to 

the obligee. 

(ii) Analysis. Distributing is treated as 

having dominion or control over the 

$200x payment despite its receipt of the 

payment in a segregated account. See 

paragraphs (e)(2)(i) and (ii) of this 

section. Accordingly, the $200x 

payment is treated as money received by 

Distributing in the contribution, and the 

rules in section 361(b) apply. See 

paragraph (e)(1) of this section. 

(3) Example 3: Exception to dominion 

or control—(i) Facts. The facts are the 

same as in paragraph (f)(2)(i) of this 

section (Example 2), except that, as part 

of the contribution, Distributing and 

Controlled enter into an indemnity 

agreement with respect to a contingent 

liability of Distributing that Controlled 

cannot assume in form under State law. 

Pursuant to the indemnity agreement, 

Distributing remains the primary obligor 

for State law purposes, but Controlled 

must reimburse Distributing for any 

payment that Distributing is required to 

make to satisfy the contingent liability. 

The indemnity agreement is treated as 

an assumption by Controlled of the 

contingent liability under paragraph (d) 

of this section. In a taxable year 

following the year of the distribution, 

the contingent liability becomes fixed 

and determinable, and Distributing 

makes a $200x payment to the obligee 

to satisfy the liability. Pursuant to the 

terms of the indemnity agreement, 

Controlled transfers to Distributing 

$200x, which Distributing retains. The 

$200x payment from Controlled to 

Distributing places Distributing in the 

same net economic position it would 

have been in if Controlled were allowed 

to assume the contingent liability under 

State law. 

(ii) Analysis. For purposes of 

paragraph (e)(1) of this section, 

Distributing is treated as not having 

dominion or control over the $200x 

payment despite its receipt of the 

payment. See paragraph (e)(2)(iii)(A) of 

this section. Accordingly, the $200x 

payment is not treated as money 

received by Distributing in the 

contribution. See paragraph (a) of this 

section. 

■ Par. 10. Sections 1.357–3 through 

1.357–5 are added to read as follows: 

§ 1.357–3 Application of section 357(b). 

(a) Principal purpose standard—(1) 

General rule. Section 1.357–2(a) does 

not apply to any exchange involving the 

assumption by a transferee corporation 

of a liability of a transferor if the 

principal purpose of the transferor with 

respect to that assumption is either— 

(i) To avoid Federal income tax on the 

exchange; or 

(ii) Not a bona fide business purpose. 

(2) Ordinary course of business 

requirement. With regard to an 

assumption by a transferee corporation 

of a liability described in paragraph 

(a)(1) of this section, a principal purpose 

is presumed to exist if the liability was 

not incurred in the ordinary course of a 

business of the transferor. 

(b) Amount of gain recognized. For 

purposes of determining the amount of 

gain recognized upon an exchange 

described in paragraph (a) of this 

section, the total amount of liabilities 

assumed or acquired pursuant to that 

exchange (and not merely a particular 

liability with respect to which the tax 

avoidance or non-business purpose 

existed) is treated as money or other 

property received by the transferor 

under section 351(b) or 361(b) (as 

applicable) of the Code upon the 

exchange. 

(c) Burden of proof. If the 

Commissioner determines that the 

transferor’s principal purpose with 

respect to the assumption of a liability 

by a transferee corporation was to avoid 

Federal income tax on the exchange or 

was not a bona fide business purpose, 

and if the transferor contests that 

determination, the burden is on the 

transferor to prove by a clear 

preponderance of the evidence that the 

liability assumption should not be 

treated as the receipt of money or other 

property. Therefore, the transferor must 

prove by such a clear preponderance of 

all the evidence that the absence of a 

purpose to avoid Federal income tax on 

the exchange, or the presence of a bona 

fide business purpose, is unmistakable. 

(d) Eligible distributing corporation 

liabilities—(1) Scope. The rules of this 


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5268 Federal Register / Vol. 90, No. 10 / Thursday, January 16, 2025 / Proposed Rules 

paragraph (d) apply solely to divisive 

reorganizations. 

(2) In general. A distributing 

corporation is presumed to have the 

principal purpose described in 

paragraph (a) of this section (and, as a 

result, is presumed to be treated as 

recognizing an amount of gain 

determined under paragraph (b) of this 

section) if the controlled corporation 

assumes a distributing corporation 

liability that is not eligible to be 

assumed under paragraph (d)(3) of this 

section. 

(3) Eligible assumptions of 

Distributing corporation liabilities. 

Distributing corporation liabilities are 

eligible to be assumed under § 1.357– 

2(a) in a divisive reorganization if— 

(i) The distributing corporation 

liabilities to be assumed are described 

in a plan of reorganization or original 

plan of reorganization (if amended); 

(ii) The distributing corporation 

liabilities were incurred in the ordinary 

course of business of the distributing 

corporation; and 

(iii) The assumption of such 

distributing corporation 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. 

(4) Distributing corporation debt—(i) 

In general. Except as provided in 

paragraph (d)(4)(ii) of this section, 

distributing corporation debt eligible to 

be assumed under paragraph (d)(3) of 

this section must qualify as historical 

distributing corporation debt. 

(ii) Exceptions. The following 

exceptions apply to the general rule in 

paragraph (d)(4)(i) of this section: 

(A) Qualifying trade payables. For 

purposes of paragraph (d)(4)(i) of this 

section, solely trade payables of the 

distributing corporation that meet the 

requirements set forth in paragraph 

(d)(3) of this section are not required to 

qualify as historical distributing 

corporation debt. 

(B) Assumptions of refinanced 

distributing corporation debt. For 

purposes of paragraph (d)(4)(i) of this 

section, refinanced distributing 

corporation debt is treated as historical 

distributing corporation debt if all the 

following requirements are met: 

(1) The distributing corporation has a 

direct business purpose for the 

controlled corporation’s assumption of 

the refinanced distributing corporation 

debt. For purposes of this paragraph 

(d)(4)(ii)(B)(1), the modification of the 

capital structure of the distributing 

corporation or the controlled 

corporation is not a direct business 

purpose unless that modification 

directly accomplishes a corporate 

business purpose of the distributing 

corporation. 

(2) 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. 

(3) 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. 

(4) The distributing corporation’s 

refinancing of its historical distributing 

corporation debt and the subsequent 

assumption of that refinanced 

distributing corporation debt are 

included in the plan of reorganization 

for the divisive reorganization. 

(5) There is no untaxed gain or other 

Federal income tax benefit resulting to 

the distributing corporation or the 

controlled corporation 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. 

(6) The business assets transferred by 

the distributing corporation to the 

controlled corporation in the exchange 

described in section 361(a) are 

associated with the refinanced 

distributing corporation debt assumed 

by the controlled corporation. 

(7) The refinancing of a 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. 

(C) Qualifying assumption of a 

traveling note. For purposes of 

paragraph (d)(4)(i) of this section, a 

controlled corporation’s assumption of a 

traveling note (within the meaning of 

§ 1.357–2(c)) issued to refinance a 

historical distributing corporation debt 

will be treated as historical distributing 

corporation debt only if all requirements 

set forth in paragraph (d)(4)(ii)(B) of this 

section are satisfied. 

(D) Revolving credit agreements. For 

purposes of paragraph (d)(4)(i) of this 

section, a revolving credit agreement to 

which the distributing corporation is a 

debtor qualifies as historical distributing 

corporation debt only if— 

(1) The distributing corporation 

entered into the agreement before the 

earliest applicable date; 

(2) That agreement does not expire 

until after the date of the exchange 

described in § 1.361–2(a) or 1.361–3(a); 

and 

(3) That agreement is identified in the 

plan of reorganization or original plan of 

reorganization (if amended). 

(e) Examples. The following examples 

illustrate the application of the rules of 

this section. For purposes of these 

examples: any liability assumption is 

provided for in an agreement or a plan 

of reorganization entered into between 

the transferor and transferee corporation 

before the date of the exchange; and the 

amount of liabilities assumed by the 

transferee corporation does not exceed 

the adjusted basis of the assets 

transferred to the transferee corporation 

in the exchange. 

(1) Example 1: Application of general 

rule—(i) Facts. In an exchange that 

qualifies under section 351, Individual 

A transfers to a transferee corporation 

property with an adjusted basis of 

$10,000x in exchange for stock of the 

corporation with a fair market value of 

$8,000x, money amounting to $3,000x, 

and the assumption by the corporation 

of debt of Individual A amounting to 

$4,000x. Individual A’s principal 

purpose for causing the transferee 

corporation to assume the $4,000x 

liability is to avoid Federal income tax 

on the exchange. 

(ii) Analysis. Individual A’s realized 

gain is $5,000x, computed as follows: 

TABLE 1 TO PARAGRAPH (e)(1)(ii) 

Stock received, fair market value $8,000x 

Money received ............................ 3,000x 

Liability assumed by transferee 

corporation ................................ 4,000x 

Total consideration received ........ 15,000x 

Less: Adjusted basis of property 

transferred ................................. 10,000x 

Gain realized ................................ 5,000x 

Because Individual A’s principal 

purpose for the assumption of the 

$4,000x liability is to avoid Federal 

income tax on the exchange, the amount 

of gain recognized is $5,000x. See 

paragraphs (a) and (b) of this section 

and section 351(b). 

(2) Example 2: Refinanced 

distributing corporation debt—(i) 


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Facts—(A) In general. A distributing 

corporation (Distributing) transfers one 

of its businesses to a newly formed 

controlled corporation (Controlled) in 

exchange for Controlled stock and 

Controlled’s assumption of liabilities of 

Distributing (contribution). Distributing 

distributes all the Controlled stock to its 

shareholders (distribution; together with 

the contribution, the separation). The 

separation satisfies all requirements to 

qualify as a divisive reorganization. 

(B) Refinanced debt. One liability that 

Distributing intended Controlled to 

assume in the contribution is a $4,000x 

portion of a $25,000x historical 

Distributing debt to a creditor that 

Distributing incurred in connection 

with the transferred business. However, 

Distributing is unable to apportion this 

historical debt with Controlled because 

the creditor refuses to relieve 

Distributing of its primary liability for 

repayment of the debt. Therefore, unless 

Distributing refinances that portion of 

its historical debt, Distributing will be 

unable to have Controlled assume an 

amount of existing historical debt that 

properly relates to, and to have that debt 

properly be satisfied with earnings from, 

the transferred business. Accordingly, 

pursuant to the plan of reorganization 

for the separation, Distributing obtains 

from a bank a new long-term $4,000x 

loan on which Distributing is primarily 

liable (New Loan), Distributing uses the 

proceeds from the New Loan to repay 

$4,000x of the $25,000x historical debt, 

Controlled then assumes the New Loan 

in the contribution (Controlled 

refinanced debt assumption), and the 

bank relieves Distributing of its primary 

liability for repayment of the New Loan. 

(ii) Analysis. The Controlled 

refinanced debt assumption satisfies all 

requirements set forth in paragraph 

(d)(4)(ii)(B) of this section and, 

therefore, is treated under paragraph 

(d)(3) of this section as an eligible 

assumption by Controlled to which 

§ 1.357–2(a) applies. Distributing has a 

direct business purpose for Controlled’s 

assumption of the New Loan. See 

paragraph (d)(4)(ii)(B)(1) of this section. 

Distributing’s refinancing of its 

historical debt is completed before 

Controlled’s assumption of the New 

Loan. See paragraph (d)(4)(ii)(B)(2) of 

this section. Following the Controlled 

refinanced debt assumption, 

Distributing and Controlled are in the 

same net economic position as they 

would have been had Controlled 

assumed an equivalent portion of 

Distributing’s historical debt. See 

paragraph (d)(4)(ii)(B)(3) of this section. 

Distributing’s refinancing of historical 

debt and the Controlled refinanced debt 

assumption occur pursuant to the plan 

of reorganization for the separation. See 

paragraph (d)(4)(ii)(B)(4) of this section. 

No untaxed gain or other Federal 

income tax benefit results to 

Distributing or Controlled from 

Distributing’s refinancing of historical 

Distributing debt and the Controlled 

refinanced debt assumption. See 

paragraph (d)(4)(ii)(B)(5) of this section. 

The business assets transferred by 

Distributing to Controlled in the section 

361 exchange are associated with the 

New Loan. See paragraph (d)(4)(ii)(B)(6) 

of this section. Lastly, the Distributing 

refinancing of historical debt and the 

Controlled refinanced debt assumption 

result in Controlled assuming liabilities 

in an amount that properly relates to, 

and that properly will be satisfied with 

earnings generated by, its business 

operations. See paragraph (d)(4)(ii)(B)(7) 

of this section. 

(3) Example 3: Traveling note—(i) 

Facts. The facts are the same as in 

paragraph (e)(2)(i) of this section 

(Example 2), except that, pursuant to 

the terms of the New Loan, Controlled 

replaces Distributing as the debtor on 

the New Loan upon the contribution. 

(ii) Analysis. The New Loan is treated 

as a traveling note. See § 1.357–1(b)(22). 

Therefore, Controlled is treated as 

assuming the New Loan at the time 

Controlled becomes the debtor on the 

New Loan (that is, upon the 

contribution). See § 1.357–2(c). The 

analysis is the same as in paragraph 

(e)(2)(ii) of this section (Example 2). 

(4) Example 4: Trade payables—(i) 

Facts—(A) In general. Pursuant to a plan 

of reorganization, a distributing 

corporation (Distributing) transfers one 

of its two operating divisions (Business 

B) to a newly formed controlled 

corporation (Controlled) in exchange for 

Controlled stock and the assumption of 

$20,000x of Distributing liabilities 

(contribution), and Distributing 

distributes all the Controlled stock to its 

shareholders on a pro rata basis 

(distribution; together with the 

contribution, the separation). The 

separation satisfies all requirements to 

qualify as a divisive reorganization. 

(B) Liabilities assumed. The $20,000x 

of liabilities assumed by Controlled 

arose in the ordinary course of Business 

B’s operations from the rendition of 

services to or for Distributing. The 

liabilities were incurred after the 

earliest applicable date, but before the 

contribution date identified in the plan 

of reorganization for the separation. The 

assumption of those liabilities is 

necessary to ensure the transfer to 

Controlled of all liabilities properly 

associated with Business B and to result 

in Controlled assuming an amount of 

Distributing liabilities that properly 

relates to, and that will be properly 

satisfied with earnings from, Business B. 

(ii) Analysis. The $20,000x of 

liabilities assumed by Controlled are 

trade payables because they constitute 

debt that arose in the ordinary course of 

Business B’s operations from the 

rendition of services to or for 

Distributing. See § 1.357–1(b)(19). 

Accordingly, these liabilities are not 

required to qualify as historical 

distributing corporation debt to be 

eligible for assumption by Controlled. 

See paragraph (d)(4)(ii)(A) of this 

section. Consequently, all $20,000x of 

trade payables are eligible to be 

assumed by Controlled under paragraph 

(d)(3) of this section. See paragraph 

(d)(4)(i) of this section. Therefore, 

Distributing is not treated as having the 

principal purpose described in 

paragraph (a)(1) of this section for 

Controlled’s assumption of the $20,000x 

of liabilities, and, consequently, those 

liabilities are not treated as money 

received by Distributing in the 

contribution. See paragraphs (a) and 

(d)(2) of this section. 

(5) Example 5: Assumption to avoid 

Federal income tax in a divisive 

reorganization—(i) Facts. A distributing 

corporation (Distributing) transfers one 

of its businesses (Business A) to a newly 

formed controlled corporation 

(Controlled) in exchange for Controlled 

stock and Controlled’s assumption of 

historical Distributing debt 

(contribution). The historical 

Distributing debt consists of two loans 

(Loan 1 and Loan 2) that were incurred 

by Distributing prior to the earliest 

applicable date and have an original 

term that ends after the date of the 

contribution. Loan 1 was incurred in the 

ordinary course of business and is 

associated with Business A. Loan 2 was 

not incurred in the ordinary course of 

business and is not associated with 

Business A. Distributing distributes all 

the Controlled stock to its shareholders 

(distribution; together with the 

contribution, the separation). The 

separation satisfies all requirements to 

qualify as a divisive reorganization. 

(ii) Analysis. Because Loan 2 was not 

incurred in the ordinary course of 

business and the assumption of that 

debt is not necessary to ensure the 

transfer to Controlled of all liabilities 

properly associated with Business A, 

Loan 2 is presumed to have been 

assumed for a principal purpose 

described in paragraph (a) of this 

section. See paragraphs (d)(2) and (3) of 

this section. Accordingly, Controlled’s 

assumption of the historical Distributing 

debt (that is, both Loan 1 and Loan 2) 

is presumed to be treated as money 

received by Distributing in the 


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exchange. See paragraphs (a) and (b) of 

this section and § 1.357–2(a). However, 

Distributing would recognize no gain on 

the exchange if, pursuant to the plan of 

reorganization, Distributing distributes 

to its shareholders an amount of money 

equivalent to the amount it is treated as 

having received in the contribution or 

transfers an equivalent amount of 

money to its creditors in satisfaction of 

Distributing debt in a distribution or 

transfer meeting the requirements set 

forth in § 1.361–3(b)(2). 

(6) Example 6: Assumption to avoid 

Federal income tax in a section 351 

exchange—(i) Facts. In a transaction 

that qualifies as a section 351 exchange, 

Corporation A contributes one of its two 

businesses to newly formed Corporation 

B in exchange for all of B’s stock and B’s 

assumption of liabilities of A. One of the 

liabilities assumed by B was not 

incurred in the ordinary course of A’s 

business. 

(ii) Analysis. Because the liability 

assumed by B was not incurred in the 

ordinary course of business, the liability 

is presumed to have been assumed for 

a principal purpose described in 

paragraph (a)(1) of this section. See 

paragraph (a)(2) of this section. 

Accordingly, B’s assumption of 

liabilities is presumed to be treated as 

money received by A on the exchange. 

For purposes of determining the amount 

of gain A recognizes on the exchange 

under section 351(b), the total amount 

of liabilities assumed by B would be 

treated as money received by A. See 

paragraph (b) of this section. 

§ 1.357–4 Application of section 357(c). 

(a) Liabilities in excess of adjusted 

basis—(1) General rule. Except as 

provided in paragraph (a)(2) of this 

section, in an exchange to which section 

351 of the Code is applicable, or to 

which section 361 of the Code is 

applicable by reason of a divisive 

reorganization that qualifies under 

sections 355 and 368(a)(1)(D) of the 

Code, a transferor is treated as 

recognizing gain from the sale or 

exchange of a capital asset or of 

property that is not a capital asset, as 

applicable, in an amount equal to 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 to the exchange. 

(2) Exceptions. Paragraph (a)(1) of this 

section does not apply to any 

exchange— 

(i) To which § 1.357–3(a) applies; 

(ii) That is pursuant to a plan of 

reorganization for a transaction that 

qualifies as a reorganization under 

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 

the exchange— 

(A) Also qualifies as part of a 

reorganization described in section 

368(a)(1)(A), (C), (D) (provided the 

requirements of section 354(b)(1) of the 

Code are satisfied), or (G) (provided the 

requirements of section 354(b)(1) are 

satisfied); and 

(B) Is described as a reorganization 

pursuant to a filing with the IRS under 

§ 1.368–3. 

(3) Certain liabilities excluded—(i) 

General rule. Except as provided in 

paragraph (a)(3)(ii) of this section, the 

following liabilities are excluded for 

purposes of applying paragraph (a)(1) of 

this section: 

(A) A liability the payment of which 

would give rise to a deduction. 

(B) A liability the payment of which 

would give rise to the creation of, or 

increase in, the basis of any property. 

(C) A liability the payment of which 

would be described in section 736(a) of 

the Code. 

(ii) Exceptions. Paragraph (a)(3)(i) of 

this section does not apply to any 

liability to the extent that— 

(A) The incurrence of the liability 

resulted in a deduction; 

(B) The incurrence of the liability 

resulted in the creation of, or an 

increase in, the basis of any property; or 

(C) The liability is not— 

(1) Incurred in the ordinary course of 

business; or 

(2) Associated with any assets 

transferred. 

(b) Determination of character of gain 

of multiple capital assets. The 

determination of whether gain resulting 

from the transfer of capital assets is 

long-term or short-term capital gain is 

made 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. 

(c) Examples. The following examples 

illustrate the application of the rules of 

this section. For purposes of these 

examples: no exchange is described in 

paragraph (a)(2) of this section; any 

liability assumption is provided for in 

an agreement or a plan of reorganization 

entered into between the transferor and 

the transferee corporation before the 

date of the exchange; no liability is 

described in paragraph (a)(3)(i) of this 

section; all liabilities were incurred in 

the ordinary course of business and are 

associated with the assets transferred; 

the transferor’s principal purpose with 

respect to the assumption of liabilities is 

not to avoid Federal income tax on the 

exchange; and there is a bona fide 

business purpose for the assumption of 

liabilities. 

(1) Example 1: Determination of 

character of gain—(i) Facts. In an 

exchange that qualifies under section 

351, Individual A transfers to a 

transferee corporation property with an 

adjusted basis of $1,000x in exchange 

for stock of the transferee corporation 

with a fair market value of $8,000x and 

the assumption by the transferee 

corporation of Individual A debt 

amounting to $4,000x. All assets 

transferred by Individual A to the 

transferee corporation are capital assets. 

By reference to Individual A’s holding 

period at the time of the exchange, one 

half of the assets transferred (with a fair 

market value of $4,000x and an adjusted 

basis of $500x) have a long-term holding 

period, and the other half of the assets 

transferred (with a fair market value of 

$4,000x and an adjusted basis of $500x) 

have a short-term holding period. 

(ii) Analysis. The excess of the 

amount of liabilities assumed over the 

adjusted basis of the assets transferred 

($4,000x¥$1,000x = $3,000x) is treated 

as gain from the sale or exchange of a 

capital asset. See paragraph (a)(1) of this 

section. Half of Individual A’s capital 

gain resulting from the deemed sale or 

exchange of a capital asset (that is, 

$1,500x) is long-term capital gain, and 

the other half is short-term capital gain. 

See paragraph (b) of this section. 

(2) Example 2: Capital and noncapital assets—(i) Facts. The facts are 

the same as in paragraph (c)(1)(i) of this 

section (Example 1), except that the 

long-term assets transferred are capital 

assets, and the short-term assets are 

other than capital assets. 

(ii) Analysis. Half of the gain 

recognized by Individual A is treated as 

capital gain, and the other half of the 

gain recognized by Individual A is 

treated as gain from the sale or exchange 

of assets other than capital assets. See 

paragraph (a)(1) of this section. 

(3) Example 3: Liabilities in excess of 

adjusted basis—(i) Facts. Pursuant to a 

plan of reorganization, a distributing 

corporation (Distributing) transfers one 

of its businesses (Business A) to a newly 

formed controlled corporation 

(Controlled) in exchange for Controlled 

stock and Controlled’s assumption of a 

historical Distributing debt 

(contribution), and Distributing 

distributes all the Controlled stock to its 

shareholders (distribution; together with 

the contribution, the separation). The 

separation satisfies all requirements to 

qualify as a divisive reorganization. At 

the time of the contribution, 


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Distributing has an aggregate adjusted 

basis of $5,000x in the Business A 

assets, which are the only assets subject 

to a nonrecourse loan of $10,000x. 

(ii) Analysis. Under paragraph (a) of 

this section, Controlled’s assumption of 

Distributing’s Business A loan causes 

Distributing to recognize gain on the 

transfer of Business A to Controlled as 

though Distributing had sold or 

exchanged the Business A assets to 

Controlled. Specifically, because the 

amount of the loan ($10,000x) exceeds 

the total adjusted basis of the Business 

A assets ($5,000x), Distributing 

recognizes gain of $5,000x 

($10,000x¥$5,000x) on the exchange. 

See paragraph (a)(1) of this section. The 

character of that gain depends on the 

character of the assets transferred in the 

exchange. See paragraph (b) of this 

section. 

§ 1.357–5 Applicability date. 

