Internal Revenue Bulletin 2025-10 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 2025–10
March 3, 2025
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
EMPLOYEE PLANS
Notice 2025-14, page 980.
This notice sets forth updates on the corporate bond
monthly yield curve, the corresponding spot segment rates
for January 2025 used under § 417(e)(3)(D), the 24-month
average segment rates applicable for February 2025, and
the 30-year Treasury rates, as reflected by the application of
§ 430(h)(2)(C)(iv).
INCOME TAX
REG-112261-24, page 983.
These proposed regulations provide guidance regarding
certain matters relating to corporate separations, incorpora-
tions, and reorganizations qualifying, in whole or in part, for
nonrecognition of gain or loss. These matters include distribu-
tions and retentions of controlled corporation stock, assump-
tions of liabilities by controlled corporations, exchanges of
property between distributing corporations and controlled
corporations, and distributions and transfers of consider-
ation to distributing corporation shareholders and creditors.
Finding Lists begin on page ii.

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and
enforce the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of inter-
nal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rul-
ings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
March 3, 2025 Bulletin No. 2025–10

Part III
Update for Weighted
Average Interest Rates,
Yield Curves, and Segment
Rates
Notice 2025-14
This notice provides guidance on the
corporate bond monthly yield curve, the
corresponding spot segment rates used
under § 417(e)(3), and the 24-month aver-
age segment rates under § 430(h)(2) of the
Internal Revenue Code. In addition, this
notice provides guidance as to the inter-
est rate on 30-year Treasury securities
under § 417(e)(3)(A)(ii)(II) as in effect for
plan years beginning before 2008 and the
30-year Treasury weighted average rate
under § 431(c)(6)(E)(ii)(I).
YIELD CURVE AND SEGMENT
RATES
Section 430 specifies the minimum
funding requirements that apply to sin-
gle-employer plans (except for CSEC
plans under § 414(y)) pursuant to § 412.
Section 430(h)(2) specifies the inter-
est 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 (“seg-
ment rates”), each of which applies to
cash flows during specified periods. To
the extent provided under § 430(h)(2)(C)
(iv), these segment rates are adjusted by
the applicable percentage of the 25-year
average segment rates for the period end-
ing September 30 of the year preceding
the calendar year in which the plan year
begins.
1
However, an election may be
made under § 430(h)(2)(D)(ii) to use the
monthly yield curve in place of the seg-
ment rates.
Section 1.430(h)(2)-1(d) provides
rules for determining the monthly cor-
porate bond yield curve,
2
and § 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. Con-
sistent with the methodology specified in
§ 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 Janu-
ary 2025 are, respectively, 4.74, 5.55, and
5.92.
The 24-month average segment rates
determined under § 430(h)(2)(C)(i)
through (iii) must be adjusted pursuant to
§ 430(h)(2)(C)(iv) to be within the appli-
cable minimum and maximum percent-
ages of the corresponding 25-year aver-
age 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 pub-
lished in Notice 2023-66, 2023-40 I.R.B.
992 and Notice 2024-67, 2024-41 I.R.B.
726, respectively.
24-MONTH AVERAGE CORPORATE
BOND SEGMENT RATES
The three 24-month average corporate
bond segment rates applicable for Feb-
ruary 2025 without adjustment for the
25-year average segment rate limits are as
follows:
24-Month Average Segment Rates Without 25-Year Average Adjustment
Applicable Month First Segment Second Segment Third Segment
February 2025 5.00 5.29 5.44
The adjusted 24-month average seg-
ment rates set forth in the chart below
reflect § 430(h)(2)(C)(iv) of the Code. The
24-month averages applicable for Febru-
ary 2025, adjusted to be within the appli-
cable minimum and maximum percent-
ages of the corresponding 25-year average
segment rates in accordance with § 430(h)
(2)(C)(iv) of the Code, are as follows:
Adjusted 24-Month Average Segment Rates
For Plan Years
Beginning InApplicable MonthFirst SegmentSecond SegmentThird Segment
2024February 20255.005.295.59
2025February 20255.005.295.50
1
Pursuant to § 433(h)(3)(A), the third segment rate determined under § 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 § 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).
