obÌåÓý

Section 430 specifies the minimum funding requirements that apply to single-employer plans (except for CSEC plans under ¡ì 414(y)) pursuant to ¡ì 412. Section 430(h)(2) specifies the interest rates that must be used to determine a plan¡¯s target normal cost and funding target. Under this provision, present value is generally determined using three 24-month average interest rates (¡°segment rates¡±), each of which applies to cash flows during specified periods. To the extent provided under ¡ì 430(h)(2)(C)(iv), these segment rates are adjusted by the applicable percentage of the 25-year average segment rates for the period ending September 30 of the year preceding the calendar year in which the plan year begins.¹ However, an election may be made under ¡ì 430(h)(2)(D)(ii) to use the monthly yield curve in place of the segment rates.

Section 1.430(h)(2)-1(d) provides rules for determining the monthly corporate bond yield curve,² and ¡ì 1.430(h)(2)-1(c) provides rules for determining the 24-month average corporate bond segment rates used to compute the target normal cost and the funding target. Consistent with the methodology specified in ¡ì 1.430(h)(2)-1(d), the monthly corporate bond yield curve derived from January 2025 data is in Table 2025-1 at the end of this notice. The spot first, second, and third segment rates for the month of January 2025 are, respectively, 4.74, 5.55, and 5.92.

The 24-month average segment rates determined under ¡ì 430(h)(2)(C)(i) through (iii) must be adjusted pursuant to ¡ì 430(h)(2)(C)(iv) to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates. Those percentages are 95% and 105% for plan years beginning in 2024 and 2025. For this purpose, any 25-year average segment rate that is less than 5% is deemed to be 5%. The 25-year average segment rates for plan years beginning in 2024 and 2025 were published in Notice 2023-66, 2023-40 I.R.B. 992 and Notice 2024-67, 2024-41 I.R.B. 726, respectively.

The three 24-month average corporate bond segment rates applicable for February 2025 without adjustment for the 25-year average segment rate limits are as follows:

 

The adjusted 24-month average segment rates set forth in the chart below reflect ¡ì 430(h)(2)(C)(iv) of the Code. The 24-month averages applicable for February 2025, adjusted to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates in accordance with ¡ì 430(h)(2)(C)(iv) of the Code, are as follows:

Section 431 specifies the minimum funding requirements that apply to multiemployer plans pursuant to ¡ì 412. Section 431(c)(6)(B) specifies a minimum amount for the full-funding limitation described in ¡ì 431(c)(6)(A), based on the plan¡¯s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate used to calculate current liability for this purpose must be no more than 5 percent above and no more than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year. Notice 88-73, 1988-2 C.B. 383, provides guidelines for determining the weighted average interest rate. The rate of interest on 30-year Treasury securities for January 2025 is 4.85 percent. The Service determined this rate as the average of the daily determinations of yield on the 30-year Treasury bond maturing in November 2054. For plan years beginning in February 2025, the weighted average of the rates of interest on 30-year Treasury securities and the permissible range of rates used to calculate current liability are as follows:

In general, the applicable interest rates under ¡ì 417(e)(3)(D) are segment rates computed without regard to a 24-month average. Section 1.417(e)-1(d)(3) provides guidelines for determining the minimum present value segment rates. Pursuant to that section, the minimum present value segment rates determined for January 2025 are as follows:

The principal author of this notice is Tom Morgan of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the IRS participated in the development of this guidance. For further information regarding this notice, contact Mr. Morgan at 202-317-6700 or Tony Montanaro at 626-927-1475 (not toll-free calls).

 

¹ Pursuant to ¡ì 433(h)(3)(A), the third segment rate determined under ¡ì 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount of the full funding limitation under ¡ì 433(c)(7)(C)).