(a) Applicability date. The rules of 

§§ 1.357–1 through 1.357–4 apply to 

transactions intended to qualify under 

section 351 or 361 of the Code for which 

the earliest of the following dates occurs 

after [DATE OF PUBLICATION OF 

FINAL REGULATIONS IN THE 

FEDERAL REGISTER]: 

(1) The date of the first public 

announcement (as defined in § 1.355– 

7(h)(10)) of the transaction. 

(2) The date of entry by the taxpayer 

into a written agreement to engage in 

the transaction. 

(3) The date of approval of the 

transaction 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 

of a court) in a title 11 or similar case 

(as defined in section 368(a)(3)(A) of the 

Code), but only if the taxpayer was a 

debtor in a case before such court. 

(5) The date a ruling request for the 

transaction is submitted to the IRS. 

■ Par. 11. Section 1.361–0 is added to 

read as follows: 

§ 1.361–0 Table of contents. 

This section lists the major captions 

that appear in §§ 1.361–1 through 

1.361–6. 

§ 1.361–1 Nonrecognition of gain or loss to 

corporations under section 361. 

(a) Overview. 

(1) In general. 

(2) Scope. 

(b) Definitions. 

(1) Acquiring corporation. 

(2) Acquisitive reorganization. 

(3) Amount. 

(4) Appreciated nonqualified property. 

(i) In general. 

(ii) Inclusions. 

(5) Assume; assumption. 

(6) Code. 

(7) Contingent liability. 

(8) Control distribution. 

(9) Control distribution date. 

(10) Controlled corporation. 

(11) Controlled corporation contingent 

liability. 

(12) Controlled corporation debt. 

(13) Controlled corporation related person. 

(14) Covered convertible debt. 

(15) CSAG. 

(i) In general. 

(ii) Controlled corporation not a common 

parent. 

(16) Debt. 

(17) Direct issuance transaction. 

(18) Distributing corporation. 

(19) Distributing corporation contingent 

liability. 

(20) Distributing corporation debt. 

(i) In general. 

(ii) Section 381(a) transactions. 

(21) Distributing corporation liability. 

(22) Distributing corporation related 

person. 

(23) Distribution. 

(24) Distribution date. 

(25) Distribution period. 

(26) Divisive reorganization. 

(27) DSAG. 

(i) In general. 

(ii) Distributing corporation not a common 

parent. 

(28) Earliest applicable date. 

(i) In general. 

(ii) Similar transaction. 

(29) Final distribution. 

(30) Final distribution date. 

(31) First distribution. 

(32) First distribution date. 

(33) Historical distributing corporation 

debt. 

(34) Intermediary. 

(i) In general. 

(ii) Inclusion. 

(35) Intermediated exchange. 

(36) Liability. 

(i) In general. 

(ii) Certain obligations incurred in the 

ordinary course of business. 

(37) Non-qualifying creditor. 

(38) Obligor. 

(39) Other property. 

(40) Party to a reorganization. 

(41) Plan of reorganization. 

(42) Post-distribution payment. 

(43) Qualified property. 

(44) Qualifying creditor. 

(45) Qualifying debt elimination 

transaction. 

(46) Refinanced historical distributing 

corporation debt. 

(47) Related person. 

(48) Revolving credit agreement. 

(49) Section 361 consideration. 

(i) In general. 

(ii) Inclusions. 

(iii) Exclusion. 

(50) Section 361 regulations. 

(51) Target corporation. 

(i) In general. 

(ii) Inclusions. 

(52) Trade payable. 

(53) True-up payment. 

(54) Unrelated ultimate creditor. 

§ 1.361–2 Exchanges solely for stock or 

securities under section 361(a). 

(a) General rule. 

(b) Exchanges not solely for stock or 

securities. 

(c) Example. 

§ 1.361–3 Exchanges not solely for stock or 

securities under section 361(b). 

(a) Scope. 

(1) In general. 

(2) Exception. 

(b) Money or other property distributed in 

acquisitive reorganizations. 

(1) Distributions to shareholders. 

(2) Transfers to creditors. 

(c) Money or other property distributed in 

divisive reorganizations. 

(1) Distributions to shareholders. 

(2) Transfers to creditors. 

(i) In general. 

(ii) Application of adjusted basis limitation 

to divisive reorganizations described in 

sections 355 and 368(a)(1)(D). 

(3) Post-distribution payments received by 

a distributing corporation. 

(i) Treatment as section 361 consideration. 

(ii) Segregated account requirement. 

(iii) Disposition requirement. 

(4) Post-distribution payments received by 

a controlled corporation. 

(i) Characterization as contribution in the 

reorganization exchange. 

(ii) Value not reasonably ascertainable. 

(iii) Proper accounting. 

(d) Money or other property not 

distributed. 

(e) No recognition of loss. 

(f) Examples. 

(1) Example 1: Acquisitive reorganization. 

(2) Example 2: Divisive reorganization with 

money or other property distributed pursuant 

to plan of reorganization. 

(3) Example 3: Ordinary course 

distribution. 

(4) Example 4: Special stock repurchase 

program. 

(5) Example 5: Existing stock repurchase 

program. 

(6) Example 6: Divisive reorganization with 

money or other property not distributed 

within the 12-month period. 

(7) Example 7: Post-distribution payments 

from a distributing corporation to a 

controlled corporation. 

(8) Example 8: Post-distribution payment 

from a controlled corporation to a 

distributing corporation. 

§ 1.361–4 Distributions of property under 

section 361(c). 

(a) Distributions of qualified property. 

(1) Distributions to shareholders. 

(2) Treatment of certain transfers to 

creditors. 

(i) Acquisitive reorganizations. 

(ii) Divisive reorganizations. 

(b) Distributions of appreciated 

nonqualified property. 

(1) Deemed sale treatment. 

(2) Treatment of liabilities. 

(c) No recognition of loss. 

(d) Coordination with other provisions; 

cross-references. 

(e) Examples. 

(1) Example 1: Distribution of qualified 

property. 

(2) Example 2: Distribution timing 

requirement. 


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(3) Example 3: Distribution of nonqualified 

property. 

§ 1.361–5 Transfers to creditors of 

distributing corporation in divisive 

reorganizations under section 361(b)(3) 

and (c)(3). 

(a) General rule. 

(b) Qualifying creditor. 

(1) General status as a creditor with regard 

to distributing corporation debt. 

(2) Related-creditor prohibition. 

(i) General rule. 

(ii) Exception for certain distributing 

corporation related persons. 

(iii) Determination of related-person status. 

(c) Eligible distributing corporation debt. 

(1) Overview. 

(2) Qualification as eligible distributing 

corporation debt. 

(i) Historical distributing corporation debt. 

(ii) Refinancing exception for historical 

distributing corporation debt. 

(iii) Revolving credit agreements. 

(iv) Qualifying trade payables. 

(v) Direct issuance debt. 

(3) Determination of amount of distributing 

corporation debt. 

(i) Purpose. 

(ii) Aggregate amount of distributing 

corporation debt. 

(iii) Offsetting debts taken into account. 

(d) Maximum amount of distributing 

corporation debt. 

(1) General calculation. 

(2) Eight-quarterly-average test. 

(i) Determination. 

(ii) Calculation of distributing corporation 

debt at the close of each quarter. 

(iii) Distributing corporation debt held by 

distributing corporation related person. 

(e) Qualifying debt elimination 

transactions. 

(1) Overview. 

(2) Qualifying original creditor exchanges. 

(3) Qualifying intermediated exchanges. 

(i) Prohibition on intermediary benefits. 

(ii) Prohibition on acquiring debt from 

distributing corporation. 

(iii) Arm’s-length bargaining required. 

(iv) Prohibition on profit-sharing or 

limitation. 

(v) Independence requirement. 

(vi) Minimum temporal requirement. 

(4) Qualifying direct issuance transactions. 

(i) Overview. 

(ii) Facts-and-circumstances test. 

(iii) Safe harbor for direct issuance 

transactions. 

(iv) Prohibition regarding variable pricing 

and similar agreements. 

(f) Transitorily eliminated distributing 

corporation debt. 

(1) Overview. 

(2) Transitory elimination. 

(i) General rule. 

(ii) Borrowings not in the ordinary course. 

(iii) Borrowings in the ordinary course. 

(g) Examples. 

(1) Example 1: Transfer of money or other 

property to related creditor. 

(2) Example 2: Refinancing of historical 

distributing corporation debt. 

(3) Example 3: Eight-quarterly-average test. 

(4) Example 4: Amount of distributing 

corporation debt under revolving credit 

agreement. 

(5) Example 5: Effect of offsetting debts on 

amount of distributing corporation debt. 

(6) Example 6: Qualifying original creditor 

exchange. 

(7) Example 7: Not a qualifying direct 

issuance transaction. 

(8) Example 8: Qualifying intermediated 

exchange. 

§ 1.361–6 Applicability date. 

(a) Applicability date. 

■ Par. 12. Section 1.361–1 is revised to 

read as follows: 

§ 1.361–1 Nonrecognition of gain or loss 

to corporations under section 361. 

(a) Overview—(1) In general. The 

section 361 regulations apply— 

(i) To exchanges of property by a 

target corporation pursuant to a plan of 

reorganization for property from an 

acquiring corporation that is a party to 

the reorganization; and 

(ii) To distributions by the target 

corporation to its shareholders of 

property pursuant to a plan of 

reorganization (including transfers by 

the target corporation treated as such 

distributions). 

(2) Scope. Paragraph (b) of this section 

provides definitions for purposes of the 

regulations under section 361 of the 

Code. Section 1.361–2 provides rules 

regarding exchanges in which a target 

corporation receives solely stock or 

securities in an acquiring corporation. 

Section 1.361–3 provides rules 

regarding exchanges in which a target 

corporation receives money or other 

property in addition to stock or 

securities in an acquiring corporation. 

Section 1.361–4 provides rules 

regarding distributions of property 

received by a target corporation in the 

exchange. Section 1.361–5 provides 

rules regarding transfers of section 361 

consideration to creditors of a 

distributing corporation in a divisive 

reorganization. Section 1.361–6 

provides the applicability date. 

(b) Definitions. The following 

definitions apply for purposes of the 

section 361 regulations: 

(1) Acquiring corporation. The term 

acquiring corporation means a 

corporation (including a controlled 

corporation) that receives property 

transferred by a target corporation in an 

exchange to which section 361(a) 

applies. 

(2) Acquisitive reorganization. The 

term acquisitive reorganization means a 

transaction that qualifies as a 

reorganization under— 

(i) Section 368(a)(1)(A) of the Code 

(including by reason of section 

368(a)(2)(D) or section 368(a)(2)(E)); 

(ii) Section 368(a)(1)(C); 

(iii) Section 368(a)(1)(D) (provided the 

requirements of section 354(b)(1) of the 

Code are satisfied); 

(iv) Section 368(a)(1)(F); or 

(v) Section 368(a)(1)(G) (provided the 

requirements of section 354(b)(1) are 

satisfied). 

(3) Amount. The term amount means: 

(i) With respect to liabilities, except as 

provided under paragraph (b)(3)(ii) or 

(iii) of this section, the amount of cash 

that a willing assignor would pay to a 

willing assignee to assume the liability 

in an arm’s-length transaction. 

(ii) With respect to debt, except as 

provided in paragraph (b)(3)(iii) of this 

section, the adjusted issue price (as 

defined in § 1.1275–1(b)) of the debt. 

(iii) With respect to covered 

convertible debt, the fair market value of 

the covered convertible debt as of the 

earliest applicable date. 

(4) Appreciated nonqualified 

property—(i) In general. The term 

appreciated nonqualified property 

means property distributed by a target 

corporation under § 1.361–4(b) that— 

(A) Is property other than qualified 

property; and 

(B) At the time of the distribution of 

that property under section 361(c), has 

a fair market value that exceeds the 

adjusted basis of that property in the 

hands of the target corporation. 

(ii) Inclusions. The term appreciated 

nonqualified property includes all 

controlled corporation stock or 

securities— 

(A) Treated as other property under 

section 355(a)(3)(B) of the Code; 

(B) Distributed in a disqualified 

distribution, as defined in section 

355(d)(2); or 

(C) Distributed by a distributing 

corporation pursuant to an acquisition 

described in section 355(e)(2). 

(5) Assume; assumption. With respect 

to a liability, the terms assume, 

assumption, and similar terms have the 

meaning of ‘‘assumed’’ as set forth in 

§ 1.357–2(d). 

(6) Code. The term Code means the 

Internal Revenue Code of 1986, as 

amended. 

(7) Contingent liability. The term 

contingent liability means a liability 

(other than a debt) that includes one or 

more contingent payments. 

(8) Control distribution. The term 

control distribution means a distribution 

of controlled corporation stock, or of 

controlled corporation stock and 

securities, that results in the 

distribution by the distributing 

corporation of an amount of controlled 

corporation stock constituting control 

(within the meaning of section 368(c) of 

the Code). 

(9) Control distribution date. The term 

control distribution date means the date 

of the control distribution. 

(10) Controlled corporation. The term 

controlled corporation means the 


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controlled corporation described in 

section 355(a)(1)(A). 

(11) Controlled corporation 

contingent liability. The term controlled 

corporation contingent liability means a 

contingent liability for which a 

controlled corporation is the obligor. 

(12) Controlled corporation debt. The 

term controlled corporation debt means 

debt for which a controlled corporation 

is the obligor. 

(13) Controlled corporation related 

person. The term controlled corporation 

related person means a related person 

with respect to a controlled corporation. 

(14) Covered convertible debt. The 

term covered convertible debt means 

debt with a conversion option described 

in § 1.1275–4(a)(4) that is reasonably 

certain to be exercised as of the earliest 

applicable date based on all facts and 

circumstances— 

(i) Taking into account § 1.1504–4(g) 

(to the extent relevant); but 

(ii) Not taking into account the safe 

harbors described in § 1.1504–4(g)(3). 

(15) Debt. The term debt means a 

liability pursuant to an instrument or a 

contractual arrangement that constitutes 

debt under general principles of Federal 

income tax law. See § 1.1275–1(d). 

(16) Direct issuance debt. The term 

direct issuance debt means the newly 

incurred debt a distributing corporation 

incurs with a creditor as part of a direct 

issuance transaction and the proceeds of 

which are used to repay historical 

distributing corporation debt. 

(17) Direct issuance transaction. The 

term direct issuance transaction means 

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. 

(18) Distributing corporation. The 

term distributing corporation means the 

distributing corporation described in 

section 355(a)(1)(A). 

(19) Distributing corporation 

contingent liability. The term 

distributing corporation contingent 

liability means a contingent liability for 

which the distributing corporation is the 

obligor. 

(20) Distributing corporation debt—(i) 

In general. The term distributing 

corporation debt means debt for which 

the distributing corporation is the 

obligor. 

(ii) Section 381(a) transactions. The 

term distributing corporation debt 

includes a debt that satisfies the 

following requirements: 

(A) The distributing corporation 

assumed the debt in a transaction to 

which section 381(a) of the Code 

applies; and 

(B) The debt assumed in the 

transaction was incurred prior to the 

earliest applicable date. 

(21) Distributing corporation liability. 

The term distributing corporation 

liability means a liability for which the 

distributing corporation is the obligor. 

(22) Distributing corporation related 

person. The term distributing 

corporation related person means a 

related person with respect to the 

distributing corporation. 

(23) Distribution. The term 

distribution means a single distribution, 

or one of a series of distributions, of 

controlled corporation stock, or of 

controlled corporation stock and 

securities— 

(i) Intended to qualify as a divisive 

reorganization; and 

(ii) Made by the distributing 

corporation pursuant to the plan of 

reorganization. 

(24) Distribution date. If all 

distributions comprising an intended 

divisive reorganization take place on 

one date— 

(i) The term distribution date means 

that date; and 

(ii) Each of the terms first distribution 

date, control distribution date, and final 

distribution date refers to the 

distribution date. 

(25) Distribution period. The term 

distribution period means the period of 

time that— 

(i) Begins at the time of the first 

distribution; and 

(ii) Ends at the time of the final 

distribution. 

(26) Divisive reorganization. The term 

divisive reorganization means a series of 

transactions carried out pursuant to a 

plan of reorganization that qualify as a 

reorganization under sections 355 and 

368(a)(1)(D) or (G). 

(27) Earliest applicable date—(i) In 

general. The term earliest applicable 

date means the date that is the earliest 

of— 

(A) The date of the first public 

announcement (as defined in § 1.355– 

7(h)(10)) of the divisive reorganization 

or a similar transaction; 

(B) The date of entry by the 

distributing corporation into a written 

agreement to engage in the divisive 

reorganization or a similar transaction; 

and 

(C) The date of approval of the 

divisive reorganization or a similar 

transaction by the board of directors of 

the distributing corporation. 

(ii) Similar transaction. For purposes 

of paragraph (b)(27)(i) of this section, 

the term similar transaction means a 

similar acquisition within the meaning 

of § 1.355–7(h)(12) and (13). 

(28) Eligible distributing corporation 

debt. The term eligible distributing 

corporation debt means distributing 

corporation debt described in § 1.361– 

5(c). 

(29) Final distribution. The term final 

distribution means, with respect to a 

series of distributions, the last 

distribution that is made by the 

distributing corporation pursuant to the 

plan of reorganization. 

(30) Final distribution date. The term 

final distribution date means the date of 

the final distribution. 

(31) First distribution. The term first 

distribution means, with respect to a 

series of distributions, the earliest 

distribution that is made by the 

distributing corporation pursuant to the 

plan of reorganization. 

(32) First distribution date. The term 

first distribution date means the date of 

the first distribution. 

(33) Historical distributing 

corporation debt. The term historical 

distributing corporation debt means 

distributing corporation debt described 

in § 1.361–5(c)(2). 

(34) Intermediary—(i) In general. The 

term intermediary means an investment 

bank or other person that— 

(A) Is not a distributing corporation 

related person or a controlled 

corporation related person, at any time 

during the period beginning on the 

earliest applicable date and ending on 

the date of completion of the plan of 

reorganization; and 

(B) Provides capital or financial 

services to the distributing corporation 

or the controlled corporation, directly or 

indirectly, to facilitate the divisive 

reorganization. 

(ii) Inclusion. The term intermediary 

includes a related person of the 

intermediary. 

(35) Intermediated exchange. The 

term intermediated exchange means a 

transaction, or a series of transactions 

(or similar transaction or series of 

transactions), in which an 

intermediary— 

(i) Acquires historical distributing 

corporation debt on a secondary market 

from the holders of that debt; and 

(ii) Exchanges that historical 

distributing corporation debt for 

controlled corporation stock or 

securities held by the distributing 

corporation. 


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(36) Liability—(i) In general. The term 

liability means a debt, a contingent 

liability, or any other fixed or 

contingent obligation, without regard to 

whether the obligation otherwise has 

been taken into account for Federal 

income tax purposes. 

(ii) Certain obligations incurred in the 

ordinary course of business—(A) In 

general. Except as provided in 

paragraph (b)(36)(ii)(B) of this section, 

an obligation incurred in the ordinary 

course of business pursuant to a 

bilateral contract is not a liability. 

(B) Exception regarding financial 

statements. An obligation described in 

paragraph (b)(36)(ii)(A) of this section is 

a liability, in whole or in part, to the 

extent the obligation is reflected in one 

or more financial statements of the 

obligor as a liability, reserve, or similar 

item. 

(37) Non-qualifying creditor. The term 

non-qualifying creditor has the meaning 

provided in § 1.361–5(b)(2)(i). 

(38) Obligor. With regard to a liability, 

the term obligor means the person that 

has agreed and is expected (as 

determined based on all facts and 

circumstances) to satisfy the liability, 

taking into account— 

(i) All relevant provisions of the Code 

(including the principles of section 

357(d) (liability treated as assumed)); 

(ii) Treasury regulations (26 CFR 

chapter I); and 

(iii) General principles of Federal 

income tax law, including the 

substance-over-form doctrine. 

(39) Other property. The term other 

property means section 361 

consideration other than money, 

acquiring corporation stock or 

securities, and stock of a corporation 

controlling the acquiring corporation 

(within the meaning of section 368(c)). 

(40) Party to a reorganization. The 

term party to a reorganization has the 

meaning provided in § 1.368–2(f). 

(41) Plan of reorganization. The term 

plan of reorganization has the meaning 

provided in § 1.368–4. 

(42) Post-distribution payment. The 

term post-distribution payment means a 

transfer of money or other property by 

the controlled corporation to the 

distributing corporation or by the 

distributing corporation to the 

controlled corporation— 

(i) Pursuant to the plan of 

reorganization; and 

(ii) Subsequent to the control 

distribution date. 

(43) Qualified property. The term 

qualified property means any stock in 

(or right to acquire stock in), or 

obligation of— 

(i) The target corporation; 

(ii) The acquiring corporation, if that 

stock (or right) or obligation is received 

by the target corporation in an exchange 

described in § 1.361–2 or § 1.361–3; or 

(iii) A corporation controlling the 

acquiring corporation (within the 

meaning of section 368(c)), if— 

(A) The controlling corporation is a 

party to the reorganization; and 

(B) That stock (or right) or obligation 

is received by the target corporation in 

an exchange described in in § 1.361–2 or 

§ 1.361–3. 

(44) Qualifying creditor. The term 

qualifying creditor means a creditor 

described in § 1.361–5(b). 

(45) Qualifying debt elimination 

transaction. The term qualifying debt 

elimination transaction means a 

transaction described in § 1.361–5(e). 

(46) Refinanced historical distributing 

corporation debt. The term refinanced 

historical distributing corporation debt 

has the meaning provided in § 1.361– 

5(c)(2)(ii). 

(47) Related person. The term related 

person means a person related within 

the meaning of section 267(b) or section 

707(b)(1) of the Code. 

(48) Revolving credit agreement. The 

term revolving credit agreement means 

a loan structure that— 

(i) Permits the borrower to make 

multiple borrowings and re-borrowings 

during the term of the revolving credit 

facility; 

(ii) Limits the aggregate borrowings to 

a pre-determined maximum amount that 

the one or more lenders agree to fund; 

and 

(iii) May, or may not, require the 

borrower to pledge any of its assets as 

security for the loan (that is, it may be 

a secured or unsecured loan structure). 

(49) Section 361 consideration—(i) In 

general. The term section 361 

consideration means, with regard to an 

exchange to which § 1.361–2 or § 1.361– 

3 applies, the consideration received by 

a target corporation from an acquiring 

corporation in exchange for property 

transferred by the target corporation to 

the acquiring corporation pursuant to 

the plan of reorganization. 

(ii) Inclusions. The term section 361 

consideration includes— 

(A) Acquiring corporation stock or 

stock of a corporation controlling the 

acquiring corporation (within the 

meaning of section 368(c)); 

(B) Acquiring corporation securities; 

(C) Acquiring corporation nonsecurity debt; 

(D) Money transferred by the 

acquiring corporation; and 

(E) Other property (other than 

acquiring corporation non-security debt) 

transferred by the acquiring corporation. 

(iii) Exclusion. The term section 361 

consideration does not include an 

assumption of a liability described in 

§ 1.357–2(a). 

(50) Section 361 regulations. The term 

section 361 regulations means this 

section and §§ 1.361–2 through 1.361–6. 

(51) Target corporation—(i) In 

general. The term target corporation 

means the corporation that is treated 

under section 361(a) or (b) as 

exchanging its property pursuant to a 

plan of reorganization for section 361 

consideration. 

(ii) Inclusions. The term target 

corporation includes solely— 

(A) A corporation that is acquired in 

an acquisitive reorganization; and 

(B) A distributing corporation in a 

divisive reorganization. 

(52) Trade payable. The term trade 

payable means debt arising in the 

ordinary course of a business from sales, 

leases, licenses, or the rendition of 

services provided to or for the 

distributing corporation. 