March 3, 2025 980 Bulletin No. 2025–10

30-YEAR TREASURY SECURITIES
INTEREST RATES
Section 431 specifies the mini-
mum funding requirements that apply
to multiemployer plans pursuant to §
412. Section 431(c)(6)(B) specifies a
minimum amount for the full-funding
limitation described in § 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 securi-
ties 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 calcu-
late current liability are as follows:
Treasury Weighted Average Rates
For Plan Years Beginning In30-Year Treasury Weighted AveragePermissible Range 90% to 105%
February 20253.883.49 to 4.07
MINIMUM PRESENT VALUE
SEGMENT RATES
In general, the applicable interest rates
under § 417(e)(3)(D) are segment rates
computed without regard to a 24-month
average. Section 1.417(e)-1(d)(3) pro-
vides guidelines for determining the min-
imum present value segment rates. Pursu-
ant to that section, the minimum present
value segment rates determined for Janu-
ary 2025 are as follows:
Minimum Present Value Segment Rates
Month First Segment Second Segment Third Segment
January 2025 4.74 5.55 5.92
DRAFTING INFORMATION
The principal author of this notice is
Tom Morgan of the Office of Associ-
ate 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).
Bulletin No. 2025–10 981 March 3, 2025

March 3, 2025 982 Bulletin No. 2025–10
Table 2025-1
Monthly Yield Curve for January 2025
Derived from January 2025 Data
MaturityYieldMaturityYieldMaturityYieldMaturityYieldMaturityYield
0.54.5320.55.8440.55.9360.55.9980.56.01
1.04.5821.05.8441.05.9461.05.9981.06.01
1.54.6321.55.8541.55.9461.55.9981.56.01
2.04.6722.05.8542.05.9462.05.9982.06.02
2.54.7222.55.8542.55.9462.55.9982.56.02
3.04.7623.05.8643.05.9463.05.9983.06.02
3.54.8123.55.8643.55.9563.55.9983.56.02
4.04.8624.05.8644.05.9564.05.9984.06.02
4.54.9124.55.8644.55.9564.55.9984.56.02
5.04.9625.05.8645.05.9565.05.9985.06.02
5.55.0125.55.8645.55.9565.56.0085.56.02
6.05.0726.05.8646.05.9566.06.0086.06.02
6.5
5.1226.55.8646.55.9566.56.0086.56.02
7.05.1727.05.8747.05.9667.06.0087.06.02
7.55.2227.55.8747.55.9667.56.0087.56.02
8.05.2728.05.8748.05.9668.06.0088.06.02
8.55.3228.55.8748.55.9668.56.0088.56.02
9.05.3629.05.8749.05.9669.06.0089.06.02
9.55.4029.55.8849.55.9669.56.0089.56.02
10.05.4430.05.8850.05.9670.06.0090.06.02
10.55.4830.55.8850.55.9770.56.0090.56.02
11.05.5131.05.8951.05.9771.06.0091.06.02
11.55.5431.55.8951.55.9771.56.0091.56.02
12.05.5732.05.8952.05.9772.06.0092.06.02
12.55.6032.55.9052.55.9772.56.0092.56.02
13.05.6333.05.9053.0
5.9773.06.0193.06.02
13.55.6533.55.9053.55.9773.56.0193.56.02
14.05.6834.05.9054.05.9774.06.0194.06.03
14.55.7034.55.9154.55.9874.56.0194.56.03
15.05.7135.05.9155.05.9875.06.0195.06.03
15.55.7335.55.9155.55.9875.56.0195.56.03
16.05.7536.05.9156.05.9876.06.0196.06.03
16.55.7636.55.9256.55.9876.56.0196.56.03
17.05.7837.05.9257.05.9877.06.0197.06.03
17.55.7937.55.9257.55.9877.56.0197.56.03
18.05.8038.05.9258.05.9878.06.0198.06.03
18.55.8138.55.9358.55.9878.56.0198.56.03
19.05.8239.05.9359.05.9879.06.0199.06.03
19.55.8339.55.9359.55.9979.56.0199.5
6.03
20.05.8340.05.9360.05.9980.06.01100.06.03

Bulletin No. 2025–10 983 March 3, 2025
Part IV
Notice of Proposed
Rulemaking
Guidance Regarding
Certain Matters Relating
to Nonrecognition
of Gain or Loss in
Corporate Separations,
Incorporations, and
Reorganizations
REG-112261-24
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations regarding certain
matters relating to corporate separations,
incorporations, and reorganizations quali-
fying, in whole or in part, for nonrecogni-
tion of gain or loss. These matters include
distributions and retentions of controlled
