DealLawyers.com Blog

January 29, 2025

Spin-Offs: IRS Proposes Comprehensive New Regs

In the past, the tax treatment for divisive reorganizations such as corporate spin-offs has typically been addressed through IRS private letter rulings. However, earlier this month, the IRS issued proposed regulations that would apply to corporate spin-offs. This excerpt from intro to Wachtell’s memo on the proposal summarizes the potential implications of the proposed rules for companies considering a spin-off:

Although the Proposed Regulations would liberalize certain areas relative to the IRS’s recent policy in issuing private letter rulings (see our prior memo), they would tighten others and introduce new onerous reporting and filing requirements. If finalized, the regulations would be effective generally for transactions that are announced after the date of finalization. Finalization could take considerable time, as many aspects need to be clarified, corrected, and refined in order to ensure that the regulations do not impede transactions that should qualify as tax-free. However, the IRS has announced that it will now issue private letter rulings based on the Proposed Regulations, rather than based on previously issued guidance.

The Proposed Regulations reflect an intention to publish rules binding on taxpayers and on which taxpayers can rely without the need to seek a private letter ruling. While it remains to be seen to what extent final regulations will deviate from the current proposal, the Proposed Regulations would, in certain respects, constrain taxpayers in structuring spin-off transactions, especially with respect to capital structure considerations.

The proposed regulations address the parent company debt & liabilities eligible to be assumed or repaid by the spun-off subsidiary and identify the types of permissible debt-for-debt and debt-for-equity exchanges. The proposed rules would also provide for somewhat greater flexibility in the terms of the parent’s commitment to dispose of retained stock in the spun-off subsidiary, restrict certain parent re-borrowings undertaken in connection with de-leveraging transactions as part of a spin-off, and limit payments by the parent company to its shareholders using cash received from the spun-off subsidiary. In addition, the proposed rules would require a taxpayer to file its “plan of reorganization” or “plan of distribution” with the IRS, and only those steps included in the final plan would be eligible for tax-free treatment.

We’re posting memos on the proposed rules in our “Spin-Offs” Practice Area.

John Jenkins