² For months before February 2024, the monthly corporate bond yield curve was determined in accordance with Notice 2007-81, 2007-44 I.R.B. 899. Section 1.430(h)(2)-1(d) generally adopts the methodology for determining the monthly corporate bond yield curve under Notice 2007-81 but includes two enhancements to take into account subsequent changes in the bond market. Those enhancements are described in the preamble to TD 9986 (89 FR 2127).

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.¡±

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 non-authoritative 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 long-standing 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.

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 ¡ì¡ì1.355-2(e), 1.355-4, and 1.355-10 would be applicable to section 355 transactions occurring after the general applicability date. Proposed ¡ì¡ì1.357-1 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 ¡ì¡ì1.361-1 through 1.361-5 would be applicable to exchanges under section 361 occurring after the general applicability date. Proposed ¡ì¡ì1.368-1(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.

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.

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.

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 .

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.

Income taxes, Reporting and recordkeeping requirements.

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order for ¡ì¡ì1.355-2(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 ¡ì1.355-2T(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:

(a) Application of section 355¡ª(1) Overview¡ª(¾±) 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 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 ³¾±ð²¹²Ô²õ¡ª

(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 ¡ì1.355-4.

(xiv) Plan of reorganization. The term plan of reorganization has the meaning provided in ¡ì1.368-4.

(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 ¡ì¡ì1.355-2 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¡ª(1) In general. Section 355 provides for nonrecognition of gain or loss with respect to a distribution whether or not¡ª

(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 ¡ì1.356-6, 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 ¡ì1.356-7(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 ¡ì1.356-7(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¡ª(1) Section 1.355-1¡ª(¾±) 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 ¡ì1.355-7(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¡ª(¾±) In general. Except as otherwise provided in this paragraph (e)(2), ¡ì¡ì1.355-2 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 transactions occurring on or before October 20, 2011, see ¡ì1.355-2T(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:

* * * * *

(e) Stock and securities distributed¡ª(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 ¡ì1.355-4) or a plan of reorganization (within the meaning of ¡ì1.368-4), 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

(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 ¡ì1.355-10(c)).

* * * * *

Par. 4. Section 1.355-4 is revised to read as follows:

(a) Plan of distribution¡ª(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 ³¾±ð²¹²Ô²õ¡ª

(i) A plan of distribution of the distributing corporation that¡ª

(A) Satisfies all requirements set forth in paragraph (c) of this section; and

(B) Is filed with the IRS pursuant to ¡ì1.355-5(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 ¡ì1.355-5(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 ¡ì1.355-5(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¡ª(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¡ª

(i) Satisfying all requirements set forth in paragraph (c) of this section; and

(ii) Filing the plan of distribution with the IRS pursuant to ¡ì1.355-5(a)(2).

(2) Correction or identification of plan of distribution due to distributing corporation¡¯s failure to file a complete plan of distribution¡ª(¾±) 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

(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¡ª

(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¡ª

(i) The acts of the distributing corporation¡¯s duly authorized officers and directors; and

(ii) The distributing corporation¡¯s official records.

(3) Completion of plan of distribution¡ª(¾±) 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(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¡ª(¾±) 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 ¡ì1.355-2(±ð)(2)(¾±¾±).

(iii) Relevancy of contemplated possibilities¡ª(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¡ª(¾±) 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¡ª(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¡ª

(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¡ª(¾±) 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 ¡ì1.355-5 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 ¡ì1.355-1(a)(2)(xviii)) and completing the plan of distribution as expeditiously as practicable; Distributing satisfies all requirements for qualification under section 355; and with regard to any retained controlled corporation stock (as defined in ¡ì1.355-10(b)(7)), the requirements set forth in ¡ì1.355-10(c) are satisfied.

(1) Example 1: Status of distributions as part of the plan of distribution¡ª(¾±) 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¡ª(¾±) 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:

(a) Reporting of transaction information¡ª(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 ¡ì1.355-4.

(3) Plan of reorganization. With regard to a divisive reorganization, see ¡ì1.368-3(²¹).

(b) [Reserved]

(c) [Reserved]

(d) Applicability date¡ª(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 ¡ì1.355-7(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.