corporation stock, assumptions of liabili-
ties by controlled corporations, exchanges
of property between distributing corpora-
tions and controlled corporations, and dis-
tributions and transfers of consideration to
distributing corporation shareholders and
creditors. The proposed regulations would
affect corporations and their shareholders
and security holders. Proposed regulations
modifying the reporting requirements for
corporate separations are published else-
where in the Proposed Rules section of
this issue of the Federal Register.
DATES: Written or electronic comments
and requests for a public hearing must be
received by March 17, 2025.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically via the Federal eRulemak-
ing Portal at https://www.regulations.gov
(indicate IRS and REG-112261-24) by
following the online instructions for sub-
mitting comments. Requests for a public
hearing must be submitted as prescribed
in the “Comments and Requests for a
Public Hearing” section. Once submitted
to the Federal eRulemaking Portal, com-
ments cannot be edited or withdrawn. The
Department of the Treasury (Treasury
Department) and the IRS will publish for
public availability any comments to the
IRS’s public docket. Send paper submis-
sions to CC:PA:01:PR (REG-112261-24),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Justin R. Du Mouchel at
(202) 317-6975 (not a toll-free number);
concerning submissions of comments and
requests for a hearing, contact the Publica-
tions and Regulations branch at (202) 317-
6901 (not a toll-free number) or by email
to publichearings@irs.gov (preferred).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed reg-
ulations 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 cor-
porate 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 regula-
tions as may be necessary or appropriate
to carry out the purposes of the amend-
ments 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 regu-
lations 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 nec-
essary to prevent avoidance of tax through
abuse of the preceding sentence or [sec-
tion 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 rela-
tion to internal revenue.”
Background
I. Overview of Section 355
A. Section 355 transactions
1. In General
If a transaction satisfies the require-
ments of section 355 (section 355 trans-
action) and other relevant provisions of
the Code and Income Tax Regulations, the
transaction may occur without recognition
of any gain or loss to the distributing cor-
poration (within the meaning of section
355(a)(1)(A)) and without recognition of
any gain or loss to, or the inclusion of any
amount in the income of, the sharehold-
ers or security holders of the distributing
corporation. A section 355 transaction
may take one of the following forms: (i) a
spin-off, which is a pro rata distribution of
stock of the controlled corporation (within
the meaning of section 355(a)(1)(A)) to
shareholders of the distributing corpora-
tion; (ii) a split-off, which is a distribu-
tion of stock of the controlled corporation
to some (but not all) shareholders of the
distributing corporation in exchange for
some or all of their stock of the distribut-
ing corporation; or (iii) a split-up, which
is a liquidating distribution in which the
distributing corporation distributes to its
shareholders, either pro rata or non-pro
rata, the stock of more than one controlled
corporation. As discussed in parts I.A.3
and I.A.4 of this Background, a section
355 transaction may occur either as a
“section 355(c) distribution” or as part of
a “divisive reorganization.”

