On March 17, the Tax Section of the New York State Bar Association (the “Tax Section”) released a report on the proposed regulations on corporate spin-offs and reorganizations that were issued in January. As we discussed here, these proposed regulations were intended to resolve a long period of uncertainty in the area of corporate spin-off transactions, especially those involving debt exchanges and retentions or delayed distributions of stock or debt of Spinco by the parent company making the distribution (“Remainco”). Just as the 2025 proposed regulations followed a long series of guidance by the IRS, this most recent Tax Section report follows a series of reports by the Tax Section on these spin-off issues, including two in 2024 (one in March and the other in July) and one in 2020. The Tax Section’s bottom line in this report: the IRS and Treasury need to start over and try again.
According to the Tax Section’s report, numerous provisions of the proposed regulations “do not properly reflect the statutory language and purpose” of the Internal Revenue Code governing spin-offs and reorganizations, adding additional requirements and unnecessarily restricting provisions and terms found in the Code that have historically been interpreted broadly. Additionally, as we discussed here, the proposed regulations contain a number of sweeping revisions to how corporate separation and reorganization transactions are conceptualized and conducted. In particular, the proposed regulations included provisions that appeared to cover not only spin-off transactions with the complex features described above, but also ordinary corporate reorganizations and incorporations having nothing to do with corporate separations.
Indeed, the Tax Section report continues, instead of providing increased certainty, many of the provisions of the proposed regulations may have the perverse effect of increasing uncertainty and the number of substantive and procedural “traps for the unwary” that would be likely to increase costs for taxpayers. Lastly, the report questions the need for broad, comprehensive guidance in the context of spin-offs, reorganizations and incorporations, noting that there already exists well-developed law governing each of these types of transactions not implicated by the perceived need for additional spin-off guidance.
Accordingly, the Tax Section recommends withdrawing the proposed regulations in their entirety and replacing them with more targeted guidance (which could include Treasury Regulations or “sub-regulatory” guidance such as Revenue Procedures) with respect to the specific aspects of spin-off transactions that may warrant clarification.
The Tax Section report also contains dozens of specific recommendations to be adopted either as more specific, targeted guidance following the withdrawal of the proposed regulations or, if the proposed regulations are not withdrawn altogether, as modifications to the proposed regulations before finalization.
In particular, the proposed regulations’ new concept of a “plan of distribution” for spin-off transactions, as well as its reconceptualization of the “plan of reorganization” required for corporate reorganizations, came in for especial criticism. Generally speaking, only actions taken pursuant to a plan of distribution or reorganization may qualify for tax-free treatment. The new proposed regulations would impose significant procedural and substantive requirements on a taxpayer’s actions taken in connection with a spin-off or reorganization that may be treated as part of a plan. Taxpayers would be required to set out their entire plan in a single comprehensive document that details all steps in a transaction (including all possible steps that might be taken in response to potential contingencies) and their intended federal income tax consequences, and to file this plan with the IRS. After taking the first step in the plan, taxpayers would not be permitted to amend their plans absent “unexpected changes in market and business conditions.” The Tax Section recommends eliminating these provisions entirely, limiting the guidance to particular issues relating to more complex spin-off transactions (such as those involving debt exchanges and post-retention of Spinco stock), or (if those two recommendations are rejected) adding a series of clarifying and liberalizing changes “to provide appropriate flexibility, deference to business judgment, and acknowledgment of the practicalities of planning and executing transactions.”
Likewise, the Tax Section’s report recommends withdrawing the proposed regulations’ provision that applies the same treatment to any Spinco stock distributed after the initial distribution date. Historically, legal authorities distinguished between “delayed distributions” (in which Remainco may continue to hold Spinco stock or debt for a relatively short period, e.g., to allow trading in Spinco stock to settle before entering into a debt-for-equity exchange, and then distribute or exchange the retained stock tax-free) and “retentions” (in which Remainco holds Spinco stock for a longer period of time, such as where it has pledged the stock as collateral for debt, and then disposes of it in a separate, taxable transaction). The Tax Section criticizes the proposed regulations’ apparent collapse of this distinction as “unsupported by the plain language and structure of the statute,” and provides a series of separate recommendations for how delayed distributions and retentions should each be treated.
Other commentators, including the Silicon Valley Tax Directors Group, have echoed the same concerns set out in the Tax Section’s report, and we and many other tax experts have expressed similar reservations at conferences over the first quarter of this year. We all hope that if the proposed regulations are finalized, they will take a different, more limited form.