(53) True-up payment. The term trueup payment means, with respect to an 

exchange of controlled corporation 

stock or securities, or controlled 

corporation non-security debt, for 

distributing corporation debt pursuant 

to a plan of reorganization of a divisive 

reorganization, a payment— 

(i) Under an agreement entered into 

between the distributing corporation 

(including any distributing corporation 

related person) and an intermediary 

(including any related person with 

regard to the intermediary); and 

(ii) Made pursuant to that agreement 

by— 

(A) The distributing corporation to the 

intermediary as the result of a decrease 

in value of any controlled corporation 

stock or securities or controlled 

corporation non-security debt (as 

applicable) between an initial valuation 

date and a subsequent valuation date; or 

(B) The intermediary to the 

distributing corporation as the result of 

an increase in value of any controlled 

corporation stock or securities or 

controlled corporation non-security debt 

(as applicable) between an initial 

valuation date and a subsequent 

valuation date. 

(54) Unrelated ultimate creditor. The 

term unrelated ultimate creditor means 

a creditor that is not— 

(i) A distributing corporation related 

person; or 

(ii) A related person with regard to a 

distributing corporation related person. 

■ Par. 13. Sections 1.361–2 through 

1.361–6 are added to read as follows: 

§ 1.361–2 Exchanges solely for stock or 

securities under section 361(a). 

(a) General rule. A target corporation 

that is a party to a reorganization does 

not recognize any gain or loss on a 

transfer of property by that corporation 

to an acquiring corporation if— 


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(1) The acquiring corporation or a 

corporation controlling the acquiring 

corporation is a party to the 

reorganization; 

(2) The target corporation receives 

solely stock or securities of— 

(i) The acquiring corporation in 

exchange for the transferred property; or 

(ii) The corporation controlling the 

acquiring corporation in exchange for 

the transferred property; and 

(3) The exchange occurs pursuant to 

the plan of reorganization. 

(b) Exchanges not solely for stock or 

securities. With regard to an exchange to 

which paragraph (a) of this section 

would apply but for the fact that the 

target corporation receives money or 

other property in addition to stock and 

securities of an acquiring corporation or 

a corporation controlling the acquiring 

corporation, see § 1.361–3. 

(c) Example—(1) Facts. Pursuant to a 

plan of reorganization for a transaction 

that qualifies as a reorganization 

described in section 368(a)(1)(C), a 

target corporation (Target) transfers all 

its property to an acquiring corporation 

(Acquiring) solely in exchange for 

Acquiring stock, which Target 

distributes to its shareholders in 

complete liquidation of Target. Target 

properly files a plan of reorganization 

with the IRS pursuant to § 1.368–3(a)(5) 

that satisfies all requirements set forth 

in § 1.368–4, including properly 

including and identifying Target and 

Acquiring as parties to the 

reorganization. 

(2) Analysis. Target recognizes no gain 

or loss on the transfer of its property to 

Acquiring solely in exchange for 

Acquiring stock because Target and 

Acquiring are parties to the 

reorganization, Target receives solely 

Acquiring stock in exchange for Target’s 

property, and the exchange occurs 

pursuant to the plan of reorganization. 

See paragraph (a) of this section. 

§ 1.361–3 Exchanges not solely for stock 

or securities under section 361(b). 

(a) Scope—(1) In general. If § 1.361– 

2(a) would apply to an exchange 

between a target corporation and an 

acquiring corporation but for the fact 

that the target corporation receives 

money or other property, in addition to 

stock and securities of the acquiring 

corporation or stock of the corporation 

controlling the acquiring corporation, 

the exchange is governed by paragraphs 

(b) through (e) this section. 

(2) Exception. If the exchange is 

pursuant to a reorganization that 

qualifies under section 368(a)(1)(F) of 

the Code, the exchange is not governed 

by paragraphs (b) through (e) of this 

section. See § 1.368–2(m)(3)(iii). 

(b) Money or other property 

distributed in acquisitive 

reorganizations—(1) Distributions to 

shareholders. In an acquisitive 

reorganization, the target corporation 

recognizes no gain from an exchange 

described in paragraph (a)(1) of this 

section if the target corporation 

distributes the money or other property 

received in the exchange to its 

shareholders pursuant to the plan of 

reorganization. 

(2) Transfers to creditors. In an 

acquisitive reorganization, if a target 

corporation receives money or other 

property in an exchange described in 

paragraph (a)(1) of this section, the 

target corporation is treated as 

distributing the money or other property 

to its shareholders for purposes of 

paragraph (b)(1) of this section if the 

target corporation transfers that money 

or other property to a creditor— 

(i) Pursuant to the plan of 

reorganization; and 

(ii) In satisfaction of debt of the target 

corporation. 

(c) Money or other property 

distributed in divisive reorganizations— 

(1) Distributions to shareholders. In a 

divisive reorganization, the distributing 

corporation recognizes no gain from an 

exchange described in paragraph (a)(1) 

of this section if, pursuant to the plan 

of reorganization, the distributing 

corporation— 

(i) Deposits the money received in the 

exchange in a segregated account; and 

(ii) Distributes the money or other 

property received in the exchange to its 

shareholders no later than the end of the 

12-month period beginning on the date 

of the exchange. 

(2) Transfers to creditors—(i) In 

general. Subject to the adjusted basis 

limitation set forth in paragraph 

(c)(2)(ii) of this section, in a divisive 

reorganization, if a distributing 

corporation receives money or other 

property in an exchange described in 

paragraph (a)(1) of this section, the 

distributing corporation is treated as 

distributing the money or other property 

to its shareholders for purposes of 

paragraph (c)(1) of this section if, 

pursuant to the plan of reorganization, 

the distributing corporation— 

(A) Deposits the money received in 

the exchange in a segregated account; 

and 

(B) Transfers that money or other 

property to a creditor— 

(1) In satisfaction of distributing 

corporation debt in a transfer meeting 

the requirements set forth in § 1.361–5; 

and 

(2) Within the period described in 

paragraph (c)(1)(ii) of this section. 

(ii) Application of adjusted basis 

limitation to divisive reorganizations 

described in sections 355 and 

368(a)(1)(D). The aggregate amount of 

money and the fair market value of any 

other property transferred to a creditor 

that is treated as a distribution under 

paragraph (c)(1) of this section is limited 

to the amount by which the aggregate 

adjusted basis of the assets transferred 

by a distributing corporation to a 

controlled corporation in a divisive 

reorganization described in sections 355 

and 368(a)(1)(D) exceeds the aggregate 

amount of distributing corporation 

liabilities assumed by the controlled 

corporation. 

(3) Post-distribution payments 

received by a distributing corporation. 

Paragraphs (c)(1) and (2) of this section 

(without regard to paragraph (c)(1)(ii) of 

this section) apply to any postdistribution payment received by a 

distributing corporation only if all the 

following requirements are satisfied: 

(i) Treatment as section 361 

consideration. The post-distribution 

payment constitutes section 361 

consideration for Federal income tax 

purposes. For purposes of this 

paragraph (c)(3), a post-distribution 

payment constitutes section 361 

consideration for Federal income tax 

purposes (and not, for example, a 

payment for goods or services separate 

from and, therefore, not pursuant to the 

plan of reorganization for the divisive 

reorganization) only if all the following 

requirements are satisfied: 

(A) Characterization as section 361 

consideration. The post-distribution 

payment properly is characterized for 

Federal income tax purposes as 

consideration that the distributing 

corporation receives in the exchange 

described in § 1.361–3(a). 

(B) Value not reasonably 

ascertainable. As of the date of the 

exchange described in § 1.361–3(a), the 

fair market value of the distributing 

corporation’s right to receive the postdistribution payment is not reasonably 

ascertainable. 

(C) Proper accounting. In accordance 

with the plan of reorganization, the 

distributing corporation properly 

accounts for the post-distribution 

payment as part of the contribution 

when the distributing corporation 

receives that payment. 

(ii) Segregated account requirement. 

The distributing corporation deposits 

the post-distribution payment in a 

segregated account pursuant to the plan 

of reorganization. 

(iii) Disposition requirement. By the 

later of 90 days after the date on which 

the distributing corporation receives the 

post-distribution payment or the date 


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5276 Federal Register / Vol. 90, No. 10 / Thursday, January 16, 2025 / Proposed Rules 

specified in paragraph (c)(1)(ii) of this 

section, the distributing corporation, 

pursuant to the plan of reorganization— 

(A) Distributes that post-distribution 

payment to the distributing 

corporation’s shareholders; or 

(B) Transfers that post-distribution 

payment to the distributing 

corporation’s creditors in satisfaction of 

distributing corporation debt in a 

transfer meeting the requirements set 

forth in § 1.361–5. 

(4) Post-distribution payments 

received by a controlled corporation. 

For purposes of the adjusted basis 

limitation set forth in paragraph 

(c)(2)(ii) of this section, any postdistribution payment received by the 

controlled corporation from the 

distributing corporation will increase 

the aggregate adjusted basis of the assets 

transferred by the distributing 

corporation to the controlled 

corporation only if all the following 

requirements are satisfied: 

(i) Characterization as contribution in 

the reorganization exchange. The postdistribution payment properly is 

characterized for Federal income tax 

purposes as consideration that the 

controlled corporation receives in the 

exchange described in § 1.361–3(a). 

(ii) Value not reasonably 

ascertainable. As of the date of the 

exchange described in § 1.361–3(a), the 

fair market value of the controlled 

corporation’s right to receive the postdistribution payment is not reasonably 

ascertainable. 

(iii) Proper accounting. In accordance 

with the plan of reorganization, the 

controlled corporation properly 

accounts for the post-distribution 

payment as part of the contribution 

when the controlled corporation 

receives that payment. 

(d) Money or other property not 

distributed. If a target corporation does 

not satisfy the requirements set forth in 

paragraph (b) or (c) of this section with 

respect to an exchange described in 

paragraph (a)(1) of this section, the 

target corporation recognizes gain (if 

any) from the exchange in an amount 

that does not exceed the sum of— 

(1) The amount of money received but 

not distributed; and 

(2) The fair market value of other 

property received but not distributed. 

(e) No recognition of loss. A target 

corporation does not recognize any loss 

on an exchange described in paragraph 

(a)(1) of this section. 

(f) Examples. The following examples 

illustrate the application of the rules of 

this section. For purposes of these 

examples: Distributing is a distributing 

corporation, and Controlled is a 

controlled corporation, in a divisive 

reorganization; Target is a target 

corporation, and Acquiring is an 

acquiring corporation, in an acquisitive 

reorganization; all taxpayers are 

calendar-year taxpayers; and for each 

transaction, a plan of reorganization has 

been properly filed with the IRS 

pursuant to § 1.368–3(a)(5) that satisfies 

all requirements set forth in § 1.368–4, 

including identifying all parties to the 

reorganization, identifying all 

transactions included in the plan of 

reorganization, and describing the 

intended Federal income tax treatment 

of the transaction. 

(1) Example 1: Acquisitive 

reorganization—(i) Facts. Pursuant to a 

plan of reorganization for a transaction 

that qualifies as a reorganization 

described in section 368(a)(1)(C), Target 

transfers all its property to Acquiring in 

exchange for Acquiring stock and 

money (exchange), and Target 

distributes the Acquiring stock and 

money to Target’s shareholders in 

complete liquidation of Target. 

(ii) Analysis. Target recognizes no 

gain on the exchange because Target 

distributes the money received in the 

exchange to its shareholders pursuant to 

the plan of reorganization. See 

paragraph (b)(1) of this section. 

(2) Example 2: Divisive reorganization 

with money or other property 

distributed pursuant to plan of 

reorganization—(i) Facts—(A) In 

general. On June 1, 2025, pursuant to a 

plan of reorganization for a transaction 

that qualifies as a divisive 

reorganization, Distributing transfers 

one of its businesses (Business B) to 

newly formed Controlled in exchange 

for $10,000x of Controlled stock and 

$10,000x of cash (contribution) and 

distributes all the Controlled stock to 

Distributing’s shareholders 

(distribution). The Business B assets 

have an aggregate adjusted basis of 

$10,000x. Pursuant to its plan of 

reorganization, Distributing will deposit 

the $10,000x of cash received in the 

contribution in a segregated account. 

(B) Special distribution. On December 

1, 2025, Distributing distributes the 

$10,000x of cash received to 

Distributing’s shareholders in a special 

distribution (special dividend) pursuant 

to the plan of reorganization. A 

separation and distribution agreement 

filed by Distributing with the U.S. 

Securities and Exchange Commission 

(SEC), a resolution by Distributing’s 

board of directors, and other official 

records of Distributing collectively 

evidence a definite intent, prior to the 

first step of the transaction, to have 

Distributing distribute the $10,000x of 

cash pursuant to the special dividend. 

Specifically, those documents provide 

that the special dividend is in addition 

to any regularly occurring dividends 

distributed to Distributing’s 

shareholders pursuant to Distributing’s 

dividend payment policy (as reflected in 

documents filed by Distributing with 

the SEC). 

(ii) Analysis. The special dividend 

satisfies all requirements set forth in 

§ 1.368–4(e). Accordingly, the special 

dividend is properly included in the 

plan of reorganization for the divisive 

reorganization. Distributing recognizes 

no gain on the contribution because, 

pursuant to the plan of reorganization, 

Distributing deposits the money 

received in the contribution in a 

segregated account, and it distributes 

the money received in the contribution 

to its shareholders no later than the end 

of the 12-month period beginning on the 

date of the contribution. See paragraph 

(c)(1) of this section. 

(3) Example 3: Ordinary course 

distribution—(i) Facts. The facts are the 

same as in paragraph (f)(2)(i) of this 

section (Example 2), except that 

Distributing provides in the separation 

and distribution agreement, or in 

Distributing’s other official records, that 

Distributing will distribute the $10,000x 

of cash received from Controlled to 

Distributing’s shareholders through an 

ordinary course dividend pursuant to 

Distributing’s dividend payment policy 

(as reflected in documents filed by 

Distributing with the SEC). Distributing 

distributes the cash in an ordinary 

course dividend on November 1, 2025. 

(ii) Analysis. The ordinary course 

dividend is not properly included in the 

plan of reorganization for the divisive 

reorganization because the dividend 

does not satisfy the requirements set 

forth in § 1.368–4(e)(2)(i)(B) (that is, the 

dividend would have occurred 

regardless of the divisive 

reorganization). Because the $10,000x of 

cash received from Controlled is not 

distributed to Distributing’s 

shareholders pursuant to the plan of 

reorganization, Distributing recognizes 

gain (but not loss) on the exchange in an 

amount that does not exceed the amount 

of money received (that is, $10,000x). 

See paragraphs (c)(1), (d), and (e) of this 

section. The Federal income tax 

consequences of the ordinary course 

dividend are determined under section 

301 of the Code. 

(4) Example 4: Special stock 

repurchase program—(i) Facts. The 

facts are the same as in paragraph 

(f)(2)(i) of this section (Example 2), 

except that, pursuant to the plan of 

reorganization, and as reflected in the 

official records of Distributing and 

Controlled, Distributing uses the 

$10,000x of cash received from 


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Controlled to fund a special repurchase 

of Distributing stock (and, accordingly, 

is not part of an existing stock 

repurchase program approved by 

Distributing’s board of directors). The 

redemptions occur on February 1, 2026, 

and March 1, 2026. 

(ii) Analysis. The analysis is the same 

as in paragraph (f)(2)(ii) of this section 

(Example 2). 

(5) Example 5: Existing stock 

repurchase program—(i) Facts. The 

facts are the same as in paragraph 

(f)(4)(i) of this section (Example 4), 

except that Distributing uses the 

$10,000x of cash received from 

Controlled to fund a repurchase of 

Distributing stock pursuant to an 

existing stock repurchase program 

approved by Distributing’s board of 

directors. 

(ii) Analysis. The analysis is the same 

as in paragraph (f)(3)(ii) of this section 

(Example 3). Accordingly, the Federal 

income tax consequences of the 

ordinary course stock repurchase are 

determined under section 301 or 302 of 

the Code. 

(6) Example 6: Divisive reorganization 

with money or other property not 

distributed within the 12-month 

period—(i) Facts. The facts are the same 

as in paragraph (f)(2)(i)(A) of this 

section (Example 2), except that 

Distributing distributes the $10,000x of 

cash received from Controlled to 

Distributing’s shareholders on July 1, 

2026, and, therefore, after the end of the 

12-month period beginning on June 1, 

2025. 

(ii) Analysis. Distributing recognizes 

gain (but not loss) on the exchange in an 

amount that does not exceed the amount 

of money received (that is, $10,000x). 

See paragraphs (c)(1), (d), and (e) of this 

section. 

(7) Example 7: Post-distribution 

payments from a distributing 

corporation to a controlled 

corporation—(i) Facts. The facts are the 

same as in paragraph (f)(2)(i)(A) of this 

section (Example 2), except that 

Distributing and Controlled enter into a 

capital contribution agreement, which is 

identified and properly included in the 

plan of reorganization, under which 

Distributing will make one or more 

transfers of working capital to 

Controlled after the contribution to fund 

Business B’s post-distribution 

operations. Distributing’s obligation to 

make any such transfer, and the amount 

of any such transfer (if required to be 

made), is subject to certain conditions 

such that, as of the date of the 

contribution, the fair market value of 

Controlled’s right to receive any one or 

more post-distribution payments is not 

reasonably ascertainable. On September 

30, 2025, it is determined that 

Distributing must transfer $200x to 

Controlled under this agreement. 

Distributing and Controlled both treat 

the $200x payment as part of the 

contribution. 

(ii) Analysis. The $200x payment is 

treated as increasing the aggregate 

adjusted basis of the assets transferred 

by Distributing to Controlled in the 

contribution. See paragraph (c)(4) of this 

section. First, the $200x is a postdistribution payment because the 

transfer of $200x from Distributing to 

Controlled occurs pursuant to the plan 

of reorganization and after the control 

distribution date. See § 1.361–1(b)(42). 

Based on all facts and circumstances, 

including because the capital 

contribution agreement is identified and 

properly included in the plan of 

reorganization, the $200x properly is 

characterized for Federal income tax 

purposes as consideration that 

Controlled receives in an exchange 

described in paragraph (a)(1) of this 

section (that is, the contribution). See 

paragraph (c)(4)(i) of this section. In 

addition, Controlled’s right to receive 

the post-distribution payment is not 

reasonably ascertainable as of the 

contribution date, and, in accordance 

with the plan of reorganization, 

Controlled properly accounts for the 

post-distribution payment as part of the 

contribution when Controlled receives 

that payment. See paragraphs (c)(4)(ii) 

and (iii) of this section. 

(8) Example 8: Post-distribution 

payment from a controlled corporation 

to a distributing corporation—(i) Facts— 

(A) In general. The facts are the same as 

in paragraph (f)(7)(i) of this section 

(Example 7), except for the following. 

Distributing transferred $10,000x 

received from Controlled in the 

contribution to a qualifying creditor in 

a transfer meeting the requirements set 

forth in paragraph (c)(3) of this section 

and § 1.361–5. Distributing and 

Controlled also enter into an 

indemnification agreement whereby 

Controlled agrees to satisfy a contingent 

liability (Liability) that is associated 

with Business B but that Controlled 

cannot assume under State law. Under 

the indemnification agreement, 

Distributing may demand payment from 

Controlled once the amount of the 

Liability becomes fixed and 

determinable, without regard to whether 

Distributing has satisfied the Liability. 

The fair market value of Distributing’s 

right to receive any such payment, and 

the amount of any such payment (if 

required to be made), is not reasonably 

ascertainable at the time of the 

contribution. On November 1, 2026, the 

Liability becomes fixed and 

determinable in the amount of $300x. 

(B) Payment under indemnification 

agreement. After November 1, 2026, 

Distributing seeks payment from 

Controlled under the indemnification 

agreement without first satisfying the 

Liability with Distributing’s own funds. 

Upon receiving the $300x payment from 

Controlled, Distributing properly 

accounts for the payment as section 361 

consideration and deposits the $300x in 

a segregated account pursuant to the 

plan of reorganization. Not later than 90 

days after the date on which 

Distributing receives the $300x from 

Controlled, pursuant to the plan of 

reorganization, Distributing transfers the 

$300x to a qualifying creditor in 

satisfaction of Distributing debt in a 

manner that satisfies all requirements 

set forth in § 1.361–5. 

(ii) Analysis—(A) Post-distribution 

payment; section 361 consideration; 

treatment as distribution to 

shareholders. The $300x that 

Distributing receives from Controlled is 

a post-distribution payment because 

that transfer occurs pursuant to the plan 

of reorganization and after the control 

distribution date. See § 1.361–1(b)(42). 

Based on all facts and circumstances, 

including because the indemnification 

agreement is identified and properly 

included in the plan of reorganization, 

the $300x payment properly is 

characterized for Federal income tax 

purposes as consideration that 

Distributing receives in an exchange 

described in paragraph (a)(1) of this 

section (that is, the contribution). See 

paragraph (c)(3)(i)(A) of this section. In 

addition, the fair market value of 

Distributing’s right to receive the postdistribution payment is not reasonably 

ascertainable as of the contribution date, 

and, in accordance with the plan of 

reorganization, Distributing properly 

accounts for the post-distribution 

payment as part of the contribution 

when Distributing receives that 

payment. See paragraphs (c)(3)(i)(B) and 

(C) of this section. Paragraph (c)(2) of 

this section applies to Distributing’s 

receipt and transfer of the $300x 

payment because the payment 

constitutes section 361 consideration 

and, pursuant to the plan of 

reorganization, Distributing deposits the 

payment in a segregated account and 

transfers the $300x to a qualifying 

creditor in satisfaction of Distributing 

debt in a transfer meeting the 

requirements set forth in § 1.361–5 not 

later than 90 days after the date on 

which Distributing receives the 

payment. See paragraph (c)(2) of this 

section. Accordingly, and subject to the 

adjusted basis limitation set forth in 


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paragraph (c)(2)(ii) of this section, 

Distributing would be treated as 

distributing to its shareholders for 

purposes of paragraph (c)(1) of this 

section the $300x post-distribution 

payment. See paragraph (c)(2)(i) of this 

section. 

(B) Adjusted basis limitation. The 

aggregate amount of money and the fair 

market value of any other property that 

Distributing may transfer to a creditor 

under paragraph (c)(2)(i) of this section 

that is treated as a distribution under 

paragraph (c)(1) of this section is limited 

to the amount by which the aggregate 

adjusted basis of the Business B assets 

transferred by Distributing to Controlled 

in the contribution ($10,200x) exceeds 

the sum of the aggregate amount of 

Distributing liabilities assumed by 

Controlled ($0), as further reduced by 

the $10,000x that Distributing had 

transferred to a qualifying creditor. See 

paragraph (c)(2)(ii) of this section. 

Therefore, Distributing has $200x 

remaining in its adjusted basis 

limitation ($10,200x¥$10,000x) under 

paragraph (c)(2)(ii) of this section. As a 

result, $100x of the post-distribution 

payment ($300x¥$200x) is treated as 

money not distributed to Distributing’s 

shareholders for purposes of paragraph 

(c)(1) of this section. See paragraph 

(c)(2)(i) of this section. Therefore, 

Distributing recognizes $100x of gain 

(that is, an amount that does not exceed 

the sum of the money received but not 

distributed and the fair market value of 

other property received but not 

distributed). See paragraph (d) of this 

section. 

§ 1.361–4 Distributions of property under 

section 361(c). 

(a) Distributions of qualified 

property—(1) Distributions to 

shareholders. A target corporation 

recognizes no gain or loss on a 

distribution of qualified property 

received in an exchange described in 

§ 1.361–2(a) or § 1.361–3(a) to the target 

corporation’s shareholders pursuant to a 

plan of reorganization. 

(2) Treatment of certain transfers to 

creditors—(i) Acquisitive 

reorganizations. In an acquisitive 

reorganization, if a target corporation 

receives qualified property in an 

exchange described in § 1.361–2(a) or 

§ 1.361–3(a), the target corporation is 

treated as distributing the qualified 

property to its shareholders for purposes 

of paragraph (a)(1) of this section if the 

target corporation transfers that 

qualified property to a creditor— 

(A) Pursuant to the plan of 

reorganization; and 

(B) In satisfaction of target corporation 

debt. 