(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:

(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) °ä³§´¡³Ò¡ª(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) ¶Ù³§´¡³Ò¡ª(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¡ª

(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¡ª(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¡ª(¾±) In general. A qualifying retention is a retention that¡ª

(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 ¡ì1.355-4(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¡ª(i) General rule. A distributing corporation is considered to have met the requirements of the facts-and-circumstances 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

(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

(A) As of the date on which the plan of distribution or the plan of reorganization (as applicable) is adopted in accordance with ¡ì1.355-4(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 ¡ì1.355-8(c)(2))) is widely 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 ¡ì1.7704-1(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

(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

(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¡ª

(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¡ª(¾±) 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-and-circumstances 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 facts-and-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 ¡ì1.355-2(e)(2)(iii).

(2) Example 2: Safe harbor¡ª(¾±) 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 ¡ì1.355-4(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 ¡ì1.7704-1(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 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¡ª(¾±) 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¡ª(¾±) 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 ¡ì1.355-4(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¡ª(¾±) 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 ¡ì1.355-2(e)(2)(iii).

Par. 7. Section 1.357-0 is added to read as follows:

This section lists the major captions that appear in ¡ì¡ì1.357-1 through 1.357-5.

(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.

(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.

(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.

(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.

(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.

(a) Applicability date.

Par. 8. Section 1.357-1 is revised to read as follows:

(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) °ä³§´¡³Ò¡ª(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 ¡ì1.1275-1(»å).

(7) Distributing corporation. The term distributing corporation means the distributing corporation described in section 355(a)(1)(A).

(8) Distributing corporation debt¡ª(¾±) 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) ¶Ù³§´¡³Ò¡ª(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¡ª(¾±) In general. The term earliest applicable date means the date that is the earliest of¡ª

(A) The date of the first public announcement (as defined in ¡ì1.355-7(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 ¡ì1.355-7(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 ¡ì1.361-2(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) ³¢¾±²¹²ú¾±±ô¾±³Ù²â¡ª(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.

(16) Plan of reorganization. The term plan of reorganization has the meaning provided in ¡ì1.368-4.

(17) Refinanced distributing corporation debt. The term refinanced distributing corporation debt means debt of a distributing corporation¡ª

(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 ¡ì¡ì1.357-2 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:

(a) In general. Except as provided in ¡ì¡ì1.357-3 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¡ª

(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¡ª(1) In general. For purposes of this section and ¡ì¡ì1.357-3, 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¡ª

(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¡ª(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¡ª

(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 ¡ì¡ì1.357-3 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¡ª(¾±) 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 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¡ª(¾±) 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:

 

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¡ª(¾±) 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¡ª(¾±) 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:

(a) Principal purpose standard¡ª(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¡ª

(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¡ª(1) Scope. The rules of this 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 ¡ì1.357-2(a) in a divisive reorganization if¡ª

(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

(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¡ª(¾±) 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 ¡ì1.357-2(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¡ª

(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 ¡ì1.361-2(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¡ª(¾±) 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:

 

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¡ª(¾±) ¹ó²¹³¦³Ù²õ¡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 ¡ì1.357-2(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¡ª(¾±) 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 ¡ì1.357-1(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 ¡ì1.357-2(c). The analysis is the same as in paragraph (e)(2)(ii) of this section (Example 2).

(4) Example 4: Trade payables¡ª(i) ¹ó²¹³¦³Ù²õ¡ª(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 ¡ì1.357-1(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¡ª(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 exchange. See paragraphs (a) and (b) of this section and ¡ì1.357-2(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 ¡ì1.361-3(b)(2).

(6) Example 6: Assumption to avoid Federal income tax in a section 351 exchange¡ª(¾±) 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.

(a) Liabilities in excess of adjusted basis¡ª(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¡ª

(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¡ª

(i) To which ¡ì1.357-3(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

(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 ¡ì1.368-3.