March 3, 2025 984 Bulletin No. 2025–10
2. General Utilities Repeal
In General Utilities & Operating
Co. v. Helvering, 296 U.S. 200 (1935),
the Supreme Court of the United States
(Supreme Court) held that corporations
generally could distribute appreciated
property to their shareholders without
the recognition of any corporate-level
gain (General Utilities doctrine). Con-
gress repealed the General Utilities doc-
trine beginning with legislation in 1969
and culminating with the Tax Reform
Act of 1986 (Public Law 99-514,
100 Stat. 2085), which, among other
changes, amended sections 311, 336,
and 337 of the Code (originally enacted
in the Internal Revenue Code of 1954
(1954 Code) (Public Law 83-591, 68A
Stat. 3) to apply gain and loss recogni-
tion to non-liquidating and liquidating
distributions, respectively.
Notwithstanding the repeal of the
General Utilities doctrine, section 355
allows a distributing corporation to dis-
tribute the stock and securities of a sub-
sidiary (that is, a controlled corporation)
to its shareholders without imposing a
corporate-level tax on the distribution.
Accordingly, as observed by the United
States Tax Court (Tax Court), “more
attention has been directed toward [s]
ection 355 today than was ever the case
in the past [because] it is one of the
few (some might say the only) viable
opportunity to escape the repeal of the
General Utilities doctrine.” McLaulin v.
Comm’r, 115 T.C. 255, 266 (2000).
In connection with the repeal of the
General Utilities doctrine, Congress
authorized the Treasury Department to
promulgate regulations to carry out the
purposes of that repeal, including by
preventing its avoidance. Specifically,
section 337(d) directs the Secretary to
prescribe regulations that are necessary
or appropriate to carry out the purposes
of General Utilities repeal, including
“regulations to ensure that such pur-
poses may not be circumvented through
the use of any provision of law or reg-
ulations (including ... part III of this
subchapter).” Section 355, among other
corporate organization and reorganiza-
tion provisions, is included in part III of
subchapter C of chapter 1 of the Code
(subchapter C).
3. Section 355(c) Distributions
The general rule set forth in section
355(c)(1) provides that no gain or loss is
recognized to a distributing corporation
upon any distribution to which section
355 (or so much of section 356 of the
Code as relates to section 355) applies and
that is not made pursuant to a plan of reor-
ganization (section 355(c) distribution).
However, if the distributing corporation
distributes any property other than stock
or securities of a controlled corporation
(that is, any property other than qualified
property, as defined in section 355(c)(2)
(B)) in a section 355(c) distribution, and
if the fair market value of that property
exceeds the distributing corporation’s
adjusted basis in that property, then sec-
tion 355(c)(2)(A) requires the distributing
corporation to recognize gain as if the
property were sold to the distributee at its
fair market value. This Federal income tax
treatment reflects the status of section 355
as a narrow exception to General Utilities
repeal. Compare section 311(b).
Because a section 355(c) distribution is
not made pursuant to a plan of reorganiza-
tion, a section 355(c) distribution (unlike
a divisive reorganization) does not per-
mit the distributing corporation to satisfy
distributing corporation debt constituting
securities with property other than qual-
ified property. In other words, because a
section 355(c) distribution does not qual-
ify as a reorganization under the defini-
tional provisions of section 368(a)(1), the
operative provision set forth in section
361(b)(3) is not applicable. Therefore, in
a section 355(c) distribution, a distribut-
ing corporation cannot transfer any prop-
erty other than qualified property to its
creditors (including its security holders)
without recognizing gain or loss on that
transfer.