(ii) Divisive reorganizations. In a 

divisive reorganization, if a distributing 

corporation receives qualified property 

in an exchange described in § 1.361–2(a) 

or § 1.361–3(a), the distributing 

corporation is treated as distributing the 

qualified property to its shareholders for 

purposes of paragraph (a)(1) of this 

section if the distributing corporation 

transfers that qualified property to a 

creditor— 

(A) Pursuant to a plan of 

reorganization; and 

(B) In satisfaction of distributing 

corporation debt in a transfer meeting 

the requirements set forth in § 1.361–5. 

(b) Distributions of appreciated 

nonqualified property—(1) Deemed sale 

treatment. If a target corporation 

distributes appreciated nonqualified 

property received in an exchange 

described in § 1.361–3(a) to its 

shareholders pursuant to a plan of 

reorganization, the target corporation 

recognizes gain as if the target 

corporation had sold that property to its 

shareholders at the property’s fair 

market value. 

(2) Treatment of liabilities. If a target 

corporation distributes appreciated 

nonqualified property subject to a 

liability to its shareholders pursuant to 

a plan of reorganization, or if a 

shareholder assumes a liability of the 

target corporation pursuant to the plan 

of reorganization, the fair market value 

of that appreciated nonqualified 

property for purposes of paragraph 

(b)(1) of this section is treated as not less 

than the amount of that liability. 

(c) No recognition of loss. If a target 

corporation distributes property 

received in an exchange described in 

described in § 1.361–2(a) or § 1.361–3(a) 

to its shareholders pursuant to a plan of 

reorganization, the target corporation 

does not recognize loss. 

(d) Coordination with other 

provisions; cross-references. Sections 

311 and 336 through 338 of the Code do 

not apply to a target corporation’s 

distribution of property described in 

paragraph (a) or (b) of this section. See 

sections 355(a)(3)(B), (d), and (e) of the 

Code for purposes of determining 

whether a distributing corporation 

recognizes gain on a distribution of 

controlled corporation stock or 

securities. 

(e) Examples. The following examples 

illustrate the application of the rules of 

this section. 

(1) Example 1: Distribution of 

qualified property—(i) Facts. On June 1, 

2025, a calendar-year distributing 

corporation (Distributing) transfers one 

of its businesses to a newly formed 

controlled corporation (Controlled) in 

exchange for Controlled stock 

(contribution). On June 2, 2025, 

Distributing distributes 80 percent of the 

Controlled stock to Distributing’s 

shareholders on a pro rata basis (control 

distribution). As reflected in the 

separation and distribution agreement 

between Distributing and Controlled 

filed by Distributing with the U.S. 

Securities and Exchange Commission, 

Distributing evidences a definite intent 

to distribute the Controlled stock not 

distributed in the control distribution 

(retained Controlled stock) in 2026 

pursuant to, and in completion of, the 

plan of reorganization (final 

distribution; together with the 

contribution and the control 

distribution, the separation). The 

retention of the retained Controlled 

stock is a qualifying retention within the 

meaning of § 1.355–10(c). Distributing 

properly files a plan of reorganization 

with the IRS pursuant to § 1.368–3(a)(5) 

satisfying all requirements set forth in 

§ 1.368–4, including identifying 

Distributing and Controlled as parties to 

the reorganization, determining that the 

contribution and each distribution are 

properly included in the plan of 

reorganization, and describing the 

intended Federal income tax treatment 

of the contribution and each 

distribution. The separation qualifies as 

a divisive reorganization. 

(ii) Analysis. The Controlled stock 

Distributing receives in the contribution 

is qualified property. See § 1.361– 

1(b)(43). The contribution is an 

exchange described in § 1.361–2(a), 

because Controlled is a party to the 

reorganization, Distributing receives 

solely Controlled stock in the 

contribution, and the contribution and 

each distribution of Controlled stock 

occurs pursuant to the plan of 

reorganization. Consequently, 

Distributing recognizes no gain or loss 

on the control distribution or the final 

distribution. See paragraph (a)(1) of this 

section. 

(2) Example 2: Distribution timing 

requirement—(i) Facts. The facts are the 

same as in paragraph (e)(1)(i) of this 

section (Example 1), except that the 

plan of reorganization evidences a 

definite intent to distribute the retained 

Controlled stock three years after the 

date of the first step of the plan of 

reorganization. 

(ii) Analysis. The 24-month 

presumption for the expeditious 

prosecution of the plan of 

reorganization requirement is not 

satisfied. See § 1.368–4(d)(3)(i)(B). 

However, if Distributing demonstrates, 

based on all facts and circumstances, 

that Distributing has transferred the 

retained Controlled stock to its 

shareholders as expeditiously as 


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practicable in completion of the plan of 

reorganization, Distributing recognizes 

no gain or loss on the control 

distribution or final distribution. See 

§ 1.368–4(d)(3)(i)(A) and paragraph 

(a)(1) of this section. 

(3) Example 3: Distribution of 

nonqualified property—(i) Facts. 

Pursuant to a plan of reorganization for 

a transaction that qualifies as a 

reorganization under section 

368(a)(1)(C), a target corporation 

(Target) transfers all its property other 

than an appreciated asset (Asset) to an 

acquiring corporation (Acquiring) solely 

in exchange for Acquiring voting stock, 

which Target distributes, along with 

Asset, to its shareholders in complete 

liquidation of Target. Asset has a fair 

market value of $100x and an adjusted 

basis of $50x and is subject to a $130x 

nonrecourse liability. Target properly 

files a plan of reorganization with the 

IRS pursuant to § 1.368–3(a)(5) 

satisfying all requirements set forth in 

§ 1.368–4, including identifying Target 

and Acquiring as parties to the 

reorganization, determining that the 

distribution of Asset is properly 

included in the plan of reorganization, 

and describing the intended Federal 

income tax treatment of the 

reorganization. 

(ii) Analysis—(A) In general. The 

Acquiring stock Target receives in the 

exchange is qualified property. See 

§ 1.361–1(b)(43). The exchange of Target 

assets for Acquiring stock is described 

in § 1.361–2(a), because the exchange 

occurs pursuant to a plan of 

reorganization, Target and Acquiring are 

parties to the reorganization, and Target 

receives solely Acquiring stock in the 

exchange. Accordingly, Target 

recognizes no gain on the distribution of 

Acquiring stock to Target shareholders. 

See paragraph (a)(1) of this section. 

(B) Asset distribution. Asset is 

appreciated nonqualified property. See 

§ 1.361–1(b)(4). Accordingly, Target 

recognizes gain on the distribution of 

Asset to its shareholders pursuant to the 

plan of reorganization as if Target had 

sold Asset to its shareholders at Asset’s 

fair market value. See paragraph (b)(1) 

of this section. Because Target 

distributed Asset to its shareholders 

subject to the $130 nonrecourse 

liability, the fair market value of Asset 

is treated as not less than the amount of 

that liability. See paragraph (b)(2) of this 

section. Accordingly, the amount of gain 

Target recognizes on the distribution is 

$80x ($130x fair market value ¥ $50x 

adjusted basis). 

§ 1.361–5 Transfers to creditors of 

distributing corporation in divisive 

reorganizations under section 361(b)(3) and 

(c)(3). 

(a) General rule. The transfer of 

section 361 consideration by a 

distributing corporation to a creditor of 

the distributing corporation under 

§ 1.361–3(c)(2) or 1.361–4(a)(2)(ii) (as 

appropriate) in a divisive reorganization 

is not treated as a distribution by the 

distributing corporation to its 

shareholders pursuant to the plan of 

reorganization unless the transfer is— 

(1) To a qualifying creditor of the 

distributing corporation, as determined 

under paragraph (b) of this section; 

(2) In satisfaction of eligible 

distributing corporation debt, as 

determined under paragraph (c) of this 

section; 

(3) In an amount not greater than the 

maximum amount of distributing 

corporation debt, as determined under 

paragraph (d) of this section; and 

(4) Part of a qualifying debt 

elimination transaction, as determined 

under paragraph (e) of this section. 

(b) Qualifying creditor—(1) General 

status as a creditor with regard to 

distributing corporation debt. Each 

creditor to which the distributing 

corporation transfers section 361 

consideration must be a creditor 

(qualifying creditor) that— 

(i) Holds historical distributing 

corporation debt, qualifying trade 

payables, or direct issuance debt; and 

(ii) Satisfies the requirements set forth 

in paragraph (b)(2) of this section. 

(2) Related-creditor prohibition—(i) 

General rule. Except as provided in 

paragraph (b)(2)(ii) of this section, the 

following persons are not qualifying 

creditors of the distributing corporation 

(non-qualifying creditors): 

(A) A distributing corporation related 

person. 

(B) A controlled corporation related 

person. 

(C) A related person with respect to a 

distributing corporation related person. 

(D) A related person with respect to 

a controlled corporation related person. 

(ii) Exception for certain distributing 

corporation related persons. A 

distributing corporation related person 

or a related person with respect to a 

distributing corporation related person 

(each as determined in accordance with 

paragraph (b)(2)(iii) of this section) is a 

qualifying creditor of the distributing 

corporation only if the following 

requirements are satisfied: 

(A) Transfer to unrelated ultimate 

creditor—(1) Money or other property. 

No later than the end of the 12-month 

period beginning on the date the 

distributing corporation receives the 

money or other property, the section 

361 consideration composed of money 

or other property is transferred to an 

unrelated ultimate creditor pursuant to 

the plan of reorganization to satisfy debt 

owed by the distributing corporation 

related person or the related person 

with regard to a distributing corporation 

related person, respectively, to the 

unrelated ultimate creditor. 

(2) Qualified property. The section 

361 consideration composed of 

qualified property is transferred 

pursuant to the plan of reorganization to 

an unrelated ultimate creditor to satisfy 

debt owed by the distributing 

corporation related person or the related 

person with regard to a distributing 

corporation related person, respectively, 

to the unrelated ultimate creditor. For 

rules regarding the expeditious 

completion of the plan of 

reorganization, see § 1.368–4(d)(3). 

(3) Intermediate transfers. For 

purposes of paragraph (b)(2)(ii)(A)(1) 

and (2) of this section, one or more 

intermediate transfers of section 361 

consideration between or among 

distributing corporation related persons 

or related persons with regard to 

distributing corporation related persons 

to satisfy debts (including the initial 

distributing corporation debt) are 

permissible if those intermediate 

transfers culminate in a transfer of 

section 361 consideration to an 

unrelated ultimate creditor. 

(B) Debt in existence as of earliest 

applicable date—(1) In general. Except 

as provided in paragraph (b)(2)(ii)(B)(2) 

of this section, all debt for which 

section 361 consideration is exchanged 

pursuant to the transfers described in 

paragraph (b)(2)(ii)(A) of this section is 

in existence as of the earliest applicable 

date. 

(2) Distributing corporation debt 

directly held by internal creditor. 

Distributing corporation debt held 

directly by a distributing corporation 

related person or a related person with 

regard to a distributing corporation 

related person qualifies as historical 

distributing corporation debt described 

in paragraph (c)(2)(i) of this section. 

(C) Transactions, debts, and creditors 

identified in plan of reorganization. 

Each transaction (including each 

intermediate and unrelated ultimate 

creditor transfer), creditor (including the 

unrelated ultimate creditor), and debt 

referenced in paragraph (b)(2)(ii)(A) of 

this section is identified and described 

in the plan of reorganization with regard 

to the divisive reorganization. 

(iii) Determination of related-person 

status. For purposes of paragraph (b)(2) 

of this section, the status of a person as 

a distributing corporation related person 


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or a controlled related person, or as a 

related person with regard to any 

distributing corporation related person 

or as a related person with respect to 

any controlled corporation related 

person, is determined as of the date on 

which that person receives section 361 

consideration in a transfer or series or 

transfers described in paragraph 

(b)(2)(ii)(A) of this section. 

(c) Eligible distributing corporation 

debt—(1) Overview. Distributing 

corporation debt is not eligible to be 

satisfied with section 361 consideration 

under paragraph (a) of this section 

unless that debt qualifies under 

paragraph (c)(2) of this section. 

(2) Qualification as eligible 

distributing corporation debt—(i) 

Historical distributing corporation debt. 

Historical distributing corporation debt 

is eligible to be satisfied with section 

361 consideration under paragraph 

(c)(1) of this section. Except as provided 

in paragraph (c)(2)(ii) or (iii) of this 

section, for a distributing corporation 

debt to qualify as historical distributing 

corporation debt— 

(A) The distributing corporation must 

have incurred the distributing 

corporation debt before the earliest 

applicable date; 

(B) That debt must have an original 

term that ends after the date of the 

exchange described in § 1.361–2(a) or 

1.361–3(a); and 

(C) That debt must be identified in the 

plan of reorganization or original plan of 

reorganization (if amended). 

(ii) Refinancing exception for 

historical distributing corporation debt. 

Distributing corporation debt incurred 

by the distributing corporation after the 

earliest applicable date is treated as 

historical distributing corporation debt 

only if— 

(A) The distributing corporation debt 

is— 

(1) A refinancing of historical 

distributing corporation debt 

(refinanced historical distributing 

corporation debt); or 

(2) A refinancing of refinanced 

historical distributing corporation debt 

(that is, the debt is traced directly 

through one or more refinancings to 

debt that qualifies as historical 

distributing corporation debt pursuant 

to this paragraph (c)(2)(ii); 

(B) The incurrence of the refinanced 

historical distributing corporation debt 

described in paragraph (c)(2)(ii)(A) of 

this section is not part of a plan to incur 

debt in addition to historical 

distributing corporation debt 

determined under paragraph (c)(2)(i) of 

this section (or an amount of debt in 

addition to the amount of historical 

distributing corporation debt 

determined under paragraph (d) of this 

section, without regard to paragraph 

(d)(2)(iv) of this section) 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); 

(C) The distributing corporation 

engages in a qualifying debt elimination 

transaction solely under paragraph (e)(3) 

or (4) of this section to eliminate that 

refinanced historical distributing 

corporation debt; and 

(D) The qualifying debt elimination 

transaction described in paragraph 

(c)(2)(ii)(C) of this section is described 

and identified in the plan of 

reorganization or original plan of 

reorganization (if amended) for the 

divisive reorganization. 

(iii) Revolving credit agreements. A 

revolving credit agreement to which the 

distributing corporation is a debtor 

qualifies as historical distributing 

corporation debt only if— 

(A) The distributing corporation 

entered into the agreement before the 

earliest applicable date; 

(B) That agreement does not expire 

until after the date of the exchange 

described in § 1.361–2(a) or 1.361–3(a); 

and 

(C) That agreement is identified in the 

plan of reorganization or original plan of 

reorganization (if amended). 

(iv) Qualifying trade payables. Trade 

payables of the distributing corporation 

that meet the following requirements are 

eligible to be satisfied with section 361 

consideration under paragraph (c)(1) of 

this section: 

(A) The trade payables are described 

in a plan of reorganization or original 

plan of reorganization (if amended). 

(B) The trade payables were incurred 

in the ordinary course of business of the 

distributing corporation. 

(C) The satisfaction such trade 

payables is necessary— 

(1) To ensure the allocation to the 

controlled corporation of all liabilities 

properly associated with the business 

assets transferred to that corporation; 

and 

(2) 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. 

(v) Direct issuance debt. Direct 

issuance debt incurred as part of a direct 

issuance transaction satisfying the 

requirements of paragraph (e)(4) of this 

section is eligible to be satisfied with 

section 361 consideration under 

paragraph (c)(1) of this section. 

(3) Determination of amount of 

distributing corporation debt—(i) 

Purpose. The rules in this paragraph 

(c)(3) apply to determine the aggregate 

amount of distributing corporation debt. 

For rules to determine the maximum 

amount of distributing corporation debt 

that can be satisfied with section 361 

consideration under paragraph (a) of 

this section, see paragraph (d) of this 

section. 

(ii) Aggregate amount of distributing 

corporation debt. The aggregate amount 

of distributing corporation debt includes 

solely the amounts described in 

paragraphs (c)(3)(ii)(A) through (E) of 

this section, as applicable, taking into 

account any reduction required by 

paragraph (c)(3)(iii) of this section. 

(A) Historical distributing corporation 

debt. The aggregate amount of historical 

distributing corporation debt equals the 

aggregate remaining principal amount, 

as of the earliest applicable date, of all 

historical distributing corporation debt 

other than historical distributing 

corporation debt that is eliminated as 

part of a qualifying direct issuance 

transaction under paragraph (e)(4) of 

this section. 

(B) Refinanced distributing 

corporation debt. If the distributing 

corporation relies on the exception set 

forth in paragraph (c)(2)(ii) of this 

section (that is, the refinancing 

exception for historical distributing 

corporation debt) with regard to any 

distributing corporation debt, the 

amount of that distributing corporation 

debt equals the lesser of— 

(1) The original principal amount of 

the refinanced distributing corporation 

debt; and 

(2) 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. 

(C) Revolving credit agreements. With 

regard to a revolving credit agreement 

that satisfies the requirements set forth 

in paragraph (c)(2)(iii) of this section, 

the amount of that revolving credit 

agreement equals the lesser of— 

(1) 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 

(2) The lowest balance under that 

agreement beginning on the earliest 

applicable date and ending on the 

control distribution date. 

(D) Qualifying trade payables. With 

regard to trade payables of the 

distributing corporation that satisfy the 

requirements set forth in paragraph 


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(c)(2)(iv) of this section, the amount of 

those payables equals the aggregate 

amount of those payables on the date of 

the exchange described in § 1.361–2(a) 

or 1.361–3(a). 

(E) Direct issuance debt. With regard 

to direct issuance debt that satisfies the 

requirements set forth in paragraph 

(c)(2)(v) of this section, the amount of 

that debt equals the aggregate principal 

amount of that debt on the date of the 

exchange described in § 1.361–2(a) or 

1.361–3(a). 

(iii) Offsetting debts taken into 

account. The aggregate amount of 

distributing corporation debt 

determined under paragraph (c)(3)(ii) of 

this section must be reduced by the 

aggregate principal amount (or the 

balance, in the case of a revolving credit 

agreement) of any debt for which— 

(A) The distributing corporation is a 

creditor; and 

(B) The debtor of that debt is a 

creditor with respect to distributing 

corporation debt described in paragraph 

(c)(3)(ii) of this section. 

(d) Maximum amount of distributing 

corporation debt—(1) General 

calculation. The maximum amount of 

distributing corporation debt that can be 

satisfied with section 361 consideration 

under paragraph (a) of this section 

equals the amount obtained by 

subtracting the aggregate amount of 

distributing corporation debt that the 

controlled corporation assumes 

pursuant to the plan of reorganization 

from the lesser of— 

(i) The aggregate amount of 

distributing corporation debt (as 

determined under paragraph (c)(3) of 

this section); and 

(ii) The aggregate amount of 

distributing corporation debt 

determined under the eight-quarterlyaverage test (as set forth in paragraph 

(d)(2) of this section). 

(2) Eight-quarterly-average test—(i) 

Determination. In accordance with 

paragraphs (d)(2)(ii) and (iii) of this 

section, the aggregate amount of 

distributing corporation debt under the 

eight-quarterly-average test, measured as 

of the close of each of the eight fiscal 

quarters that end immediately before the 

earliest applicable date, equals the 

average of the amount of distributing 

corporation debt owed to persons other 

than distributing corporation related 

persons. 

(ii) Calculation of distributing 

corporation debt at the close of each 

quarter. The methodology for 

determining the maximum amount of 

distributing corporation debt under 

paragraph (c)(3) of this section must be 

used to determine the amount of 

distributing corporation debt at the 

close of each quarter for purposes of 

paragraph (d)(2)(i) of this section. 

(iii) Distributing corporation debt held 

by distributing corporation related 

person. If the distributing corporation 

relies on the exception set forth in 

paragraph (b)(2)(ii) of this section (that 

is, the related-creditor exception), the 

amount determined under paragraph 

(d)(2)(i) of this section includes an 

amount equal to the least of— 

(A) The amount of distributing 

corporation debt directly held by 

distributing corporation related persons 

or related persons with respect to 

distributing corporation related persons 

(each, a related person); 

(B) The amount of debt of a related 

person (related person debt) held by any 

other related person; and 

(C) The amount of related person debt 

held by the unrelated ultimate creditor. 

(e) Qualifying debt elimination 

transactions—(1) Overview. A 

transaction that satisfies the 

requirements set forth in this paragraph 

(e) qualifies as a qualifying debt 

elimination transaction for purposes of 

paragraph (a) of this section. 

(2) Qualifying original creditor 

exchanges. The satisfaction of 

distributing corporation debt with 

section 361 consideration in an 

exchange not described in paragraph 

(e)(3) or (4) of this section (original 

creditor exchange) qualifies as a 

qualifying debt elimination transaction 

if all applicable requirements set forth 

in paragraphs (b) through (d) of this 

section (without regard to paragraph 

(c)(2)(ii)(A) of this section) are satisfied. 

(3) Qualifying intermediated 

exchanges. An intermediated exchange 

qualifies as a qualifying debt 

elimination transaction if all applicable 

requirements set forth in paragraphs (b) 

through (d) and (e)(3)(i) through (vi) of 

this section are satisfied. 

(i) Prohibition on intermediary 

benefits—(A) In general. Except as 

provided in paragraph (e)(3)(i)(B) of this 

section, no holder of a distributing 

corporation debt satisfied with section 

361 consideration holds the distributing 

corporation debt for the benefit of— 

(1) The distributing corporation; 

(2) The controlled corporation; 

(3) A distributing corporation related 

person; or 

(4) A controlled corporation related 

person. 

(B) Exception. The prohibition 

described in paragraph (e)(3)(i)(A) of 

this section does not apply to the 

collateral benefit 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. 

(ii) Prohibition on acquiring debt from 

distributing corporation. The 

intermediary does not acquire historical 

distributing corporation debt satisfied 

with section 361 consideration from the 

distributing corporation, the controlled 

corporation, or any distributing 

corporation related person or controlled 

corporation related person. 

(iii) Arm’s-length bargaining required. 

Each exchange of section 361 

consideration for historical distributing 

corporation debt between the 

distributing corporation and the 

intermediary is effectuated based on 

terms and conditions arrived at by the 

parties bargaining at arm’s length. 

(iv) Prohibition on profit-sharing or 

limitation. None of the distributing 

corporation, the controlled corporation, 

or any distributing corporation related 

person or controlled corporation related 

person— 

(A) Participates in any profit gained 

by the intermediary upon an exchange 

of section 361 consideration; or 

(B) Limits by agreement or other 

arrangement any profit described in 

paragraph (e)(3)(iv)(A) of this section. 

(v) Independence requirement—(A) 

General rule. The intermediary acts for 

its own account with regard to all 

components of the intermediated 

exchange. 

(B) Risk of loss. The intermediary 

bears the risk of loss with respect to— 

(1) The historical distributing 

corporation debt; and 

(2) Any subsequent sale or other 

disposition of section 361 consideration 

transferred to the intermediary to satisfy 

the historical distributing corporation 

debt. 

(C) Prohibition regarding variable 

pricing and similar agreements. The 

requirement set forth in paragraph 

(e)(3)(v)(B) of this section is not satisfied 

if the intermediary enters into a variable 

pricing agreement or similar 

arrangement with the distributing 

corporation (or a controlled corporation, 

distributing corporation related person, 

or controlled corporation related 

person) with regard to any section 361 

consideration, including— 

(1) True-up payments; 

(2) Forward exchange agreements; and 

(3) Any similar agreement or 

arrangement. 

(vi) Minimum temporal requirement. 

The intermediary holds the historical 

distributing corporation debt for a 

period of not less than 30 days ending 

on the control distribution date. 

(4) Qualifying direct issuance 

transactions—(i) Overview—(A) In 

general. To qualify as a qualifying debt 


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elimination transaction, a direct 

issuance transaction must be 

determined to comprise a transfer by the 

distributing corporation of section 361 

consideration to the creditor in 

exchange for the satisfaction of the 

distributing corporation debt held by 

the 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. 