(3) Certain liabilities excluded¡ª(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

(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¡ª

(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¡ª(¾±) 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 non-capital assets¡ª(¾±) 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¡ª(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, 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.

(a) Applicability date. The rules of ¡ì¡ì1.357-1 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 ¡ì1.355-7(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:

This section lists the major captions that appear in ¡ì¡ì1.361-1 through 1.361-6.

(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.

(a) General rule.

(b) Exchanges not solely for stock or securities.

(c) Example.

(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.

(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.

(3) Example 3: Distribution of nonqualified property.

(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.

(a) Applicability date.

Par. 12. Section 1.361-1 is revised to read as follows:

(a) Overview¡ª(1) In general. The section 361 regulations apply¡ª

(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¡ª

(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 ¡ì1.1275-1(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¡ª(¾±) In general. The term appreciated nonqualified property means property distributed by a target corporation under ¡ì1.361-4(b) that¡ª

(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

(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 ¡ì1.357-2(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 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 ¡ì1.1275-4(a)(4) that is reasonably certain to be exercised as of the earliest applicable date based on all facts and circumstances¡ª

(i) Taking into account ¡ì1.1504-4(g) (to the extent relevant); but

(ii) Not taking into account the safe harbors described in ¡ì1.1504-4(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 ¡ì1.1275-1(»å).

(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¡ª

(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¡ª(¾±) 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¡ª

(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¡ª

(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¡ª

(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¡ª(¾±) In general. The term earliest applicable date means the date that is the earliest of¡ª

(A) The date of the first public announcement (as defined in ¡ì1.355-7(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 ¡ì1.355-7(h)(12) and (13).

(28) Eligible distributing corporation debt. The term eligible distributing corporation debt means distributing corporation debt described in ¡ì1.361-5(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 ¡ì1.361-5(c)(2).

(34) Intermediary¡ª(¾±) In general. The term intermediary means an investment bank or other person that¡ª

(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¡ª

(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.

(36) Liability¡ª(¾±) 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 ¡ì1.361-5(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¡ª

(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 ¡ì1.368-2(´Ú).

(41) Plan of reorganization. The term plan of reorganization has the meaning provided in ¡ì1.368-4.

(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¡ª

(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¡ª

(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 ¡ì1.361-2 or ¡ì1.361-3; or

(iii) A corporation controlling the acquiring corporation (within the meaning of section 368(c)), if¡ª

(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 ¡ì1.361-2 or ¡ì1.361-3.

(44) Qualifying creditor. The term qualifying creditor means a creditor described in ¡ì1.361-5(b).

(45) Qualifying debt elimination transaction. The term qualifying debt elimination transaction means a transaction described in ¡ì1.361-5(e).

(46) Refinanced historical distributing corporation debt. The term refinanced historical distributing corporation debt has the meaning provided in ¡ì1.361-5(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¡ª

(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¡ª(¾±) In general. The term section 361 consideration means, with regard to an exchange to which ¡ì1.361-2 or ¡ì1.361-3 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 ¾±²Ô³¦±ô³Ü»å±ð²õ¡ª

(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 non-security 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 ¡ì1.357-2(a).

(50) Section 361 regulations. The term section 361 regulations means this section and ¡ì¡ì1.361-2 through 1.361-6.

(51) Target corporation¡ª(¾±) 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) 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 true-up 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¡ª

(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

(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¡ª

(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:

(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¡ª

(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¡ª

(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 ¡ì1.361-3.

(c) Example¡ª(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 ¡ì1.368-3(a)(5) that satisfies all requirements set forth in ¡ì1.368-4, 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.

(a) Scope¡ª(1) In general. If ¡ì1.361-2(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 ¡ì1.368-2(³¾)(3)(¾±¾±¾±).

(b) Money or other property distributed in acquisitive reorganizations¡ª(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¡ª

(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¡ª(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¡ª

(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¡ª(¾±) 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

(A) Deposits the money received in the exchange in a segregated account; and

(B) Transfers that money or other property to a creditor¡ª

(1) In satisfaction of distributing corporation debt in a transfer meeting the requirements set forth in ¡ì1.361-5; 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 post-distribution 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 ¡ì1.361-3(a).

