Treasury and the IRS withdraw the 2016 per se device test for tax-free spin-offs

A ten-year-old proposal for policing tax-free spin-offs is losing its sharpest edge. The Treasury Department and the IRS filed a notice on October 20 withdrawing parts of proposed regulations issued in July 2016 under section 355, effective when the notice is published on October 21.

The 2016 proposal would have added a per se device test. If a distributing or controlled corporation held too high a share of nonbusiness assets, measured by a Nonbusiness Asset Percentage, the distribution would have been treated as a device for distributing earnings and profits even where other factors, such as a corporate business purpose, pointed the other way.

Three provisions go: the per se rule in proposed section 1.355-2(d)(5), the device anti-abuse rule in 1.355-2(d)(2)(iv)(E), and the minimum active trade or business anti-abuse rule in 1.355-9(d). The agencies say stakeholder feedback was generally critical.

The withdrawal is narrow. The notice says it does not affect other rules or judicial doctrines, naming substance over form and step transactions, and that the agencies continue to study the issues the 2016 proposal raised.

The document: IRS, REG-134016-15 partial withdrawal, FR Doc. 2026-21568.