(B) Application of Code and general 

principles of Federal income tax law. 

The determination under paragraph 

(e)(4)(i)(A) of this section is made based 

on all relevant provisions of the Code 

and general principles of Federal 

income tax law, including the step 

transaction doctrine. Specifically, the 

substance of the direct issuance 

transaction must be determined under 

all relevant provisions of the Code and 

general principles of Federal income tax 

law before the requirements under 

section 361 can be applied to determine 

whether the transaction qualifies for 

nonrecognition treatment under that 

section. 

(ii) Facts-and-circumstances test—(A) 

In general. The determination of 

whether a direct issuance transaction 

qualifies as an exchange under section 

361 (and not as a sale under section 

1001) is made based on the factors 

specified in paragraph (e)(4)(ii)(B) of 

this section, each of which provides 

evidence of qualification or nonqualification as an exchange under 

section 361 as set forth in paragraph 

(e)(4)(ii)(B) of this section, unless the 

transaction satisfies the safe harbor 

under paragraph (e)(4)(iii) of this 

section. The strength of the evidence 

provided by those factors is determined 

based on an analysis of all relevant facts 

and circumstances. 

(B) Factors—(1) Exchange part of 

prearranged, integrated plan—(i) 

Substantial evidence of nonqualification. An exchange of section 

361 consideration by the distributing 

corporation with the creditor pursuant 

to an arrangement that comprises part of 

a prearranged, integrated plan is 

substantial evidence of nonqualification. 

(ii) Evidence of qualification. An 

exchange of section 361 consideration 

by the distributing corporation with the 

creditor that is not pursuant to an 

arrangement that comprises part of a 

prearranged, integrated plan is evidence 

of qualification. 

(2) Specified agency and substanceover-form requirements—(i) Evidence of 

non-qualification. The failure to satisfy 

one or more requirements set forth in 

paragraphs (e)(4)(iii)(C) through (F) of 

this section is evidence of nonqualification. 

(ii) Substantial evidence of nonqualification. Substantial failure to 

satisfy any of the requirements set forth 

in paragraphs (e)(4)(iii)(C) through (F) of 

this section, as determined based on all 

relevant facts and circumstances, or any 

failure to satisfy a substantial number of 

those requirements, is substantial 

evidence of non-qualification. 

(iii) Substantial evidence of 

qualification. The satisfaction of all 

requirements set forth in paragraphs 

(e)(4)(iii)(C) through (F) of this section is 

substantial evidence of qualification. 

(3) Temporal proximity—(i) Evidence 

of non-qualification. The fact that the 

creditor holds the refinanced historical 

distributing corporation debt for a 

period of less than 30 days ending on 

the control distribution date is evidence 

of non-qualification. 

(ii) Evidence of qualification. The fact 

that the creditor holds the refinanced 

historical distributing corporation debt 

for a period of at least 30 days ending 

on the control distribution date is 

evidence of qualification. 

(4) Dominion or control of cash 

proceeds of refinanced distributing 

corporation debt—(i) Substantial 

evidence of non-qualification. The 

distributing corporation’s legal or 

practical dominion or control over any 

proceeds of the refinanced historical 

distributing corporation debt (as 

determined in accordance with § 1.357– 

2(e)(2)) is substantial evidence of nonqualification. 

(ii) Substantial evidence of 

qualification. The distributing 

corporation’s lack of legal or practical 

dominion or control over any proceeds 

of the refinanced historical distributing 

corporation debt (as determined in 

accordance with § 1.357–2(e)(2)) is 

substantial evidence of qualification. 

(5) Purpose of avoiding requirements 

or limitations of section 361. The 

distributing corporation’s issuance of 

the refinanced historical distributing 

corporation debt with a principal 

purpose of avoiding any of the 

requirements or limitations of section 

361 is evidence of non-qualification. 

(iii) Safe harbor for direct issuance 

transactions. A direct issuance 

transaction is treated as a qualifying 

debt elimination transaction under this 

paragraph (e)(4)(iii) only if all the 

following requirements are satisfied: 

(A) 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 § 1.357–2(e)(2). 

(B) The creditor holds the refinanced 

historical distributing corporation debt 

for a period of not less than 30 days 

ending on the control distribution date. 

(C) Each exchange of section 361 

consideration for refinanced historical 

distributing corporation debt between 

the distributing corporation and the 

creditor is effectuated based on terms 

and conditions arrived at by the parties 

bargaining at arm’s length. 

(D) None of the distributing 

corporation, the controlled corporation, 

or any distributing corporation related 

person or controlled corporation related 

person— 

(1) Participates in any profit gained by 

the creditor upon an exchange of section 

361 consideration; or 

(2) Limits by agreement or other 

arrangement any profit of the creditor 

described in paragraph (e)(4)(iii)(D)(1) of 

this section. 

(E) The creditor acts for its own 

account with regard to all components 

of the direct issuance transaction. 

(F) The creditor bears the risk of loss 

with respect to— 

(1) The refinanced historical 

distributing corporation debt; and 

(2) Any subsequent sale or other 

disposition of section 361 consideration 

transferred to the creditor to satisfy the 

refinanced historical distributing 

corporation debt. 

(iv) Prohibition regarding variable 

pricing and similar agreements. The 

requirement set forth in paragraph 

(e)(4)(iii)(F) of this section is not 

satisfied if the creditor enters into a 

variable pricing agreement or similar 

arrangement with the distributing 

corporation (or a controlled corporation, 

distributing corporation related person, 

or controlled corporation related 

person) with regard to any section 361 

consideration, including— 

(A) True-up payments; 

(B) Forward exchange agreements; 

and 

(C) Any similar agreement or 

arrangement. 

(f) Transitorily eliminated eligible 

distributing corporation debt—(1) 

Overview. The amount of section 361 

consideration treated as transferred by a 

distributing corporation to a creditor of 

the distributing corporation in a 

qualifying debt elimination transaction 

(and, therefore, treated as distributed to 

shareholders pursuant to the plan of 

reorganization under section 361(b)(3) 

or (c)(3), as appropriate) is reduced by 

the amount of eligible distributing 

corporation debt that is transitorily 

eliminated pursuant to paragraph 

(f)(2)(i) of this section. 

(2) Transitory elimination—(i) 

General rule. Unless the exception 


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described in paragraph (f)(2)(iii) of this 

section applies, a distributing 

corporation is treated 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 (determined 

immediately after the earliest applicable 

date) replaces after the earliest 

applicable date, directly or indirectly, 

with borrowing that the distributing 

corporation or any distributing 

corporation related person (determined 

immediately after the earliest applicable 

date) expects or is committed to, 

directly or indirectly, before that date. 

(ii) Borrowings not in the ordinary 

course. For purposes of paragraph 

(f)(2)(i) of this section, a borrowing is 

not treated as expected if the borrowing 

results from— 

(A) An event unrelated to the divisive 

reorganization and not in the ordinary 

course of business of the distributing 

corporation; and 

(B) Changed circumstances that were 

not expected prior to the control 

distribution date (therefore, the 

borrowing is unrelated to, and 

demonstrably independent of, the 

divisive reorganization or any 

transaction related to the divisive 

reorganization). 

(iii) Borrowings in the ordinary 

course. A borrowing described in 

paragraph (f)(2)(i) of this section is not 

treated as transitorily eliminating 

eligible distributing corporation debt if 

the borrowing— 

(A) Is incurred in the ordinary course 

of business of the distributing 

corporation or distributing corporation 

related person (as appropriate); and 

(B) Would have been incurred by the 

distributing corporation or distributing 

corporation related person (as 

appropriate) without regard to the 

divisive reorganization or any 

transaction related to the divisive 

reorganization (that is, the borrowing is 

unrelated to, and demonstrably 

independent of, any such transaction). 

(g) Examples. The following examples 

illustrate the application of the rules of 

this section. For purposes of these 

examples, the following facts apply: A 

distributing corporation (Distributing) 

transfers one of its businesses to a newly 

formed controlled corporation 

(Controlled) in exchange for Controlled 

stock and other section 361 

consideration (contribution); 

Distributing distributes all the 

Controlled stock to its shareholders on 

a pro rata basis (distribution); 

Distributing transfers the other section 

361 consideration to holders of 

Distributing debt (together with the 

contribution and the distribution, the 

separation); Distributing properly files a 

plan of reorganization for the separation 

with the IRS pursuant to § 1.368–3(a)(5) 

that satisfies all requirements set forth 

in § 1.368–4; the separation qualifies as 

a divisive reorganization under sections 

355 and 368(a)(1)(D); and the aggregate 

amount of adjusted basis of the assets 

transferred in the contribution exceeds 

the sum of the aggregate amount of 

liabilities assumed by Controlled plus 

the amount of money and the fair 

market value of any other property 

received by Distributing. Unless 

otherwise provided, no Distributing 

debt was transitorily eliminated within 

the meaning of paragraph (f) of this 

section. 

(1) Example 1: Transfer of money or 

other property to related creditor—(i) 

Facts. The section 361 consideration 

received by Distributing in the 

contribution consists of Controlled stock 

and $100x of cash. Distributing has an 

outstanding debt of $100x owed to a 

wholly owned subsidiary that is a 

Distributing related person (Subsidiary, 

and such debt, Internal Debt). 

Subsidiary has an outstanding debt of 

$100x owed to an unrelated ultimate 

creditor (External Debt). The External 

Debt was incurred prior to the earliest 

applicable date. The Internal Debt 

qualifies as historical Distributing debt 

described in paragraph (c)(2)(i) of this 

section. The maximum amount of 

Distributing debt that can be satisfied 

with section 361 consideration, as 

determined under paragraph (d) of this 

section, is $100x. Pursuant to the plan 

of reorganization, Distributing deposits 

the $100x of cash received in the 

contribution in a segregated account. 

Subsequently, Distributing, pursuant to 

the plan of reorganization, transfers the 

$100x of cash to Subsidiary in 

satisfaction of the Internal Debt (which 

Subsidary deposits into a segregated 

account), and Subsidiary transfers the 

$100x of cash to the unrelated ultimate 

creditor in satisfaction of the External 

Debt. The transfers from Distributing to 

Subsidiary, and from Subsidiary to the 

unrelated ultimate creditor, occur no 

later than the end of the 12-month 

period beginning on the date that 

Distributing receives the $100x of cash 

from Controlled. Each transaction, 

creditor (Subsidiary and unrelated 

ultimate creditor), and debt (Internal 

Debt and External Debt) is identified 

and described in the plan of 

reorganization with regard to the 

separation. 

(ii) Analysis. Distributing’s transfer of 

the $100x of cash to Subsidiary satisfies 

all requirements under this section and 

§ 1.361–3(c)(2)(i) to be treated as a 

distribution to Distributing’s 

shareholders pursuant to the plan of 

reorganization for purposes of § 1.361– 

3(c)(1). See paragraph (a) of this section. 

First, each of Distributing and 

Subsidiary deposits the $100x of cash 

they received into a segregated account. 

See § 1.361–3(c)(2)(i)(A). Second, 

Distributing’s transfer of the $100x of 

cash to Subsidiary is a transfer to a 

qualifying creditor because, pursuant to 

the plan of reorganization, Subsidiary 

transfers the $100x of cash to an 

unrelated ultimate creditor by no later 

than the end of the 12-month period 

beginning on the date Distributing 

receives the $100x of cash from 

Controlled (see paragraph (b)(2)(ii)(A)(1) 

of this section), the Internal Debt 

qualifies as historical distributing 

corporation debt and therefore is 

eligible distributing corporation debt, 

the External Debt is in existence as of 

the earliest applicable date (see 

paragraphs (a)(2) and (b)(2)(ii)(B) of this 

section), and each transfer of the $100x 

provided by Controlled, each of the 

Internal Debt and External Debt, and 

each of Subsidiary and the unrelated 

ultimate creditor, is identified and 

described in the plan of reorganization 

(see paragraph (b)(2)(ii)(C) of this 

section). Second, the amount of 

historical distributing corporation debt 

satisfied by Distributing (that is, $100x) 

does not exceed the maximum amount 

of distributing corporation debt 

determined under paragraph (d) of this 

section (that is, $100x). See paragraph 

(a)(3) of this section. Lastly, the transfer 

of the $100x of cash by Distributing to 

Subsidiary in satisfaction of the Internal 

Debt is a qualifying original creditor 

exchange under paragraph (e)(2) of this 

section. See paragraph (a)(4) of this 

section. 

(2) Example 2: Refinancing of 

historical distributing corporation 

debt—(i) Facts. The section 361 

consideration received by Distributing 

in the contribution consists of 

Controlled stock and $100x of cash. 

Distributing has an outstanding $100x 

debt owed to an unrelated creditor that 

is a qualifying creditor (Distributing 

debt). The Distributing debt was 

incurred before the earliest applicable 

date and has an original term that ends 

after the date of the contribution. This 

debt was identified in the plan of 

reorganization. Before the date of the 

contribution, but after the earliest 

applicable date, Distributing refinances 

the Distributing debt with a bank that is 

a qualifying creditor (refinanced 

Distributing debt). The incurrence of the 

refinanced Distributing debt is not part 

of a plan to incur additional debt 


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prohibited by paragraph (c)(2)(ii)(B) of 

this section, because Distributing 

needed to refinance the Distributing 

debt in response to an identifiable, 

material, and unexpected delay in the 

date of the contribution. Thereafter, 

Distributing satisfies the refinanced 

Distributing debt through an 

intermediated exchange that is a 

qualifying debt elimination transaction 

under paragraph (e)(3) of this section 

(Distributing intermediated exchange). 

The Distributing debt refinancing and 

the Distributing intermediated exchange 

are described and identified in the 

amended plan of reorganization for the 

separation. 

(ii) Analysis. The refinanced 

Distributing debt is treated as historical 

distributing corporation debt because it 

satisfies the requirements for the 

refinancing exception set forth in 

paragraph (c)(2)(ii) of this section. First, 

the refinanced Distributing debt is a 

refinancing of historical distributing 

corporation debt (that is, the original 

Distributing debt). See paragraph 

(c)(2)(ii)(A)(1) of this section. Second, 

Distributing did not refinance the 

Distributing debt as part of a plan to 

incur additional debt prohibited by 

paragraph (c)(2)(ii)(B) of this section. 

Third, the refinanced Distributing debt 

was eliminated by Distributing through 

a qualifying debt elimination 

transaction under paragraph (e)(3) of 

this section. See paragraph (c)(2)(ii)(C) 

of this section. Lastly, the qualifying 

debt elimination transaction and the 

refinancing of the Distributing debt are 

described and identified in the amended 

plan of reorganization for the 

separation. See paragraph (c)(2)(ii)(D) of 

this section and proposed § 1.368– 

4(d)(1)(iv). Accordingly, the refinanced 

Distributing debt is eligible to be 

satisfied with section 361 consideration 

under paragraph (a) of this section. See 

paragraph (c)(1) of this section. 

(3) Example 3: Eight-quarterly-average 

test—(i) Facts. The section 361 

consideration received by Distributing 

in the contribution consists of 

Controlled stock and $100x of cash. As 

of the earliest applicable date (July 10, 

2025), Distributing has outstanding debt 

of $180x owed to an unrelated creditor 

that is a qualifying creditor (Distributing 

debt). The $180x of Distributing debt 

consists of three loans: a $100x loan 

incurred in the eighth fiscal quarter that 

ended immediately before the earliest 

applicable date (September 30, 2023); a 

$60x loan incurred in the first fiscal 

quarter that ended immediately before 

the earliest applicable date (June 30, 

2025); and a $20x loan incurred in the 

first fiscal quarter that ended 

immediately before the earliest 

applicable date (June 30, 2025). The 

three loans that comprise the $180x of 

Distributing debt have an original term 

that ends after the date of the 

contribution, as identified in the plan of 

reorganization. Controlled assumes the 

$20x loan in the contribution. 

(ii) Analysis. All $180x of the 

Distributing debt qualifies as historical 

Distributing debt, and therefore eligible 

Distributing debt, because Distributing 

incurred each of the debts before the 

earliest applicable date and each of the 

debts has an original term that ends 

after the date of the contribution and is 

identified in the plan of reorganization. 

See paragraph (c)(2)(i) of this section. 

However, the maximum amount of 

eligible Distributing debt that 

Distributing can satisfy with section 361 

consideration is limited under 

paragraphs (c)(3) and (d) of this section. 

The aggregate amount of Distributing 

debt is equal to $180x (that is, the 

remaining principal amount of all 

historical Distributing debt as of the 

earliest applicable date). See paragraph 

(c)(3)(ii)(A) of this section. The 

aggregate amount of Distributing debt 

determined under the eight-quarterlyaverage test is equal to $110x (that is, 

the eight quarterly average of $880x— 

the $180x of Distributing debt 

outstanding at the close of the first fiscal 

quarter ending immediately before the 

earliest applicable date and the $100x of 

Distributing debt outstanding at the 

close of each of the preceding seven 

fiscal quarters ((($180x × 1) + ($100x × 

7))/8 = $110x)). See paragraph (d)(2) of 

this section. Accordingly, the maximum 

amount of eligible Distributing debt that 

Distributing can satisfy with the section 

361 consideration received from 

Controlled is $90x (that is, the lesser of 

the $180x of eligible Distributing debt 

and the $110x of Distributing debt 

determined under the eight-quarterlyaverage test, reduced by the $20x of 

Distributing debt assumed by Controlled 

in the contribution). See paragraph 

(d)(1) of this section. 

(4) Example 4: Amount of distributing 

corporation debt under revolving credit 

agreement—(i) Facts. Distributing is the 

debtor under a revolving credit 

agreement entered into before the 

earliest applicable date with an 

unrelated creditor that is a qualifying 

creditor. The revolving credit agreement 

does not expire until after the date of 

the contribution, and the agreement is 

identified in the plan of reorganization 

for the separation. Distributing’s credit 

limit under the agreement is $100x. As 

of the earliest applicable date, 

Distributing’s outstanding balance 

under the agreement is $50x. After that 

date, but prior to the control 

distribution date, Distributing’s 

outstanding balance under the 

agreement decreases to $40x and then 

subsequently increases to $80x. 

(ii) Analysis. The revolving credit 

agreement qualifies as historical 

distributing corporation debt because 

Distributing entered into the agreement 

before the earliest applicable date, the 

agreement does not expire until after the 

date of the contribution, and the 

agreement is identified in the plan of 

reorganization for the separation. See 

paragraph (c)(2)(iii) of this section. 

Although Distributing’s credit limit 

under the revolving credit agreement is 

$100x, the maximum amount under the 

agreement that Distributing can satisfy 

with section 361 consideration is $40x 

(that is, the lesser of the outstanding 

balance as of the earliest applicable date 

($50x) and the lowest balance under the 

agreement beginning on the earliest 

applicable date and ending on the 

control distribution date ($40x). See 

paragraph (c)(3)(ii)(C) of this section. 

(5) Example 5: Effect of offsetting 

debts on amount of historical 

distributing corporation debt—(i) Facts. 

As of the earliest applicable date, 

Distributing has an outstanding $100x 

debt owed to an unrelated creditor 

(Creditor) that is a qualifying creditor 

(Distributing debt). The Distributing 

debt is historical Distributing debt 

under paragraph (c)(2)(i) of this section, 

and therefore qualifies as Distributing 

debt eligible to be satisfied with section 

361 consideration under paragraph 

(a)(2) of this section. See paragraphs 

(c)(1) and (2) of this section. As of the 

earliest applicable date, Creditor also 

has an outstanding $50x debt owed to 

Distributing (Creditor debt). 

(ii) Analysis. In determining the 

aggregate amount of eligible Distributing 

debt under paragraph (c)(3) of this 

section, the amount of eligible 

Distributing debt must be reduced by 

the aggregate principal amount of any 

debt for which Distributing is a creditor 

and the debtor is the Creditor with 

respect to that Distributing debt. See 

paragraph (c)(3)(iii) of this section 

(requiring offsetting debts to be taken 

into account). Accordingly, the 

aggregate amount of eligible Distributing 

debt is $50x (that is, the $100x of 

Distributing debt reduced by the $50x of 

Creditor debt). 

(6) Example 6: Qualifying original 

creditor exchange—(i) Facts. The 

section 361 consideration received by 

Distributing in the contribution consists 

of Controlled stock and $100x of 

Controlled securities. As of the earliest 

applicable date, Distributing has an 

outstanding $100x debt owed to an 

unrelated creditor (Creditor) that is a 


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qualifying creditor (Distributing debt). 

The Distributing debt has an original 

term that ends after the date of the 

contribution and is identified in the 

plan of reorganization. The maximum 

amount of Distributing debt determined 

under paragraph (d) of this section that 

can be satisfied with section 361 

consideration is $100x. Pursuant to the 

plan of reorganization for the 

separation, Distributing transfers the 

$100x of Controlled securities received 

from Controlled directly to Creditor in 

satisfaction of the Distributing debt. 

This transfer does not qualify as a 

qualifying intermediated exchange 

under paragraph (e)(3) of this section or 

as a qualifying direct issuance 

transaction under paragraph (e)(4) of 

this section. 

(ii) Analysis. The Distributing debt 

qualifies as historical distributing 

corporation debt because Distributing 

incurred the debt before the earliest 

applicable date and that debt has an 

original term that ends after the date of 

the contribution and is identified in the 

plan of reorganization. See paragraph 

(c)(2)(i) of this section. Creditor is a 

qualifying creditor because Creditor 

holds historical distributing corporation 

debt and does not run afoul of the 

related-creditor prohibition under 

paragraph (b)(2)(i) of this section. See 

paragraph (b)(1) of this section. The 

amount of Distributing debt satisfied in 

the transaction (that is, $100x) does not 

exceed the maximum amount 

determined under paragraph (d) of this 

section (that is, $100x). Distributing’s 

transfer of the $100x of Controlled 

securities directly to Creditor in 

satisfaction of Distributing debt is a 

qualifying original creditorexchange, 

and therefore is a qualifying debt 

elimination transaction. See paragraph 

(e)(2) of this section. Accordingly, the 

transfer of $100x of Controlled 

securities to Creditor in satisfaction of 

Distributing debt is treated as a 

distribution by Distributing to its 

shareholders pursuant to the plan of 

reorganization. See paragraph (a) of this 

section. 

(7) Example 7: Not a qualifying direct 

issuance transaction—(i) Facts. The 

facts are the same as in paragraph 

(g)(6)(i) of this section (Example 6), 

except for the following. In anticipation 

of the divisive reorganization, 

Distributing intends to issue new debt to 

Creditor and use the proceeds to satisfy 

historical Distributing debt on a date 

following the contribution date. 

Accordingly, after the earliest applicable 

date, and as part of a prearranged, 

integrated plan with Creditor, 

Distributing carries out the following 

transactions. First, Distributing directly 

issues new debt to Creditor (new 

Distributing debt) in exchange for 

$100x. Distributing intends to transfer to 

Creditor the Controlled securities 

Distributing receives in the contribution 

to satisfy the new Distributing debt 

(collectively, the direct issuance 

transaction). On a date following the 

contribution, Distributing uses the 

$100x of proceeds from the new 

Distributing debt to repay the historical 

Distributing debt. Also following the 

date of the contribution, Distributing 

transfers the Controlled securities to 

Creditor in exchange for the refinanced 

Distributing debt (securities-for-debt 

exchange). 

(ii) Analysis. The securities-for-debt 

exchange is not carried out through a 

qualifying debt elimination transaction. 

Distributing incurred the refinanced 

Distributing debt after the earliest 

applicable date and does not satisfy the 

requirements for the refinancing 

exception in paragraph (c)(2)(ii) of this 

section. The direct issuance transaction 

fails to qualify for the safe harbor for 

qualifying direct issuance transactions 

under paragraph (e)(4)(iii) of this section 

because Distributing had dominion and 

control over the direct issuance 

proceeds. See paragraph (e)(4)(iii)(A) of 

this section. In addition, the dominion 

and control that Distributing had over 

the direct issuance proceeds provides 

substantial evidence that the direct 

issuance transaction fails to qualify as a 

qualifying debt elimination transaction 

under the facts-and-circumstances test 

set forth in paragraph (e)(4)(ii) of this 

section. See paragraph (e)(4)(ii)(B)(4) of 

this section. In addition, the securitiesfor-debt exchange was carried out 

pursuant to an arrangement that 

comprises part of a prearranged, 

integrated plan, and therefore also 

provides substantial evidence that the 

direct issuance transaction fails to 

qualify as a qualifying debt elimination 

transaction. See paragraph 

(e)(4)(ii)(B)(1) of this section. 