(B) Value not reasonably ascertainable. As of the date of the exchange described in ¡ì1.361-3(a), the fair market value of the distributing corporation¡¯s right to receive the post-distribution 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 specified in paragraph (c)(1)(ii) of this section, the distributing corporation, pursuant to the plan of reorganization¡ª

(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 ¡ì1.361-5.

(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 post-distribution 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 post-distribution payment properly is characterized for Federal income tax purposes as consideration that the controlled corporation receives in the exchange described in ¡ì1.361-3(a).

(ii) Value not reasonably ascertainable. As of the date of the exchange described in ¡ì1.361-3(a), the fair market value of the controlled corporation¡¯s right to receive the post-distribution 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¡ª

(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 ¡ì1.368-3(a)(5) that satisfies all requirements set forth in ¡ì1.368-4, 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¡ª(¾±) 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¡ª(¾±) 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 ¡ì1.368-4(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¡ª(¾±) 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 ¡ì1.368-4(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¡ª(¾±) 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 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¡ª(¾±) 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¡ª(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¡ª(¾±) 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 post-distribution payment because the transfer of $200x from Distributing to Controlled occurs pursuant to the plan of reorganization and after the control distribution date. See ¡ì1.361-1(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¡ª(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 ¡ì1.361-5. 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 ¡ì1.361-5.

(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 ¡ì1.361-1(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 post-distribution 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 ¡ì1.361-5 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 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.

(a) Distributions of qualified property¡ª(1) Distributions to shareholders. A target corporation recognizes no gain or loss on a distribution of qualified property received in an exchange described in ¡ì1.361-2(a) or ¡ì1.361-3(a) to the target corporation¡¯s shareholders pursuant to a plan of reorganization.

(2) Treatment of certain transfers to creditors¡ª(i) Acquisitive reorganizations. In an acquisitive reorganization, if a target corporation receives qualified property in an exchange described in ¡ì1.361-2(a) or ¡ì1.361-3(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

(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 ¡ì1.361-2(a) or ¡ì1.361-3(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

(A) Pursuant to a plan of reorganization; and

(B) In satisfaction of distributing corporation debt in a transfer meeting the requirements set forth in ¡ì1.361-5.

(b) Distributions of appreciated nonqualified property¡ª(1) Deemed sale treatment. If a target corporation distributes appreciated nonqualified property received in an exchange described in ¡ì1.361-3(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 ¡ì1.361-2(a) or ¡ì1.361-3(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¡ª(¾±) 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 ¡ì1.355-10(c). Distributing properly files a plan of reorganization with the IRS pursuant to ¡ì1.368-3(a)(5) satisfying all requirements set forth in ¡ì1.368-4, 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 ¡ì1.361-1(b)(43). The contribution is an exchange described in ¡ì1.361-2(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¡ª(¾±) 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 ¡ì1.368-4(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 practicable in completion of the plan of reorganization, Distributing recognizes no gain or loss on the control distribution or final distribution. See ¡ì1.368-4(d)(3)(i)(A) and paragraph (a)(1) of this section.

(3) Example 3: Distribution of nonqualified property¡ª(¾±) 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 ¡ì1.368-3(a)(5) satisfying all requirements set forth in ¡ì1.368-4, 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 ¡ì1.361-1(b)(43). The exchange of Target assets for Acquiring stock is described in ¡ì1.361-2(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 ¡ì1.361-1(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).