4. Divisive Reorganizations
A distributing corporation may carry
out a section 355 transaction as part of a
transaction that qualifies as a reorganiza-
tion under section 368(a)(1)(D) or (G) and
to which section 354 of the Code (or so
much of section 356 as relates to section
354) does not apply (divisive reorganiza-
tion). Section 368(a)(1)(D) provides, in
part, that a reorganization includes a trans-
fer by the distributing corporation of all or
a part of its assets to a controlled corpora-
tion if, immediately after the transfer, the
distributing corporation or one or more of
its shareholders (including persons who
were shareholders immediately before the
transfer) are in control (within the mean-
ing of section 368(c)) of the controlled
corporation; but only if, pursuant to the
plan of reorganization, stock or securities
of the controlled corporation are distrib-
uted in a transaction that qualifies under
section 355 or 356.
Under section 368(a)(1)(G), a transfer
by a distributing corporation of all or a
part of its assets to a controlled corpora-
tion in a case under title 11 of the United
States Code or a similar case described in
section 368(a)(3)(A)(ii) (title 11 or simi-
lar case) also is a divisive reorganization
if, pursuant to the plan of reorganization,
stock or securities of the controlled corpo-
ration are distributed in a transaction that
qualifies under section 355 (or so much
of section 356 as relates to section 355).
Section 368(a)(3)(C) provides an order-
ing rule under which a transaction that
would qualify both under section 368(a)
(1)(G) and, among other provisions, under
section 368(a)(1)(D) or section 351 of the
Code, is treated as qualifying solely under
section 368(a)(1)(G) for all purposes of
subchapter C other than section 357(c)(1).
If a transaction satisfies the defini-
tional requirements of section 368(a)(1)
(D) or (G), the distributing corporation
may qualify for nonrecognition treatment
for (i) its exchange of property with the
controlled corporation, (ii) its distribution
of certain property to its shareholders, and
(iii) its transfer of certain property to its
creditors. Under section 357(a), the con-
trolled corporation generally may assume
distributing corporation liabilities without
the distributing corporation recognizing
gain or loss, except as provided in (i) sec-
tion 357(b) (if the principal purpose for
the liability assumption is to avoid Federal
income tax or is not a bona fide business
purpose), and (ii) section 357(c) (if the
sum of the amount of liabilities assumed
by the controlled corporation is greater
than the total adjusted basis of assets
transferred in the exchange).
Under section 361(a), the distributing
corporation recognizes no gain or loss if
it exchanges property pursuant to the plan

Bulletin No. 2025–10 985 March 3, 2025
of reorganization solely for stock and
securities in the controlled corporation.
Under section 361(b)(1)(A), if section
361(a) would apply to an exchange but
for the fact that the property received by
the distributing corporation also includes
money or other property, no gain will be
recognized by the distributing corporation
if it distributes the money or other prop-
erty pursuant to the plan of reorganization.
Under section 361(b)(3), the distributing
corporation also generally may transfer
that money or other property in connec-
tion with the reorganization to its credi-
tors in satisfaction of distributing corpora-
tion debt held by those creditors, without
recognition of gain or loss under section
361(b)(1)(A) to the extent the sum of the
money and the fair market value of the
other property transferred to such cred-
itors does not exceed the adjusted bases
of such assets transferred (reduced by the
amount of liabilities assumed within the
meaning of section 357(c)).
Under section 361(c)(1), the distrib-
uting corporation recognizes neither gain
nor loss on its distribution of qualified
property to its shareholders pursuant to the
plan of reorganization. For this purpose,
section 361(c)(2)(B) defines “qualified
property” as any stock in, right to acquire
stock in, or obligation of (i) the distribut-
ing corporation, or (ii) another corpora-
tion that is a party to the reorganization
(for example, the controlled corporation)
if such stock, stock right, or obligation is
received by the distributing corporation in
the exchange. In connection with the reor-
ganization, the distributing corporation
also generally may transfer that qualified
property to its creditors in satisfaction of
distributing corporation debt held by those
creditors, without recognition of gain or
loss under section 361(c).