Accordingly, the exchange with Creditor 

is not a qualifying original 

creditorexchange, a qualifying 

intermediated exchange, or a qualifying 

direct issuance transaction. See 

paragraphs (e)(2), (3), and (4) of this 

section. As a result, Distributing’s 

transfer of the Controlled securities to 

Creditor is not treated as a distribution 

to its shareholders pursuant to the plan 

of reorganization under § 1.361– 

4(a)(2)(ii). See paragraph (a) of this 

section. 

(8) Example 8: Qualifying 

intermediated exchange—(i) Facts—(A) 

Historical Distributing debt. The section 

361 consideration received by 

Distributing in the contribution consists 

of Controlled stock and $100x of 

Controlled securities. As of the earliest 

applicable date, Distributing has 

outstanding debt of $100x owed to an 

unrelated creditor that is a qualifying 

creditor (Distributing debt). 

Furthermore, that debt has an original 

term that ends after the date of the 

contribution and is identified in the 

plan of reorganization. 

(B) Intermediated exchange. Pursuant 

to the plan of reorganization for the 

separation, Distributing engages an 

intermediary to facilitate the transfer of 

the $100x of Controlled securities in 

satisfaction of the Distributing debt 

(intermediated exchange). As described 

in the plan of reorganization, the 

intermediary will acquire the $100x of 

Distributing debt directly from the 

creditor (and not from Distributing, 

Controlled, or any Distributing related 

person or Controlled related person). 

The intermediary will not hold that debt 

for the benefit of Distributing, 

Controlled, or any Distributing related 

person or Controlled related person. All 

exchanges of Controlled securities for 

Distributing debt between Distributing 

and the intermediary are effectuated 

based on terms and conditions arrived 

at by the parties bargaining at arm’s 

length. None of Distributing, Controlled, 

or any Distributing related person or 

Controlled related person participates in 

any profit gained by the intermediary 

upon an exchange of Controlled 

securities or limits by agreement or 

other arrangement any such profit. The 

intermediary acts for its own account 

with regard to all components of the 

intermediated exchange, bears the risk 

of loss with respect to the Distributing 

debt and any subsequent sale or other 

disposition of the Controlled securities, 

and does not enter into a variable 

pricing or similar agreement with 

Distributing, Controlled, or any 

Distributing related person or 

Controlled related person with regard to 

the Controlled securities. The 

intermediary holds the Distributing debt 

for a period of not less than 30 days 

ending on the distribution date. All 

applicable requirements set forth in 

paragraphs (b) through (d) of this 

section are satisfied. 

(ii) Analysis. The intermediated 

exchange satisfies all requirements set 

forth in paragraph (e)(3) of this section 

to qualify as a qualifying debt 

elimination transaction. See paragraphs 

(b) through (d) and (e)(3) of this section. 

§ 1.361–6 Applicability date. 

(a) Applicability date. The rules of 

§§ 1.361–1 through 1.361–5 apply to 

transactions intended to qualify under 

section 361 of the Code for which the 


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earliest of the following dates occurs 

after [DATE OF PUBLICATION OF 

FINAL REGULATIONS IN THE 

FEDERAL REGISTER]: 

(1) The date of the first public 

announcement (as defined in § 1.355– 

7(h)(10)) of the transaction. 

(2) The date of entry by the taxpayer 

into a written agreement to engage in 

the transaction. 

(3) The date of approval of the 

transaction 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 

of a court) in a title 11 or similar case 

(as defined in section 368(a)(3)(A) of the 

Code), but only if the taxpayer was a 

debtor in a case before such court. 

(5) The date a ruling request for the 

transaction is submitted to the IRS. 

■ Par. 14. Section 1.368–1 is amended 

by revising paragraph (c) to read as 

follows: 

§ 1.368–1 Purpose and scope of exception 

of reorganization exchanges. 

* * * * * 

(c) Scope of exception for 

reorganization exchanges—(1) 

Overview. The reorganization provisions 

of part III of subchapter C of chapter 1 

of the Code (part III) consist of the 

following categories of rules: 

(i) Definitional provisions (as 

described in paragraph (c)(2)(i) of this 

section), the satisfaction of which 

qualify persons for potential 

nonrecognition treatment under the 

Code. The purpose of these definitional 

provisions is to limit the scope of 

transactions, and therefore the parties to 

such transactions (and other relevant 

persons, such as shareholders of a party 

to a reorganization), to which certain 

operative provisions apply. 

(ii) Operative provisions (certain of 

which are described in greater detail in 

paragraph (c)(2)(ii) of this section), the 

satisfaction of which qualify a party for 

partial or complete nonrecognition 

treatment under part III. The purpose of 

these operative provisions is to further 

limit the scope of transactions, and 

therefore the parties to such transactions 

(and other relevant persons, such as 

shareholders of a party to a 

reorganization), that qualify for 

nonrecognition treatment (in whole or 

in part) under part III. 

(2) Definitional and operative 

provisions. The definitional and 

operative provisions referred to in 

paragraph (c)(1) of this section include 

the following: 

(i) Definitional provision. Section 

368(a)(1) limits the definition of the 

term reorganization to seven types of 

transactions (including triangular 

reorganizations, which are variants of 

such transactions). All transactions and 

series of transactions that do not satisfy 

any of the definitional provisions under 

section 368(a)(1) are excluded from 

treatment as a reorganization under part 

III. 

(ii) Operative provisions for 

transactions that qualify as 

reorganizations—(A) Section 354. 

Section 354 generally provides that a 

shareholder or security holder of a target 

corporation recognizes no gain or loss if 

the target corporation is a party to a 

reorganization and the shareholder or 

security holder exchanges solely stock 

or securities of the target corporation for 

the stock or securities of an acquiring 

corporation pursuant to the plan of 

reorganization. 

(B) Section 355. Section 355 generally 

provides that, if all requirements are 

satisfied, shareholders and security 

holders of a distributing corporation 

recognize no gain or loss (and do not 

include any amount in income) on the 

receipt of controlled corporation stock 

or securities with respect to, or in 

exchange for, their distributing 

corporation stock. 

(C) Section 356. Section 356 of the 

Code generally provides that, if a 

shareholder of a target corporation 

receives stock or securities of the 

corporation in an exchange to which 

section 354 or 355 otherwise would 

apply, and also receives money or other 

property, then that shareholder 

recognizes gain or income (as 

determined pursuant to the gain 

calculation and characterization rules 

under section 356). 

(D) Section 357. Section 357 of the 

Code generally provides that an 

assumption by an acquiring corporation 

of a liability of a target corporation is 

not treated as money received by the 

target corporation (and, therefore, the 

target corporation recognizes no gain or 

loss as a result of the liability 

assumption). 

(E) Section 361(a) and (b)—Transfers 

of stock or securities. Section 361(a) and 

(b) of the Code generally provide that a 

target corporation recognizes no gain or 

loss if that corporation is a party to a 

reorganization and exchanges property, 

pursuant to the plan of reorganization, 

solely for stock or securities in an 

acquiring corporation that is a party to 

the reorganization. 

(F) Section 361(c)—Distributions of 

qualified property by target corporation. 

Section 361(c) generally provides that a 

target corporation recognizes no gain or 

loss on the distribution to its 

shareholders or transfer to its creditors 

of qualified property (as defined in 

section 361(c)(2)(B)) pursuant to the 

plan of reorganization. 

(3) Applicability date. This paragraph 

(c) applies to transactions intended to 

qualify under section 368 of the Code 

for which the earliest of the following 

dates occurs after [DATE OF 

PUBLICATION OF FINAL 

REGULATIONS IN THE FEDERAL 

REGISTER]: 

(i) The date of the first public 

announcement (as defined in § 1.355– 

7(h)(10)) of the transaction. 

(ii) The date of entry by the taxpayer 

into a written agreement to engage in 

the transaction. 

(iii) The date of approval of the 

transaction by the board of directors of 

the taxpayer. 

(iv) The date of a court order (or a 

plan confirmed, or a sale approved, by 

order of a court) in a title 11 or similar 

case (as defined in section 368(a)(3)(A) 

of the Code), but only if the taxpayer 

was a debtor in a case before such court. 

(v) The date a ruling request for the 

transaction is submitted to the IRS. 

* * * * * 

■ Par. 15. Section 1.368–2 is amended 

by revising paragraphs (f) and (g) to read 

as follows: 

§ 1.368–2 Definitions of terms and 

operative rules. 

* * * * * 

(f) Party to a reorganization—(1) 

Overview. The provisions described in 

§ 1.368–1(c)(2)(i) and (ii) apply solely to 

a transaction that is carried out by, 

between, or among one or more parties 

to a reorganization. 

(2) Scope of party to a reorganization. 

For purposes of determining the scope 

of the transaction or series of 

transactions to which the provisions 

described in § 1.368–1(c)(2)(i) and (ii) 

apply, the term party to a reorganization 

is limited solely to a corporation that— 

(i) Is described in paragraph (f)(3) of 

this section; and 

(ii) Is determined to be a party to a 

reorganization pursuant to paragraph 

(f)(4) of this section. 

(3) Definition—(i) In general. The 

term party to a reorganization 

includes— 

(A) A corporation resulting from a 

transaction that qualifies as a 

reorganization; 

(B) Both corporations, in a transaction 

that qualifies as a reorganization in 

which one corporation acquires stock or 

properties of another corporation; and 

(C) A corporation controlling an 

acquiring corporation in a transaction 

that qualifies as a triangular 

reorganization (as defined in § 1.358– 

6(b)(2)) if stock of the controlling 

corporation is used in the acquisition of 

stock or properties. 


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(ii) Certain transfers of assets or stock 

in reorganizations—(A) In general. If a 

transaction otherwise qualifies as a 

reorganization, a corporation remains a 

party to the reorganization even though 

stock or assets acquired by the acquiring 

corporation pursuant to the plan of 

reorganization are transferred in a 

transaction described in paragraph (k) of 

this section. For example, a corporation 

does not cease to be a party to the 

reorganization solely because part or all 

of the assets acquired pursuant to the 

plan of reorganization are transferred to 

a partnership in which the transferor is 

a partner, so long as the continuity of 

business enterprise requirement is 

satisfied. See § 1.368–1(d). 

(B) Triangular reorganizations. If a 

transaction otherwise qualifies as a 

reorganization under section 

368(a)(1)(B) or as a reverse triangular 

merger (as defined in § 1.358– 

6(b)(2)(iii)), the target corporation (in 

the case of a transaction that otherwise 

qualifies as a reorganization under 

section 368(a)(1)(B)) or the surviving 

corporation (in the case of a transaction 

that otherwise qualifies as a reverse 

triangular merger) remains a party to the 

reorganization even though its stock or 

assets acquired pursuant to the plan of 

reorganization are transferred in a 

transaction described in paragraph (k) of 

this section. If a transaction otherwise 

qualifies as a forward triangular merger 

(as defined in § 1.358–6(b)(2)(i)), a 

triangular B reorganization (as defined 

in § 1.358–6(b)(2)(iv)), a triangular C 

reorganization (as defined in § 1.358– 

6(b)(2)(ii)), or a reorganization under 

section 368(a)(1)(G) by reason of section 

368(a)(2)(D), the acquiring corporation 

remains a party to the reorganization 

even though its stock is transferred in a 

transaction described in paragraph (k) of 

this section. 

(4) Determination of party to the 

reorganization—(i) Status generally 

based on plan of reorganization. Subject 

to paragraph (f)(4)(ii) of this section, the 

status of a corporation as a party to a 

reorganization is established solely by 

the inclusion and identification of that 

corporation as a party to the 

reorganization in a plan of 

reorganization (as defined in § 1.368–4) 

that is filed with the IRS pursuant to 

§ 1.368–3(a)(5). 

(ii) Status determined by 

Commissioner based on Federal income 

tax principles. Notwithstanding the 

inclusion or omission of a corporation 

as a party to a reorganization in a plan 

of reorganization filed by the taxpayer 

with the IRS pursuant to § 1.368–3(a)(5), 

the status of a corporation as a party to 

the reorganization may be determined 

by the Commissioner based on the 

correction of that plan of reorganization 

in accordance with § 1.368–4(c)(2), 

taking into account— 

(A) All facts and circumstances 

regarding the transaction or series of 

transactions; and 

(B) All relevant provisions of the Code 

and general principles of Federal 

income tax law, including the step 

transaction doctrine. 

(5) Examples. The following examples 

illustrate the application of the rules of 

this paragraph (f). 

(i) Example 1: Statutory merger—(A) 

Facts. Pursuant to State law, 

Corporation A merges into Corporation 

B in a transaction qualifying as a 

reorganization under section 

368(a)(1)(A). A plan of reorganization is 

filed with the IRS pursuant to § 1.368– 

3(a)(5) that identifies A and B as parties 

to the reorganization. 

(B) Analysis. A and B are both 

described in paragraph (f)(3)(i)(B) of this 

section. Further, the status of both A 

and B as parties to the reorganization is 

established by their identification in the 

plan of reorganization. See paragraph 

(f)(4)(i) of this section. Accordingly, 

each of A and B is a party to a 

reorganization for purposes of 

determining the scope of the 

transactions to which the definitional 

and operative provisions described in 

§ 1.368–1(c)(2)(i) and (ii) apply. See 

paragraph (f)(2) of this section. 

(ii) Example 2: B reorganization—(A) 

Facts. Corporation C owns all the stock 

of Corporation D. D acquires all the 

stock of Corporation E solely in 

exchange for voting stock of D in a 

transaction qualifying as a 

reorganization under section 

368(a)(1)(B). A plan of reorganization is 

filed with the IRS pursuant to § 1.368– 

3(a)(5) that identifies D and E as parties 

to the reorganization. 

(B) Analysis. With respect to D and E, 

the analysis is the same as in paragraph 

(f)(5)(i)(B) of this section (Example 1). C 

is not described in paragraph (f)(3) of 

this section. Accordingly, C is not a 

party to the reorganization. 

(iii) Example 3: Triangular C 

reorganization—(A) Facts. The facts are 

the same as in paragraph (f)(5)(ii)(A) of 

this section (Example 2), except that D 

acquires all the assets of E solely in 

exchange for voting stock of C, and E 

distributes the stock of C received in the 

exchange to E’s shareholders, in a 

transaction that qualifies as a 

reorganization under section 

368(a)(1)(C). A plan of reorganization is 

filed with the IRS pursuant to § 1.368– 

3(a)(5) that identifies C, D, and E as 

parties to the reorganization. 

(B) Analysis. With respect to D and E, 

the analysis is the same as in paragraph 

(f)(5)(i)(B) of this section (Example 1). C 

is described in paragraph (f)(3)(i)(C) of 

this section and is identified as a party 

to the reorganization in the plan of 

reorganization. Accordingly, C also is a 

party to a reorganization for purposes of 

determining the scope of the 

transactions to which the definitional 

and operative provisions described in 

§ 1.368–1(c)(2)(i) and (ii) apply. See 

paragraph (f)(2) of this section. 

(iv) Example 4: Transfer of assets 

acquired in a reorganization—(A) Facts. 

The facts are the same as in paragraph 

(f)(5)(iii)(A) of this section (Example 3), 

except that, after the reorganization, D 

transfers all the assets of E received in 

the exchange to a partnership in which 

D owns a significant interest. The 

partnership continues E’s historic 

business. 

(B) Analysis. The continuity of 

business enterprise requirement 

continues to be satisfied after D’s 

transfer of the E assets to the 

partnership. See § 1.368–1(d)(4)(iii). 

Consequently, none of C, D, or E ceases 

to be a party to the reorganization. See 

paragraph (f)(3)(ii)(B) of this section. 

(v) Example 5: Transfer of stock 

acquired in a triangular reorganization. 

The facts are the same as in paragraph 

(f)(5)(iii)(A) of this section (Example 3), 

except that E merges into D under State 

law solely in exchange for C stock in a 

transaction qualifying as a 

reorganization under section 

368(a)(1)(A) by reason of section 

368(a)(2)(D). After the reorganization, C 

transfers all the stock of D to newly 

formed Corporation G in exchange for 

all the stock of G. 

(B) Analysis. The analysis is the same 

as in paragraph (f)(5)(iii)(B) of this 

section. Additionally, the continuity of 

business enterprise requirement 

continues to be satisfied after C’s 

transfer of the D stock to G. See § 1.368– 

1(d)(4)(iii). Accordingly, D does not 

cease to be a party to the reorganization 

by reason of the transfer. See paragraph 

(f)(3)(ii) of this section. 

(vi) Example 6: Divisive 

reorganization—(A) Facts. Pursuant to a 

plan of reorganization for a transaction 

that qualifies as a reorganization under 

sections 368(a)(1)(D) and 355, 

Corporation F transfers one of its 

businesses to newly formed Corporation 

G in exchange for all the stock of G and 

then distributes all the G stock to F’s 

shareholders. The plan of 

reorganization, which is filed with the 

IRS pursuant to § 1.368–3(a)(5), 

identifies F and G as parties to the 

reorganization. 

(B) Analysis. The analysis is the same 

as in paragraph (f)(5)(i)(B) of this section 

(Example 1). 


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(6) Applicability date. The rules of 

this paragraph (f) apply to transactions 

intended to qualify under section 368 of 

the Code for which the earliest of the 

following dates occurs after [date of 

publication of final regulations in the 

Federal Register]: 

(i) The date of the first public 

announcement (as defined in § 1.355– 

7(h)(10)) of the transaction. 

(ii) The date of entry by the taxpayer 

into a written agreement to engage in 

the transaction. 

(iii) The date of approval of the 

transaction by the board of directors of 

the taxpayer. 

(iv) The date of a court order (or a 

plan confirmed, or a sale approved, by 

order of a court) in a title 11 or similar 

case (as defined in section 368(a)(3)(A) 

of the Code), but only if the taxpayer 

was a debtor in a case before such court. 

(v) The date a ruling request for the 

transaction is submitted to the IRS. 

(g) [Reserved] 

* * * * * 

■ Par. 16. Section 1.368–3 is amended 

by: 

■ a. Revising paragraphs (a)(3)(iv) and 

(4); 

■ b. Adding paragraph (a)(5) and 

■ c. Revising paragraph (e). 

The revisions and addition read as 

follows: 

§ 1.368–3 Records to be kept and 

information to be filed with returns. 

(a) * * * 

(3) * * * 

(iv) Property not described in 

paragraph (a)(3)(i), (ii), or (iii) of this 

section; 

(4) The date and control number of 

any private letter ruling(s) issued by the 

Internal Revenue Service in connection 

with this reorganization; and 

(5) A copy of the plan of 

reorganization satisfying the 

requirements set forth in § 1.368–4(d). 

* * * * * 

(e) Applicability date—(1) In general. 

This section applies to any taxable year 

beginning on or after May 30, 2006. 

However, taxpayers may apply this 

section to any original Federal income 

tax return (including any amended 

return filed on or before the due date 

(including extensions) of such original 

return) timely filed on or after May 30, 

2006. For taxable years beginning before 

May 30, 2006, see § 1.368–3 as 

contained in 26 CFR part 1 in effect on 

April 1, 2006. 

(2) Paragraphs (a)(3) and (b)(3). 

Paragraphs (a)(3) and (b)(3) of this 

section apply with respect to 

reorganizations occurring on or after 

March 28, 2016, and also with respect 

to reorganizations occurring before such 

date as a result of an entity classification 

election under § 301.7701–3 of this 

chapter filed on or after March 28, 2016, 

unless such reorganization is pursuant 

to a binding agreement that was in effect 

prior to March 28, 2016 and at all times 

thereafter. 

(3) Paragraph (a)(5). Paragraph (a)(5) 

of this section applies to transactions 

intended to qualify under section 368 of 

the Code for which the earliest of the 

following dates occurs after [date of 

publication of final regulations in the 

Federal Register]: 

(i) The date of the first public 

announcement (as defined in § 1.355– 

7(h)(10)) of the transaction. 

(ii) The date of entry by the taxpayer 

into a written agreement to engage in 

the transaction. 

(iii) The date of approval of the 

transaction by the board of directors of 

the taxpayer. 

(iv) The date of a court order (or a 

plan confirmed, or a sale approved, by 

order of a court) in a title 11 or similar 

case (as defined in section 368(a)(3)(A) 

of the Code), but only if the taxpayer 

was a debtor in a case before such court. 

(v) The date a ruling request for the 

transaction is submitted to the IRS. 

■ Par. 17. Section 1.368–4 is added to 

read as follows: 

§ 1.368–4 Plan of reorganization. 

(a) Plan of reorganization—(1) Scope 

and purpose. This section sets forth 

requirements and procedures for the 

determination of a plan of 

reorganization, including the scope of 

transactions properly included within 

that plan. The plan of reorganization 

serves to identify solely those 

transactions to which the definitional 

and operative provisions described in 

§ 1.368–1(c)(2)(i) and (ii) apply. The 

plan of reorganization also serves to 

distinguish those qualifying transactions 

described in § 1.368–1(c)(2)(i) and (ii) 

from transactions to which the general 

recognition provisions of the Code (such 

as section 1001 of the Code) apply. The 

plan of reorganization is not to be 

construed as broadening the definition 

of a reorganization as set forth in section 

368(a) of the Code. 

(2) Plan of reorganization to which 

definitional and operative provisions 

apply. The provisions described in 

§ 1.368–1(c)(2)(i) and (ii) apply solely to 

a transaction that is identified in, and 

carried out pursuant to— 

(i) A plan of reorganization of a 

taxpayer described in paragraph (b)(1) 

or an amended plan of reorganization 

described in paragraph (f) of this 

section; 

(ii) A plan of reorganization of a 

taxpayer that is corrected by the 

Commissioner under paragraph (b)(2)(i) 

of this section; or 

(iii) A plan of reorganization that is 

identified by the Commissioner under 

paragraph (b)(2)(ii) of this section. 

(3) Failure to satisfy requirements. 

The failure of a taxpayer to comply with 

any particular requirement or procedure 

set forth in this section (including the 

failure to file a plan of reorganization 

with the IRS pursuant to § 1.368–3(a)(5)) 

does not, on its own, prevent a 

transaction or series of transactions from 

being considered part of the plan of 

reorganization, qualifying as a 

reorganization under a definitional 

provision, or qualifying for 

nonrecognition treatment (in whole or 

in part) under an operative provision. 

(b) Definition. The term plan of 

reorganization means— 

(1) A plan of reorganization of a 

taxpayer that— 

(i) Satisfies all requirements set forth 

in paragraph (d) of this section; and 

(ii) Is filed with the IRS pursuant to 

§ 1.368–3(a)(5); or 

(2) A plan of reorganization that 

results from— 

(i) The Commissioner correcting a 

plan of reorganization of a taxpayer; or 

(ii) The Commissioner identifying a 

plan of reorganization for a taxpayer (in 

the event of a failure to file a plan of 

reorganization with the IRS pursuant to 

§ 1.355–5(a)(2)). 

(c) Determination of plan of 

reorganization—(1) Status generally 

based on plan of reorganization filed by 

taxpayer. Except as provided in 

paragraph (c)(2) of this section, a 

taxpayer establishes the plan of 

reorganization for a transaction or series 

of transactions solely by— 

(i) Satisfying all requirements set forth 

in paragraph (d) of this section; and 

(ii) Filing the plan of reorganization 

with the IRS pursuant to § 1.368–3(a)(5). 