(a) General rule. The transfer of section 361 consideration by a distributing corporation to a creditor of the distributing corporation under ¡ì1.361-3(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¡ª

(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¡ª(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¡ª

(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¡ª(¾±) 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¡ª(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 ¡ì1.368-4(»å)(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¡ª(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 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¡ª(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¡ª(¾±) 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

(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 ¡ì1.361-2(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

(A) The distributing corporation debt is¡ª

(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

(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 ¡ì1.361-2(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¡ª

(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¡ª(¾±) 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¡ª

(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¡ª

(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 (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 ¡ì1.361-2(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 ¡ì1.361-2(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

(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¡ª(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¡ª

(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-quarterly-average test (as set forth in paragraph (d)(2) of this section).

(2) Eight-quarterly-average test¡ª(¾±) 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

(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¡ª(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¡ª

(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

(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¡ª

(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¡ª

(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¡ª(¾±) Overview¡ª(´¡) In general. To qualify as a qualifying debt 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 non-qualification 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¡ª(1) Exchange part of prearranged, integrated plan¡ª(i) Substantial evidence of non-qualification. 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 non-qualification.

(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 substance-over-form requirements¡ª(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 non-qualification.

(ii) Substantial evidence of non-qualification. 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¡ª(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¡ª(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 ¡ì1.357-2(e)(2)) is substantial evidence of non-qualification.

(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 ¡ì1.357-2(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 ¡ì1.357-2(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¡ª

(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¡ª

(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

(A) True-up payments;

(B) Forward exchange agreements; and

(C) Any similar agreement or arrangement.

(f) Transitorily eliminated eligible distributing corporation debt¡ª(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¡ª(¾±) General rule. Unless the exception 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

(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

(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 ¡ì1.368-3(a)(5) that satisfies all requirements set forth in ¡ì1.368-4; 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¡ª(¾±) 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 ¡ì1.361-3(c)(2)(i) to be treated as a distribution to Distributing¡¯s shareholders pursuant to the plan of reorganization for purposes of ¡ì1.361-3(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 ¡ì1.361-3(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¡ª(¾±) 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 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 ¡ì1.368-4(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¡ª(¾±) 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-quarterly-average test is equal to $110x (that is, the eight quarterly average of $880x¡ªthe $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 x 1) + ($100x x 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-quarterly-average 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¡ª(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¡ª(¾±) 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¡ª(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 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¡ª(¾±) 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 securities-for-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 ¡ì1.361-4(a)(2)(ii). See paragraph (a) of this section.

(8) Example 8: Qualifying intermediated exchange¡ª(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.

(a) Applicability date. The rules of ¡ì¡ì1.361-1 through 1.361-5 apply to transactions intended to qualify under section 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 ¡ì1.355-7(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:

* * * * *

(c) Scope of exception for reorganization exchanges¡ª(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) ¨C 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) ¨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 ¡ì1.355-7(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:

* * * * *

(f) Party to a reorganization¡ª(1) Overview. The provisions described in ¡ì1.368-1(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 ¡ì1.368-1(c)(2)(i) and (ii) apply, the term party to a reorganization is limited solely to a corporation that¡ª

(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¡ª(¾±) In general. The term party to a reorganization ¾±²Ô³¦±ô³Ü»å±ð²õ¡ª

(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 ¡ì1.358-6(b)(2)) if stock of the controlling corporation is used in the acquisition of stock or properties.

(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 ¡ì1.368-1(»å).

(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 ¡ì1.358-6(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 ¡ì1.358-6(b)(2)(i)), a triangular B reorganization (as defined in ¡ì1.358-6(b)(2)(iv)), a triangular C reorganization (as defined in ¡ì1.358-6(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¡ª(¾±) 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 ¡ì1.368-4) that is filed with the IRS pursuant to ¡ì1.368-3(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 ¡ì1.368-3(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 ¡ì1.368-4(c)(2), taking into account¡ª

(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 ¡ì1.368-3(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 ¡ì1.368-1(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 ¡ì1.368-3(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 ¡ì1.368-3(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 ¡ì1.368-1(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 ¡ì1.368-1(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 ¡ì1.368-1(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 ¡ì1.368-3(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).

(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 ¡ì1.355-7(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:

(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 ¡ì1.368-4(d).

* * * * *

(e) Applicability date¡ª(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 ¡ì1.368-3 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 ¡ì301.7701-3 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 ¡ì1.355-7(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:

(a) Plan of reorganization¡ª(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 ¡ì1.368-1(c)(2)(i) and (ii) apply. The plan of reorganization also serves to distinguish those qualifying transactions described in ¡ì1.368-1(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 ¡ì1.368-1(c)(2)(i) and (ii) apply solely to a transaction that is identified in, and carried out pursuant to¡ª

(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 ¡ì1.368-3(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 ³¾±ð²¹²Ô²õ¡ª

(1) A plan of reorganization of a taxpayer that¡ª

(i) Satisfies all requirements set forth in paragraph (d) of this section; and

(ii) Is filed with the IRS pursuant to ¡ì1.368-3(a)(5); or

(2) A plan of reorganization that results from¡ª

(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 ¡ì1.355-5(a)(2)).

(c) Determination of plan of reorganization¡ª(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¡ª

(i) Satisfying all requirements set forth in paragraph (d) of this section; and

(ii) Filing the plan of reorganization with the IRS pursuant to ¡ì1.368-3(a)(5).

(2) Correction or identification of plan of reorganization due to taxpayer¡¯s failure to file a complete plan of reorganization¡ª(¾±) 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¡ª

(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¡ª

(i) Identifies all parties to the reorganization (as determined pursuant to ¡ì1.368-2(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 ¡ì1.361-1(b)(49)) (including all debt intended to qualify for the refinancing exception for historical distributing corporation debt under ¡ì1.361-5(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¡ª

(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¡ª(¾±) 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(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 ¡ì1.368-1(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¡ª(¾±) 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 ¡ì1.355-1(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 ¡ì1.355-2(±ð)(2)(¾±¾±).

(iii) Relevancy of contemplated possibilities¡ª(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¡ª(¾±) 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 ¡ì1.368-1(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 ¡ì1.368-1(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 ¡ì1.368-1(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 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¡ª(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¡ª

(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¡ª(¾±) Qualifying amended plan of reorganization. If the requirements set forth in paragraph (f)(1) of this section are satisfied, the provisions described in ¡ì1.368-1(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 ¡ì1.361-1(b) and used in these examples have the meaning given such terms in ¡ì1.361-1(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¡ª(¾±) 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 ¡ì1.368-3(a)(5).

(ii) Analysis. Target¡¯s failure to file a plan of reorganization with the IRS pursuant to ¡ì1.368-3(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 ¡ì1.368-1(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¡ª(¾±) 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 ¡ì1.368-3(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 ¡ì1.368-1(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 ¨C distribution to equalize values¡ª(¾±) 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 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 ¡ì1.368-1(c)(2)(i) and (ii). See paragraph (a)(2)(i) of this section.

(4) Example 4: Scope of plan of reorganization ¨C pre-merger stock acquisition¡ª(¾±) 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 ¡ì1.368-1(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 ¡ì1.368-1(c)(2)(i) and (ii). See paragraph (a)(2) of this section.

(5) Example 5: Scope of plan of reorganization ¨C multiple distributions of controlled corporation stock to constitute a control distribution¡ª(¾±) 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 ¡ì1.368-3(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 ¡ì1.368-1(c)(2)(i) and (ii) apply solely to the transactions identified in, and carried 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 ¡ì1.355-2(e)(2)(i).

(6) Example 6: Scope of plan of reorganization ¨C qualifying distribution of amount of controlled corporation stock constituting section 368(c) control¡ª(¾±) 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 ¡ì1.368-3(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 ¡ì1.368-3(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 ¡ì1.368-1(c)(2)(i) and (ii). See paragraph (a)(2)(i) of this section.