(2) Correction or identification of plan 

of reorganization due to taxpayer’s 

failure to file a complete plan of 

reorganization—(i) In general. If a 

taxpayer files a plan of reorganization 

with the IRS that fails to satisfy any 

requirement set forth in paragraph (d) of 

this section, or if the taxpayer fails to 

file any plan of reorganization with the 

IRS, the Commissioner may correct or 

identify a plan of reorganization in 

accordance with paragraph (c)(2)(ii) of 

this section. 

(ii) Status of transactions as part of a 

plan of reorganization. The 

Commissioner may determine that a 

transaction or series of transactions 

should be included in, or excluded 

from, a plan of reorganization described 

in paragraph (c)(2)(i) of this section 

based on— 


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(A) All facts and circumstances 

regarding the transaction or series of 

transactions; and 

(B) All relevant provisions of the Code 

and general principles of Federal 

income tax law, including the step 

transaction doctrine. 

(d) Requirements for a plan of 

reorganization. To qualify as a plan of 

reorganization described in paragraph 

(b)(1) of this section, the taxpayer must 

satisfy all requirements set forth in 

paragraphs (d)(1) through (3) of this 

section. For purposes of this paragraph 

(d) and paragraph (e) of this section, the 

term official records includes a contract 

or other written agreement to which the 

taxpayer is a party, a resolution or other 

document authorized by the taxpayer’s 

board of directors, or other document 

filed with the U.S. Securities and 

Exchange Commission (SEC) or other 

Federal regulatory agency. 

(1) Documentation requirement. The 

plan of reorganization is provided in a 

single, comprehensive document that— 

(i) Identifies all parties to the 

reorganization (as determined pursuant 

to § 1.368–2(f)); 

(ii) Identifies all transactions properly 

included in the plan of reorganization 

(as determined pursuant to paragraph 

(e) of this section); 

(iii) Identifies all liabilities (including 

debt) to be assumed by the acquiring 

corporation and the obligees (or 

creditors) of those liabilities; 

(iv) Identifies all debt of the target 

corporation that will be satisfied with 

section 361 consideration (as defined in 

§ 1.361–1(b)(49)) (including all debt 

intended to qualify for the refinancing 

exception for historical distributing 

corporation debt under § 1.361–5(c)) 

and the creditors of that debt; 

(v) Describes the intended Federal 

income tax treatment of the transactions 

described in paragraph (d)(1)(ii) of this 

section; 

(vi) Describes the business purpose 

for each transaction described in 

paragraph (d)(1)(ii) of this section; and 

(vii) Establishes that the 

readjustments involved in transactions 

described in paragraph (d)(1)(ii) of this 

section are undertaken to facilitate the 

continuance of the business of a 

corporation a party to the 

reorganization. 

(2) Adoption of plan of 

reorganization. Prior to the first step of 

the reorganization, a plan of 

reorganization described in paragraph 

(b)(1)(i) of this section or an original 

plan of reorganization that becomes the 

amended plan of reorganization (within 

the meaning of paragraph (f) of this 

section), as applicable, is finalized and 

adopted by the party to the 

reorganization, as established by— 

(i) The acts of the party’s respective 

duly authorized officers and directors; 

and 

(ii) The official records of the party to 

the reorganization. 

(3) Completion of plan of 

reorganization—(i) Expeditious 

prosecution of plan of reorganization— 

(A) General rule. In accordance with 

paragraph (d)(3)(iii) of this section, 

taking into account all facts and 

circumstances (including the one or 

more business purposes for the 

reorganization), all parties to the 

reorganization complete the plan of 

reorganization as expeditiously as 

practicable. 

(B) 24-month presumption. The 

requirement in paragraph (d)(3)(i)(A) of 

this section is presumed to be satisfied 

if, in accordance with paragraph 

(d)(3)(ii) of this section, all parties to the 

reorganization complete the plan of 

reorganization within the 24-month 

period beginning on the date of the first 

step of the plan of reorganization. 

(ii) Completion of entire plan of 

reorganization—(A) General rule. All 

transactions included in a plan of 

reorganization must be carried out in 

the manner described in the plan of 

reorganization. 

(B) Failure to complete entire plan of 

reorganization. Except as provided in 

paragraph (f) of this section, if the 

requirement of paragraph (d)(3)(ii)(A) of 

this section is not satisfied, the 

provisions described in § 1.368– 

1(c)(2)(i) and (ii) do not apply to the 

transaction (or series of transactions) 

unless the Commissioner determines the 

existence of a plan of reorganization. 

(e) Requirements for transactions to 

be treated as properly included in plan 

of reorganization. The requirements set 

forth in this paragraph (e) must be 

satisfied for a transaction to be treated 

as properly included in a plan of 

reorganization. The existence of 

contingencies or conditions is not 

conclusive in determining whether a 

requirement of this paragraph (e) is 

satisfied. 

(1) Definite intent requirement—(i) 

General rule. Prior to the first step of the 

plan of reorganization or an original 

plan of reorganization that becomes the 

amended plan of reorganization (within 

the meaning of paragraph (f) of this 

section), one or more parties to the 

reorganization evidences a definite 

intent to carry out the transaction 

through a written commitment in one or 

more official records of the party that 

substantiate the plan of reorganization. 

(ii) Section 355 transactions. With 

regard to a control distribution (as 

defined in § 1.355–1(a)(2)(iii)) that 

occurs in the next taxable year after the 

first distribution, the distributing 

corporation does not establish a definite 

intent under paragraph (e)(1)(i) of this 

section unless all distributions up to 

and including the control distribution 

are effectuated pursuant to a binding 

commitment of the distributing 

corporation. See § 1.355–2(e)(2)(ii). 

(iii) Relevancy of contemplated 

possibilities—(A) Contemplation 

irrelevant to taxpayer’s determination. 

The contemplation by a party that the 

party may carry out a transaction is not 

sufficient for the party to establish a 

definite intent to carry out that 

transaction, regardless of whether that 

contemplated transaction is included in 

an official record of a party. 

(B) Contemplation relevant to 

Commissioner’s determination. A 

party’s contemplation of a transaction 

may be relevant for purposes of the 

correction or identification of a plan of 

reorganization by the Commissioner 

pursuant to paragraph (c)(2) of this 

section. 

(2) Proximate relationship 

requirement—(i) General rules. Taking 

into account paragraphs (e)(2)(ii) and 

(iii) of this section: 

(A) Necessary or integral test for 

application of definitional provision. A 

transaction is part of the plan of 

reorganization for a reorganization to 

which the provisions described in 

§ 1.368–1(c)(2)(i) apply only if, on its 

own or as part of a series of transactions, 

the transaction is necessary to satisfy 

one or more requirements of a 

definitional provision described in 

§ 1.368–1(c)(2)(i), or is an integral part 

of a series of transactions carried out to 

satisfy the requirements of the 

definitional provision intended to apply 

to the reorganization, as evidenced by a 

written commitment in one or more 

official records of the party to the 

reorganization. 

(B) But for, or integral to, test for 

application of operative provision. A 

transaction is part of the plan of 

reorganization to which the provisions 

described in § 1.368–1(c)(2)(ii) apply 

only if, on its own or as part of a series 

of transactions, the transaction would 

not occur but for the reorganization that 

is covered by the plan of reorganization, 

or is an integral part of a series of 

transactions carried out to satisfy the 

requirements of the definitional 

provision intended to apply to the 

reorganization, as evidenced by a 

written commitment in one or more 

official records of the party to the 

reorganization. 

(ii) Existence of independent 

significance not determinative. The 


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independent significance of a 

transaction (for example, the fact that 

the transaction has a separate business 

motive apart from the reorganization) 

does not preclude the satisfaction of the 

requirements under paragraph (e)(2)(i) 

of this section. 

(iii) Temporal proximity. A 

transaction that takes place in close 

temporal proximity to one or more other 

transactions is not properly included in 

a plan of reorganization under 

paragraph (e)(2)(i) of this section 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. 

(3) Business purpose consistency 

requirement. A transaction, on its own 

or as part of a series of transactions is 

consistent with, and directly related to, 

one or more business purposes for the 

reorganization (for example, the 

transaction directly furthers one or more 

business purposes for the 

reorganization). 

(f) Amended plan of reorganization— 

(1) Conditions. If a taxpayer amends a 

plan of reorganization described in 

paragraph (b)(1) of this section (original 

plan of reorganization) after the first 

step of the original plan of 

reorganization (amended plan of 

reorganization), those amendments will 

not cause the taxpayer to fail to satisfy 

the requirements set forth in paragraph 

(d) of this section only if— 

(i) Those amendments are in direct 

response to an identifiable, unexpected, 

and material change in market or 

business conditions that occurs after the 

date on which the original plan of 

reorganization is adopted by the party to 

the reorganization in the manner 

described in paragraph (d)(2) of this 

section; 

(ii) The amendments are necessary to 

achieve the one or more business 

purposes for the reorganization; and 

(iii) The amended plan of 

reorganization satisfies all requirements 

set forth in paragraph (d) of this section. 

(2) Consequences of plan of 

reorganization amended due to changed 

circumstances—(i) Qualifying amended 

plan of reorganization. If the 

requirements set forth in paragraph 

(f)(1) of this section are satisfied, the 

provisions described in § 1.368– 

1(c)(2)(i) and (ii) will apply to 

transactions identified in, and carried 

out pursuant to, the amended plan of 

reorganization. That is, the Federal 

income tax consequences of all 

transactions included in the amended 

plan of reorganization will be 

determined based on that plan of 

reorganization (and not on the original 

plan of reorganization). 

(ii) Non-qualifying amended plan of 

reorganization. If an amended plan of 

reorganization fails to satisfy all 

requirements set forth in paragraph 

(f)(1) of this section, the Commissioner 

may correct or identify the amended 

plan of reorganization. 

(g) Examples. The following examples 

illustrate the application of the rules of 

this section. For purposes of these 

examples, unless otherwise stated: 

terms defined in § 1.361–1(b) and used 

in these examples have the meaning 

given such terms in § 1.361–1(b); all 

transactions are completed within the 

24-month period beginning on the date 

of the first transaction; all transactions 

qualify for the Federal income tax 

treatment intended by the taxpayers, as 

described in the facts of each example; 

and all corporations are calendar-year 

taxpayers. 

(1) Example 1: Creation of plan of 

reorganization—(i) Facts. A target 

corporation (Target) transfers all its 

assets to an acquiring corporation 

(Acquiring) solely in exchange for stock 

of Acquiring and Acquiring’s 

assumption of Target liabilities. Target 

distributes all the Acquiring stock to 

Target’s shareholders. The transaction is 

intended to qualify as a reorganization 

under section 368(a)(1)(C). Target fails 

to file a plan of reorganization with the 

IRS pursuant to § 1.368–3(a)(5). 

(ii) Analysis. Target’s failure to file a 

plan of reorganization with the IRS 

pursuant to § 1.368–3(a)(5) does not, on 

its own, prevent the series of 

transactions from qualifying as a 

reorganization under section 

368(a)(1)(C). See paragraph (a)(3) of this 

section. The Commissioner may identify 

a plan of reorganization for the series of 

transactions based on all facts and 

circumstances and all relevant 

provisions of the Code and general 

principles of Federal income tax law, 

including the step transaction doctrine. 

See paragraphs (b)(2)(ii) and (c)(2) of 

this section. The definitional and 

operative provisions described in 

§ 1.368–1(c)(2)(i) and (ii) apply to the 

series of transactions identified in, and 

carried out pursuant to, the plan of 

reorganization identified by the 

Commissioner. See paragraph (a)(2)(iii) 

of this section. 

(2) Example 2: Correction of 

taxpayer’s plan of reorganization—(i) 

Facts. An acquiring corporation 

(Acquiring) acquires a target corporation 

(Target) through the following series of 

transactions. Acquiring first effectuates 

a tender offer for 51 percent of Target 

stock from Target shareholders solely 

for Acquiring voting stock (tender offer). 

A subsidiary of Acquiring (Merger Sub) 

then merges into Target (statutory 

merger) in a transaction intended to 

qualify as a reverse subsidiary merger 

under section 368(a)(2)(E). In the 

statutory merger, Acquiring’s Merger 

Sub stock is converted into Target stock, 

and each Target shareholder holding 

shares of the remaining 49 percent of 

Target stock exchanges its shares of 

Target stock for a combination of 

consideration, two-thirds of which is 

Acquiring stock and one-third of which 

is cash. Under general principles of 

Federal income tax law, including the 

step transaction doctrine, the tender 

offer and the statutory merger are 

treated as an integrated acquisition by 

Acquiring of all the Target stock. Target 

files a plan of reorganization with the 

IRS pursuant to § 1.368–3(a)(5) that 

satisfies all requirements set forth in 

paragraph (d) of this section, except that 

the plan of reorganization does not 

mention the tender offer. 

(ii) Analysis. To determine whether 

the tender offer should be included in 

the plan of reorganization for the 

statutory merger, the Commissioner may 

examine all facts and circumstances 

regarding the series of transactions and 

apply all relevant provisions of the Code 

and general principles of Federal 

income tax law, including the step 

transaction doctrine. See paragraph 

(c)(2)(ii) of this section. Because the 

tender offer and the statutory merger are 

treated as an integrated series of 

transactions for Federal income tax 

purposes, the tender offer and the 

statutory merger are treated as an 

integrated acquisition for purposes of 

determining whether the transaction 

qualifies as a reverse subsidiary merger 

under section 368(a)(2)(E). Accordingly, 

the Commissioner may correct Target’s 

plan of reorganization by including the 

tender offer. See paragraph (c)(2)(i) of 

this section. The definitional and 

operative provisions described in 

§ 1.368–1(c)(2)(i) and (ii) apply to the 

transactions identified in, and carried 

out pursuant to, the plan of 

reorganization as corrected by the 

Commissioner. See paragraph (a)(2)(ii) 

of this section. 

(3) Example 3: Scope of plan of 

reorganization—distribution to equalize 

values—(i) Facts. On June 30, 2025, 

Corporation X and Corporation Y decide 

to merge into newly formed Corporation 

Z. As reflected in a single, 

comprehensive document that satisfies 

the requirements set forth in paragraph 

(d)(1) of this section, the board of 

directors of each of X and Y approves 

the transaction pursuant to paragraph 

(d)(2) of this section, with the agreement 

that X and Y must be of equal value 


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when merged into Z. Consequently, to 

equalize the amount of its assets and Y’s 

assets, and pursuant to a board 

resolution, X distributes $100x in cash 

to its shareholders on September 30, 

2025 (equalizing distribution). On 

October 31, 2025, X and Y consolidate 

under State law (X/Y consolidation) in 

a transaction intended to qualify as a 

reorganization described in section 

368(a)(1)(A). 

(ii) Analysis. The board resolution 

pursuant to which the equalizing 

distribution was made, and the single, 

comprehensive document that reflects 

the decision of both boards of directors 

that X and Y be of equal value when 

combined in the X/Y consolidation, 

evidence a definite intent, prior to the 

first step of the plan of reorganization, 

for X to make the equalizing 

distribution. See paragraph (e)(1) of this 

section. The equalizing distribution is 

an integral part of the X/Y consolidation 

because the equalizing distribution 

satisfies a condition identified by the 

boards of directors of X and Y for 

executing the X/Y consolidation (that is, 

to equalize the values of X and Y prior 

to the X/Y consolidation). See paragraph 

(e)(2)(i)(B) of this section. The 

equalizing distribution is consistent 

with, directly relates to, and therefore 

directly furthers the business purpose 

for the X/Y consolidation, because the 

X/Y consolidation is intended to 

effectuate a merger of equals. See 

paragraph (e)(3) of this section. 

Accordingly, the equalizing distribution 

is properly included in the plan of 

reorganization for the X/Y 

consolidation. See paragraph (e) of this 

section. Consequently, the Federal 

income tax consequences of the 

equalizing distribution and the X/Y 

consolidation are determined under the 

definitional and operative provisions 

described in § 1.368–1(c)(2)(i) and (ii). 

See paragraph (a)(2)(i) of this section. 

(4) Example 4: Scope of plan of 

reorganization—pre-merger stock 

acquisition—(i) Facts. Two potential 

acquiring corporations (X and Y) engage 

in competing tender offers to acquire 

100 percent of the stock of a target 

corporation (Target). X and Y carry out 

the tender offers through their 

respective subsidiary corporations. On 

June 30, 2025, before acquiring any 

shares in Target, X subsidiary signs an 

agreement with Target (X/Target 

agreement) providing that, among other 

conditions (including regulatory 

approval and approval by the 

shareholders of X and Target), if X 

subsidiary successfully acquires at least 

51 percent of Target’s outstanding stock 

through its tender offer, X will acquire 

all remaining Target stock by causing 

Target to merge into X subsidiary in a 

transaction intended to qualify as a 

reorganization under section 

368(a)(2)(D) (subsidiary merger). As of 

September 30, 2025, X subsidiary has 

been tendered 51 percent of Target’s 

outstanding stock. On October 15, 2025, 

Y subsidiary tenders to X subsidiary all 

of Y subsidiary’s Target shares received 

in Y subsidiary’s tender offer (30 

percent of Target’s outstanding stock) in 

exchange for X stock (Y share 

exchange). On November 1, 2025, 

pursuant to the X/Target agreement, X 

causes Target to merge into X subsidiary 

(that is, the subsidiary merger). The 

subsidiary merger satisfies the 

requirements of a definitional provision 

described in § 1.368–1(c)(2)(i) regardless 

of whether X subsidiary’s tender offer 

(including the Y share exchange) is 

included in the plan of reorganization 

for the subsidiary merger. 

(ii) Analysis. The X/Target agreement 

imposes a legal obligation on X 

subsidiary to carry out the subsidiary 

merger if X subsidiary’s tender offer is 

successful. Therefore, this agreement 

evidences a definite intent, prior to the 

first step of the plan of reorganization, 

for X subsidiary to carry out both of 

those transactions as part of a plan of 

reorganization. See paragraph (e)(1) of 

this section. Satisfaction of this 

requirement is not affected by the fact 

that the subsidiary merger is subject to 

significant conditions, including a 

successful X subsidiary tender offer, 

regulatory approval, and X and Target 

shareholder approvals. See paragraph 

(e) of this section. The X/Target 

agreement establishes that X 

subsidiary’s tender offer is an integral 

part of a series of transactions carried 

out to satisfy the requirements of section 

368(a)(2)(D). See paragraph (e)(2) of this 

section. Satisfaction of this requirement 

is not affected by the fact that X 

subsidiary’s tender offer has a degree of 

economic significance independent of 

the subsidiary merger. See paragraph 

(e)(2)(ii) of this section. X’s business 

purpose for the merger is to acquire all 

the remaining outstanding stock of 

Target, as established through the X/ 

Target agreement. The tender offer is 

consistent with, directly relates to, and 

therefore directly furthers that business 

purpose. See paragraph (e)(3) of this 

section. Accordingly, X subsidiary’s 

tender offer and the Y share exchange 

are properly included in the plan of 

reorganization for the subsidiary merger. 

Consequently, the Federal income tax 

consequences of both X subsidiary’s 

tender offer and the subsidiary merger 

are determined under the definitional 

and operative provisions described in 

§ 1.368–1(c)(2)(i) and (ii). See paragraph 

(a)(2) of this section. 

(5) Example 5: Scope of plan of 

reorganization—multiple distributions 

of controlled corporation stock to 

constitute a control distribution—(i) 

Facts. On June 30, 2025, a distributing 

corporation (Distributing) contributes 

property to a newly formed controlled 

corporation (Controlled) in exchange for 

Controlled stock (contribution). On 

September 30, 2025, Distributing 

distributes 57 percent of the Controlled 

stock to Distributing’s shareholders (first 

distribution). On January 1, 2026, 

Distributing distributes the remaining 

43 percent of Controlled stock to 

Distributing’s shareholders (final 

distribution; together with the 

contribution and the first distribution, 

the separation). The separation and 

distribution agreement provides that 

Distributing will distribute 57 percent of 

Controlled stock during Distributing’s 

2025 taxable year, but only expresses a 

contemplated possibility that 

Distributing will distribute the 

remaining 43 percent of Controlled 

stock. Distributing files a plan of 

reorganization with the IRS pursuant to 

§ 1.368–3(a)(5) with its Federal income 

tax return for the 2025 taxable year that 

includes the first distribution and the 

final distribution as part of the plan of 

reorganization for the separation. 

(ii) Analysis. If a taxpayer files a plan 

of reorganization with the IRS that fails 

to satisfy any requirement set forth in 

paragraph (d) of this section, the 

Commissioner may correct the plan of 

reorganization. See paragraph (c)(2)(i) of 

this section. The Commissioner may 

correct the plan of reorganization to 

exclude a transaction based on an 

examination of all facts and 

circumstances and consideration of all 

relevant provisions of the Code and 

general principles of Federal income tax 

law, including the step transaction 

doctrine. See paragraph (c)(2)(ii) of this 

section. The final distribution is 

properly excluded from the plan of 

reorganization for the separation 

because Distributing fails to satisfy the 

definite intent requirement with respect 

to the final distribution. See paragraph 

(e)(1)(i) and (iii) of this section. 

Specifically, because the distribution of 

control (that is, the final distribution) 

occurs in the next taxable year after the 

first distribution and is not pursuant to 

a binding commitment, Distributing 

does not establish a definite intent 

under paragraph (e)(1)(i) of this section. 

See paragraph (e)(1)(ii) of this section. 

The definitional and operative 

provisions described in § 1.368– 

1(c)(2)(i) and (ii) apply solely to the 

transactions identified in, and carried 


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out pursuant to, the plan of 

reorganization as corrected by the 

Commissioner (that is, the contribution 

and first distribution). See paragraph 

(a)(2) of this section. Accordingly, the 

transaction would fail to meet the 

definitional requirement under section 

368(a)(1)(D) because the first 

distribution, by itself, does not meet the 

requirement set forth in § 1.355– 

2(e)(2)(i). 

(6) Example 6: Scope of plan of 

reorganization—qualifying distribution 

of amount of controlled corporation 

stock constituting section 368(c) 

control—(i) Facts. The facts are the same 

as in paragraph (g)(5)(i) of this section 

(Example 5), except for the following. 

First, Distributing provides in its 

separation and distribution agreement 

with Controlled that Distributing will 

distribute the remaining 43 percent of 

Controlled stock during 2026. Second, 

for its Federal income tax return for the 

2025 taxable year, Distributing files a 

plan of reorganization with the IRS 

pursuant to § 1.368–3(a)(5) that satisfies 

all requirements set forth in paragraph 

(d) of this section, including the 

establishment, by reference to the 

separation and distribution agreement, 

that Distributing will distribute to its 

shareholders pursuant to a binding 

commitment 57 percent of Controlled 

stock during 2025 and the remaining 43 

percent of Controlled stock during 2026. 

(ii) Analysis. The final distribution is 

properly included in the plan of 

reorganization for the separation 

because Distributing satisfies the 

definite intent requirement to make the 

final distribution. See paragraph 

(e)(1)(ii) of this section. Accordingly, 

based on the correct and properly filed 

plan of reorganization pursuant to 

§ 1.368–3(a)(5), the Federal income tax 

consequences of the contribution and 

both the first distribution and the final 

distribution are determined under the 

definitional and operative provisions 

described in § 1.368–1(c)(2)(i) and (ii). 

See paragraph (a)(2)(i) of this section. 

(7) Example 7: Scope of plan of 

reorganization—contribution and 

distribution in divisive reorganization— 

(i) Facts. On June 1, 2025, a distributing 

corporation (Distributing) contributes 

property to a newly formed controlled 

corporation (Controlled) in exchange for 

Controlled stock and Controlled’s 

assumption of Distributing liabilities 

related to the contributed business 

(contribution). On September 1, 2025, 

Distributing distributes all Controlled 

stock to Distributing’s shareholders 

(distribution; together with the 

contribution, the separation). A 

separation and distribution agreement 

between Distributing and Controlled, 

filed by Distributing with the SEC, 

evidences a definite intent, prior to the 

first step of the separation, to carry out 

each of these transactions comprising 

the separation. Additional official 

records of Distributing provide that the 

separation is carried out to sharpen 

management focus on, and reduce 

competition for capital between, the 

retained and contributed businesses, 

which includes ensuring that earnings 

of each business are used to pay 

liabilities arising solely from that 

business. Distributing files a plan of 

reorganization with the IRS pursuant to 

§ 1.368–3(a)(5) with its Federal income 

tax return for the 2025 taxable year. 