(7) Example 7: Scope of plan of reorganization ¨C contribution and distribution in divisive reorganization¡ª(¾±) 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 ¡ì1.368-3(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 ¡ì1.368-3(a)(5), the Federal income tax consequences of the contribution are determined under a definitional provision described in ¡ì1.368-1(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 ¡ì1.368-3(a)(5), the Federal income tax consequences of the liability assumption are determined under an operative provision described in ¡ì1.368-1(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 ¡ì1.368-3(a)(5), the Federal income tax consequences of the distribution are determined under the definitional and operative provisions described in ¡ì1.368-1(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 ¨C boot purge through special dividend¡ª(¾±) 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 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 ¡ì1.368-3(a)(5), the Federal income tax consequences of the special dividend boot purge are determined under an operative provision described in ¡ì1.368-1(c)(2)(ii) (that is, section 361). See paragraph (a)(2) of this section.

(9) Example 9: Scope of plan of reorganization ¨C boot purge through special stock repurchase¡ª(¾±) 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 ¨C boot purge through ordinary course dividend¡ª(¾±) 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 ¡ì1.368-1(c)(2)(ii). See paragraph (a)(2) of this section.

(11) Example 11: Scope of plan of reorganization ¨C boot purge through existing stock repurchase program¡ª(¾±) 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 ¡ì1.368-1(c)(2)(ii). See paragraph (a)(2) of this section.

(12) Example 12: Scope of plan of reorganization ¨C securities-for-debt exchange¡ª(¾±) 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 ¡ì1.361-5(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 securities-for-debt exchange. Consistent with the requirements set forth in ¡ì¡ì1.361-5(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 ¡ì1.368-3(a)(5), the Federal income tax consequences of the securities-for-debt exchange are determined under an operative provision described in ¡ì1.368-1(c)(2)(ii). See paragraph (a)(2) of this section.

(13) Example 13: Scope of plan of reorganization ¨C dispositions of retained stock¡ª(¾±) 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-for-debt exchange that satisfies the requirements set forth in ¡ì¡ì1.361-5(a) and 1.368-3(a)(5) (stock-for-debt exchange). The separation and distribution agreement and those other 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 ¡ì1.368-3(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 stock-for-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 ¡ì1.368-3(a)(5), the Federal income tax consequences of the securities-for-debt exchange are determined under an operative provision described in ¡ì1.368-1(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-for-debt exchange, because Distributing commits in writing in one or more of its official records to carry out the follow-on spin-off in the event that the stock-for-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 ¡ì1.368-3(a)(5), the Federal income tax consequences of the follow-on spin-off are determined under an operative provision described in ¡ì1.368-1(c)(2)(ii) (that is, section 361). See paragraph (a)(2) of this section.

(C) Open-market sale. The open-market 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 open-market sale is necessary to satisfy one or more of the requirements of a definitional provision described in ¡ì1.368-1(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 ¡ì1.368-3(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 ¡ì1.368-1(c)(2)(i) and (ii)). See paragraph (a)(2) of this section.

(14) Example 14: Scope of plan of reorganization ¨C dispositions of retained stock¡ª(¾±) 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 ¡ì¡ì1.361-5(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 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 open-market sale, in its plan of reorganization filed with the IRS pursuant to ¡ì1.368-3(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 ¡ì1.368-1(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 ¡ì1.368-1(c)(2)(ii), does not apply.

(C) Open-market sale. The open-market 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 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 open-market sale is necessary to satisfy one or more of the requirements of a definitional provision described in ¡ì1.368-1(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 ¡ì1.368-3(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 the relevant definitional provisions described in ¡ì1.368-1(c)(2)(i). See paragraph (a)(2) of this section.

(15) Example 15: Scope of plan of reorganization ¨C dispositions of retained stock¡ª(¾±) 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 open-market 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 open-market sale is not taken into account for purposes of satisfying the relevant definitional provision described in ¡ì1.368-1(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 ¡ì1.355-7(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.

(obÌåÓýd by the Office of the Federal Register January 13, 2025, 4:15 p.m., and published in the issue of the Federal Register for January 16, 2025, 90 FR 5220)