(ii) Analysis—(A) Contribution. The 

contribution is properly included in the 

plan of reorganization for the 

separation. See paragraph (e) of this 

section. First, as substantiated by the 

separation and distribution agreement, 

Distributing and Controlled evidence a 

definite intent, prior to the first step of 

the plan of reorganization, to carry out 

the contribution. See paragraph (e)(1)(i) 

of this section. Second, the contribution 

is necessary to satisfy the requirements 

of section 368(a)(1)(D). See paragraph 

(e)(2)(i)(A) of this section. Lastly, the 

contribution is consistent with, is 

directly related to, and therefore directly 

furthers, the business purpose for the 

reorganization. See paragraph (e)(3) of 

this section. Accordingly, based on the 

correct and properly filed plan of 

reorganization pursuant to § 1.368– 

3(a)(5), the Federal income tax 

consequences of the contribution are 

determined under a definitional 

provision described in § 1.368–1(c)(2)(i) 

(that is, section 368(a)(1)(D)). See 

paragraph (a)(2) of this section. 

(B) Controlled liability assumption. 

Controlled’s liability assumption is 

properly included in the plan of 

reorganization for the separation. See 

paragraph (e) of this section. First, as 

substantiated by the separation and 

distribution agreement, Distributing and 

Controlled evidence a definite intent, 

prior to the first step of the plan of 

reorganization, for the liability 

assumption to occur. See paragraph 

(e)(1)(i) of this section. Second, the 

liability assumption would not have 

occurred but for, and is integral to, the 

separation, because the assumption 

ensures that the respective liabilities of 

the retained and contributed businesses 

continue to be associated with those 

businesses. See paragraph (e)(2)(i)(B) of 

this section. Lastly, the Controlled 

liability assumptionis consistent with, is 

directly related to, and therefore directly 

furthers the business purpose for the 

reorganization by ensuring that the 

earnings of each business are used to 

pay liabilities arising solely from that 

business (in other words, furthering 

Distributing’s fit-and-focus corporate 

business purpose). See paragraph (e)(3) 

of this section. Accordingly, based on 

the correct and properly filed plan of 

reorganization pursuant to § 1.368– 

3(a)(5), the Federal income tax 

consequences of the liability 

assumption are determined under an 

operative provision described in 

§ 1.368–1(c)(2)(ii) (that is, section 357). 

See paragraph (a)(2) of this section. 

(C) Distribution. The distribution is 

properly included in the plan of 

reorganization for the separation. See 

paragraph (e) of this section. First, as 

substantiated by the separation and 

distribution agreement, Distributing and 

Controlled evidence a definite intent, 

prior to the first step of the plan of 

reorganization, for Distributing to make 

the distribution. See paragraph (e)(1)(i) 

of this section. Second, the distribution 

is necessary to satisfy the requirements 

of section 368(a)(1)(D). See paragraph 

(e)(2)(i)(A) of this section. Lastly, the 

distribution is consistent with, is 

directly related to, and therefore directly 

furthers, the fit-and-focus corporate 

business purpose for the reorganization. 

See paragraph (e)(3) of this section. 

Accordingly, based on the correct and 

properly filed plan of reorganization 

pursuant to § 1.368–3(a)(5), the Federal 

income tax consequences of the 

distribution are determined under the 

definitional and operative provisions 

described in § 1.368–1(c)(2)(i) and (ii) 

(that is, sections 355 and 368(a)(1)(D)). 

See paragraph (a)(2) of this section. 

(8) Example 8: Scope of plan of 

reorganization—boot purge through 

special dividend—(i) Facts. The facts 

are the same as in paragraph (g)(7)(i) of 

this section (Example 7), except for the 

following. As part of the contribution, 

Distributing receives cash from 

Controlled in partial exchange for the 

assets contributed by Distributing to 

Controlled. Distributing distributes that 

cash to its shareholders pursuant to a 

special dividend declared by 

Distributing’s board of directors (special 

dividend boot purge) that is intended to 

facilitate an appropriate post-separation 

capital structure for the retained and 

contributed businesses. The separation 

and distribution agreement, a resolution 

adopted by Distributing’s board of 

directors, and other official records of 

Distributing collectively evidence a 

definite intent, prior to the first step of 

the separation, to carry out the 

transactions comprising the separation 

(including the special dividend boot 

purge). In particular, those documents 

provide that the special dividend is in 

addition to any regularly occurring 


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dividends distributed to Distributing’s 

shareholders pursuant to Distributing’s 

dividend payment policy (as reflected in 

documents filed by Distributing with 

the SEC). 

(ii) Analysis. The special dividend 

boot purge is properly included in the 

plan of reorganization for the 

separation. See paragraph (e) of this 

section. First, as substantiated by the 

separation and distribution agreement 

and other official records of 

Distributing, Distributing and 

Controlled evidence a definite intent, 

prior to the first step of the plan of 

reorganization, for Distributing to make 

the special dividend boot purge. See 

paragraph (e)(1)(i) of this section. 

Second, the special dividend boot purge 

would not occur but for the separation, 

as evidenced by the separation and 

distribution agreement and other official 

records of Distributing, and by the fact 

that the special dividend is in addition 

to any regularly occurring dividends 

made pursuant to Distributing’s 

dividend payment policy. See paragraph 

(e)(2)(i)(B) of this section. Lastly, the 

special dividend boot purge is 

consistent with, directly relates to, and 

therefore directly furthers the business 

purpose for the separation because the 

special dividend boot purge facilitates 

an appropriate post-separation capital 

structure for the retained and 

contributed businesses (thereby 

facilitating Distributing’s fit-and-focus 

corporate business purpose). See 

paragraph (e)(3) of this section. 

Accordingly, based on the correct and 

properly filed plan of reorganization 

pursuant to § 1.368–3(a)(5), the Federal 

income tax consequences of the special 

dividend boot purge are determined 

under an operative provision described 

in § 1.368–1(c)(2)(ii) (that is, section 

361). See paragraph (a)(2) of this 

section. 

(9) Example 9: Scope of plan of 

reorganization—boot purge through 

special stock repurchase—(i) Facts. The 

facts are the same as in paragraph 

(g)(8)(i) of this section (Example 8), 

except that Distributing uses the 

Controlled cash to fund a special 

repurchase of Distributing stock (and, 

accordingly, is not part of an existing 

stock repurchase program approved by 

Distributing’s board of directors). 

(ii) Analysis. The analysis is the same 

as in paragraph (g)(8)(ii) of this section 

(Example 8). 

(10) Example 10: Scope of plan of 

reorganization—boot purge through 

ordinary course dividend—(i) Facts. The 

facts are the same as in paragraph 

(g)(8)(i) of this section (Example 8), 

except for the following. Distributing 

provides in the separation and 

distribution agreement, or other official 

records of Distributing, that Distributing 

will distribute the Controlled cash to 

Distributing’s shareholders through an 

ordinary course dividend made 

pursuant to Distributing’s dividend 

payment policy. After the distribution 

date, Distributing pays an ordinary 

course dividend that is funded with the 

cash received from Controlled in the 

contribution (that is, the Controlled 

cash). 

(ii) Analysis. The ordinary course 

dividend is properly excluded from the 

plan of reorganization for the separation 

because the dividend would have 

occurred regardless of the separation. 

Therefore, the ordinary course dividend 

fails the ‘‘but for, or integral to, test’’ for 

application of operative provision. See 

paragraph (e)(2)(i)(B) of this section. 

Accordingly, the Federal income tax 

consequences of the ordinary course 

dividend are determined under section 

301 of the Code, not an operative 

provision described in § 1.368– 

1(c)(2)(ii). See paragraph (a)(2) of this 

section. 

(11) Example 11: Scope of plan of 

reorganization—boot purge through 

existing stock repurchase program—(i) 

Facts. The facts are the same as in 

paragraph (g)(10)(i) of this section 

(Example 10), except that Distributing 

uses the Controlled cash to fund a 

repurchase of Distributing stock 

pursuant to an existing stock repurchase 

program approved by Distributing’s 

board of directors. 

(ii) Analysis. The analysis is the same 

as in paragraph (g)(10)(ii) of this section 

(Example 10). Accordingly, the Federal 

income tax consequences of the 

ordinary course stock repurchase are 

determined under section 301 or 302 of 

the Code, and not an operative 

provision described in § 1.368– 

1(c)(2)(ii). See paragraph (a)(2) of this 

section. 

(12) Example 12: Scope of plan of 

reorganization—securities-for-debt 

exchange—(i) Facts. The facts are the 

same as in paragraph (g)(7)(i) of this 

section (Example 7), except for the 

following. As part of the contribution, 

Distributing receives securities from 

Controlled in partial exchange for the 

assets contributed by Distributing to 

Controlled. Distributing transfers those 

Controlled securities to a creditor of 

Distributing in a series of transactions 

that satisfies all the requirements set 

forth in § 1.361–5(a) (securities-for-debt 

exchange). The separation and 

distribution agreement, a resolution 

adopted by Distributing’s board of 

directors, and other official records of 

Distributing, collectively evidence a 

definite intent, prior to the first step of 

the separation, to carry out each of the 

transactions comprising the securitiesfor-debt exchange. Consistent with the 

requirements set forth in §§ 1.361–5(a) 

and 1.368–3(a)(5), Distributing identifies 

the historical Distributing debt and the 

qualifying creditor with regard to that 

historical Distributing debt, prior to the 

first step of the plan of reorganization 

that includes the separation. 

(ii) Analysis. The securities-for-debt 

exchange is properly included in the 

plan of reorganization for the separation 

because the exchange satisfies all 

conditions required by paragraph (e) of 

this section. First, as substantiated by 

the separation and distribution 

agreement and other official records of 

Distributing, Distributing evidences a 

definite intent, prior to the first step of 

the plan of reorganization, to carry out 

the securities-for-debt exchange. See 

paragraph (e)(1)(i) of this section. 

Second, the securities-for-debt exchange 

would not occur but for the separation, 

as evidenced by the separation and 

distribution agreement and other official 

records of Distributing. See paragraph 

(e)(2)(i)(B) of this section. Lastly, the 

securities-for-debt exchange is 

consistent with, and directly relates to, 

the fit-and-focus corporate business 

purpose for the separation, because it 

facilitates the elimination of 

competition for capital between the 

retained and contributed businesses 

through the establishment of an 

appropriate post-separation capital 

structure for each of those businesses. 

See paragraph (e)(3) of this section. 

Accordingly, based on the correct and 

properly filed plan of reorganization 

pursuant to § 1.368–3(a)(5), the Federal 

income tax consequences of the 

securities-for-debt exchange are 

determined under an operative 

provision described in § 1.368– 

1(c)(2)(ii). See paragraph (a)(2) of this 

section. 

(13) Example 13: Scope of plan of 

reorganization—dispositions of retained 

stock—(i) Facts. The facts are the same 

as in paragraph (g)(7)(i) of this section 

(Example 7), except for the following. 

On September 30, 2025, Distributing 

distributes to its shareholders 80 

percent of the outstanding Controlled 

stock, constituting a control 

distribution. With regard to the retained 

stock, the separation and distribution 

agreement and other official records of 

Distributing provide that Distributing 

will transfer the retained stock to a 

creditor of Distributing in a stock-fordebt exchange that satisfies the 

requirements set forth in §§ 1.361–5(a) 

and 1.368–3(a)(5) (stock-for-debt 

exchange). The separation and 

distribution agreement and those other 


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official records also provide that, to the 

extent the retained stock is not disposed 

of in the stock-for-debt exchange, 

Distributing will distribute that retained 

stock to Distributing’s shareholders 

(follow-on spin-off). Lastly, the 

separation and distribution agreement 

provides that, to the extent the retained 

stock is not disposed of after 

Distributing succeeds or fails in 

completing the stock-for-debt exchange 

and follow-on spin-off, Distributing will 

sell the retained stock on the open 

market by not later than five years after 

the first distribution date (open-market 

sale). Distributing describes these 

contingent commitments in its plan of 

reorganization filed with the IRS 

pursuant to § 1.368–3(a)(5). 

(ii) Analysis—(A) Stock-for-debt 

exchange. The stock-for-debt exchange 

is properly included in the plan of 

reorganization for the separation 

because the exchange satisfies all 

conditions required by paragraph (e) of 

this section. First, as substantiated in 

the separation and distribution 

agreement, in which Distributing 

expresses that it will carry out the stockfor-debt exchange, Distributing 

evidences a definite intent, prior to the 

first step of the plan of reorganization, 

to carry out the stock-for-debt exchange. 

See paragraph (e)(1) of this section. The 

satisfaction of this requirement is not 

affected by the fact that Distributing 

might engage in the follow-on spin-off 

or the open-market sale to dispose of all 

the retained stock in the event that the 

stock-for-debt exchange does not result 

in a total disposition of that stock, 

because Distributing is committed in 

writing in one or more of its official 

records to attempt to complete the 

exchange. See paragraph (e) of this 

section. Second, the stock-for-debt 

exchange would not occur but for the 

separation, as evidenced by the 

separation and distribution agreement. 

See paragraph (e)(2)(i)(B) of this section. 

Lastly, the stock-for-debt exchange is 

consistent with, and directly relates to, 

the fit-and-focus corporate business 

purpose for the separation, because it 

facilitates the elimination of 

competition for capital between the 

retained and contributed businesses 

through the establishment of an 

appropriate post-separation capital 

structure for each of those businesses. 

See paragraph (e)(3) of this section. 

Accordingly, based on the correct and 

properly filed plan of reorganization 

pursuant to § 1.368–3(a)(5), the Federal 

income tax consequences of the 

securities-for-debt exchange are 

determined under an operative 

provision described in § 1.368– 

1(c)(2)(ii). See paragraph (a)(2) of this 

section. 

(B) Follow-on spin-off. The follow-on 

spin-off is properly included in the plan 

of reorganization for the separation 

because that distribution satisfies all 

conditions required by paragraph (e) of 

this section. First, as substantiated by 

the separation and distribution 

agreement, in which Distributing 

expresses that it will carry out the 

follow-on spin-off, Distributing 

evidences a definite intent, prior to the 

first step of the plan of reorganization, 

to carry out the follow-on spin-off. See 

paragraph (e)(1) of this section. The 

satisfaction of this requirement is not 

affected by the contingency arising from 

the fact that Distributing commits to 

first attempt to carry out the stock-fordebt exchange, because Distributing 

commits in writing in one or more of its 

official records to carry out the followon spin-off in the event that the stockfor-debt exchange does not occur or 

does not result in the disposition by 

Distributing of all the retained stock. 

See paragraph (e) of this section. For the 

same reason, the satisfaction of this 

requirement is not affected by the fact 

that Distributing ultimately might 

engage in the open-market sale to 

dispose of all the retained stock, in the 

event that the follow-on spin-off does 

not result in a total disposition of that 

stock. See paragraph (e) of this section. 

In addition, the follow-on spin-off 

would not occur but for the separation, 

as evidenced by the separation and 

distribution agreement. See paragraph 

(e)(2)(i) of this section. Lastly, the 

follow-on spin-off is consistent with, 

and directly relates to, the fit-and-focus 

corporate business purpose for the 

separation because it would further the 

separation of the retained and 

contributed businesses. See paragraph 

(e)(3) of this section. Accordingly, based 

on the correct and properly filed plan of 

reorganization pursuant to § 1.368– 

3(a)(5), the Federal income tax 

consequences of the follow-on spin-off 

are determined under an operative 

provision described in § 1.368–1(c)(2)(ii) 

(that is, section 361). See paragraph 

(a)(2) of this section. 

(C) Open-market sale. The openmarket sale is properly included in the 

plan of reorganization for the separation 

because that sale satisfies all conditions 

required by paragraph (e) of this section. 

First, as evidenced by the separation 

and distribution agreement and other 

official records of Distributing, in which 

Distributing expresses that it will carry 

out the open-market sale, Distributing 

evidences a definite intent, prior to the 

first step of the plan of reorganization, 

to carry out the open-market sale. See 

paragraph (e)(1) of this section. The 

satisfaction of this requirement is not 

affected by the contingency that 

Distributing commits to first attempt to 

carry out the stock-for-debt exchange 

and then the follow-on spin-off, because 

Distributing commits in writing in one 

or more of its official records to carry 

out the open-market sale in the event 

that the stock-for-debt exchange and the 

follow-on spin-off, taken together or on 

their own, do not occur or do not result 

in the disposition by Distributing of all 

the retained stock. See paragraph (e) of 

this section. In addition, the openmarket sale is necessary to satisfy one or 

more of the requirements of a 

definitional provision described in 

§ 1.368–1(c)(2)(i) intended to apply to 

the reorganization. See paragraph 

(e)(2)(i)(A) of this section. Lastly, the 

open-market sale is consistent with, and 

directly relates to, the fit-and-focus 

corporate business purpose for the 

separation because it would further the 

separation of the retained and 

contributed businesses. See paragraph 

(e)(3) of this section. Accordingly, based 

on the correct and properly filed plan of 

reorganization pursuant to § 1.368– 

3(a)(5), the open-market sale is taken 

into account along with the contribution 

and distribution for determining the 

Federal income tax consequences of the 

separation under sections 355 and 

368(a)(1)(D) (that is, the relevant 

definitional and operative provisions 

described in § 1.368–1(c)(2)(i) and (ii)). 

See paragraph (a)(2) of this section. 

(14) Example 14: Scope of plan of 

reorganization—dispositions of retained 

stock—(i) Facts. The facts are the same 

as in paragraph (g)(13)(i) of this section 

(Example 13), except for the following. 

With regard to the retained stock, the 

separation and distribution agreement 

and other official records of Distributing 

provide that Distributing might transfer 

the retained stock to a creditor of 

Distributing in a stock-for-debt exchange 

that satisfies the requirements set forth 

in §§ 1.361–5(a) and 1.368–3(a)(5) 

(stock-for-debt exchange). The 

separation and distribution agreement 

and other official records of Distributing 

also provide that Distributing might 

distribute that retained stock to 

Distributing’s shareholders (follow-on 

spin-off). Lastly, those documents 

provide that, to the extent the retained 

stock is not disposed of after 

Distributing succeeds or fails in 

completing the stock-for-debt exchange 

and follow-on spin-off, Distributing will 

sell the retained stock on the open 

market by not later than five years after 

the first distribution date (open-market 

sale). Distributing describes these 


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contemplated possibilities of carrying 

out the stock-for-debt exchange and 

follow-on spin-off, as well as its written 

commitment to carry out the openmarket sale, in its plan of reorganization 

filed with the IRS pursuant to § 1.368– 

3(a)(5). 

(ii) Analysis—(A) Stock-for-debt 

exchange. The stock-for-debt exchange 

is properly excluded from the plan of 

reorganization for the separation 

because the exchange fails to satisfy all 

conditions required by paragraph (e) of 

this section. Specifically, as evidenced 

by the separation and distribution 

agreement and other official records of 

Distributing, Distributing treats the 

occurrence of the stock-for-debt 

exchange as a contemplated possibility, 

thereby failing to evidence a definite 

intent to carry out the transaction. See 

paragraph (e)(1)(iii) of this section. 

Accordingly, as corrected by the 

Commissioner, the securities-for-debt 

exchange is excluded from the 

taxpayer’s plan of reorganization (and 

therefore section 361(c), the otherwise 

relevant operative provision described 

in § 1.368–1(c)(2)(ii), does not apply). 

See paragraph (a)(2)(ii) of this section. 

(B) Follow-on spin-off. The analysis is 

the same as in paragraph (g)(14)(ii)(A) of 

this section (Example 14). Therefore 

section 361(c), the otherwise relevant 

operative provision described in 

§ 1.368–1(c)(2)(ii), does not apply. 

(C) Open-market sale. The openmarket sale is properly included in the 

plan of reorganization for the separation 

because the sale satisfies all conditions 

required by paragraph (e) of this section. 

First, as substantiated by the separation 

and distribution agreement, in which 

Distributing expresses that it will carry 

out the open-market sale, Distributing 

evidences a definite intent, prior to the 

first step of the plan of reorganization, 

to carry out the open-market sale. See 

paragraph (e)(1) of this section. The 

satisfaction of this requirement is not 

affected by the contingency created by 

Distributing’s contemplation of carrying 

out the stock-for-debt exchange and the 

follow-on spin-off, because Distributing 

commits in writing in one or more of its 

official records to carry out the openmarket sale in the event that the stockfor-debt exchange and the follow-on 

spin-off, taken together or on their own, 

do not occur or do not result in the 

disposition by Distributing of all the 

retained stock. See paragraph (e) of this 

section. In addition, the open-market 

sale is necessary to satisfy one or more 

of the requirements of a definitional 

provision described in § 1.368–1(c)(2)(i) 

intended to apply to the reorganization. 

See paragraph (e)(2)(i)(A) of this section. 

Lastly, the open-market sale is 

consistent with, and directly relates to, 

the fit-and-focus corporate business 

purpose for the separation because it 

would further the separation of the 

retained and contributed businesses. 

See paragraph (e)(3) of this section. 

Accordingly, based on the correct and 

properly filed plan of reorganization 

pursuant to § 1.368–3(a)(5), the openmarket sale is taken into account along 

with the contribution and distribution 

for determining the Federal income tax 

consequences of the separation under 

the relevant definitional provisions 

described in § 1.368–1(c)(2)(i). See 

paragraph (a)(2) of this section. 

(15) Example 15: Scope of plan of 

reorganization—dispositions of retained 

stock—(i) Facts. The facts are the same 

as in paragraph (g)(14)(i) of this section 

(Example 14), except for the following. 

With regard to the retained stock, the 

separation and distribution agreement 

and other official records of Distributing 

provide that the open-market sale also is 

a contemplated possibility, rather than 

subject to a written commitment by 

Distributing. 

(ii) Analysis—(A) Stock-for-debt 

exchange. The analysis is the same as in 

paragraph (g)(14)(ii)(A) of this section 

(Example 14). 

(B) Follow-on spin-off. The analysis is 

the same as in paragraph (g)(14)(ii)(B) of 

this section (Example 14). 

(C) Open-market sale. The openmarket sale is properly excluded from 

the plan of reorganization for the 

separation because the open-market sale 

fails to satisfy all conditions required by 

paragraph (e) of this section. 

Specifically, as evidenced by the 

separation and distribution agreement 

and other official records of 

Distributing, Distributing treats the 

occurrence of the open-market sale as a 

contemplated possibility, thereby failing 

to evidence a definite intent to carry out 

the transaction. See paragraph (e)(1)(iii) 

of this section. Accordingly, the openmarket sale is not taken into account for 

purposes of satisfying the relevant 

definitional provision described in 

§ 1.368–1(c)(2)(i), pursuant to a plan of 

reorganization corrected by the 

Commissioner. See paragraph (a)(2)(ii) 

of this section. 

(h) Applicability date. This section 

applies to transactions intended to 

qualify under section 368 of the Code 

for which the earliest of the following 

dates occurs after [date of publication of 

final regulations in the Federal 

Register]: 

(1) The date of the first public 

announcement (as defined in § 1.355– 

7(h)(10)) of the transaction. 

(2) The date of entry by the taxpayer 

into a written agreement to engage in 

the transaction. 

(3) The date of approval of the 

transaction 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 

of a court) in a title 11 or similar case 

(as defined in section 368(a)(3)(A) of the 

Code), but only if the taxpayer was a 

debtor in a case before such court. 

(5) The date a ruling request for the 

transaction is submitted to the IRS. 

Douglas W. O’Donnell, 

Deputy Commissioner. 

[FR Doc. 2025–00321 Filed 1–13–25; 4:15 pm] 

BILLING CODE 4830–01–P 


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