For purposes of this preamble, the
term “section 361 consideration” means,
as described in section 361(a) and (b),
the consideration received by a target
corporation from an acquiring corpora-
tion in exchange for property transferred
by the target corporation to the acquiring
corporation pursuant to a plan of reorga-
nization. Accordingly, in the context of a
divisive reorganization, the term “section
361 consideration” means, for purposes of
this preamble, the consideration received
by the distributing corporation from the
controlled corporation in exchange for
property transferred by the distributing
corporation to the controlled corporation
pursuant to the plan of reorganization.
B. General Federal income tax
consequences to distributing corporation
shareholders
Section 355(a)(1) provides that, if a
distributing corporation distributes to its
shareholders with respect to its stock,
or distributes to its security holders in
exchange for their securities, solely stock
or securities of a controlled corporation,
and if certain other requirements are sat-
isfied, then no gain or loss is recognized
by, and no amount is included in the
income of, the distributing corporation’s
shareholders or security holders upon the
receipt of stock or securities of the con-
trolled corporation. However, if any prop-
erty is received that is not permitted to
be received under section 355(a)(1), then
section 356 (and not section 355) applies
to the receipt of such property as provided
in sections 355(a)(4)(A) and 356.
C. General requirements for qualification
under section 355
To qualify as a section 355 transac-
tion under section 355(a)(1), a transaction
must satisfy the following requirements.
First, under section 355(a)(1)(A), the dis-
tributing corporation must distribute stock
or securities of a controlled corporation to
a shareholder with respect to distributing
corporation stock, or to a security holder in
exchange for its securities. Second, under
section 355(a)(1)(B), the transaction may
not be used principally as a device for the
distribution of the earnings and profits of
the distributing corporation, the controlled
corporation, or both. Third, under section
355(a)(1)(C), the distributing corporation
and each controlled corporation must sat-
isfy the active trade or business require-
ments of section 355(b).
With particular regard to these proposed
regulations, section 355(a)(1) imposes a
fourth requirement regarding distributions
of controlled corporation stock and secu-
rities. Specifically, section 355(a)(1)(D)
requires that, “as part of the distribution,”
the distributing corporation must distrib-
ute either (i) all stock and securities in the
controlled corporation held by the distrib-
uting corporation immediately before the
distribution, or (ii) an amount of stock
in the controlled corporation constituting
“control” within the meaning of section
368(c) (control distribution). In the case
of distributions of less than 100 percent of
stock in the controlled corporation, it must
be established to the satisfaction of the
Secretary that the retention by the distrib-
uting corporation of stock (or stock and
securities) of the controlled corporation
was not pursuant to a plan having as one
of its principal purposes the avoidance of
Federal income tax. For purposes of this
preamble, such a retention of controlled
corporation stock (or stock and securities)
by the distributing corporation is referred
to as a “retention,” and the requirements
in section 355(a)(1)(D) are referred to
collectively as the “distribution require-
ment.”
D. The distribution requirement and
retentions
1. Overview
As described in part I.C of this Back-
ground, the distribution requirement
consists of two alternative rules. Under
section 355(a)(1)(D)(i), the distributing
corporation will satisfy the distribution
requirement if it distributes all stock and
securities in the controlled corporation
held by the distributing corporation imme-
diately before the distribution. Alterna-
tively, under section 355(a)(1)(D)(ii),
the distributing corporation will satisfy
the distribution requirement if it satisfies
the following two discrete requirements:
(i) the distributing corporation distributes
an amount of controlled corporation stock
sufficient to qualify as a control distribu-
tion; and (ii) the distributing corporation
establishes to the satisfaction of the Sec-
retary that the retention of any controlled
corporation stock or securities was not
pursuant to a plan having as one of its
principal purposes the avoidance of Fed-
eral income tax.
2. Requirements for Control Distribution;
Commissioner v. Gordon
Section 355(a)(1)(D) provides that, if a
distributing corporation does not distribute

March 3, 2025 986 Bulletin No. 2025–10
all its stock and securities in the controlled
corporation, the distributing corporation
must make a control distribution as “part of
the distribution.” However, section 355(a)
(1)(D) does not expressly impose a tempo-
ral requirement for making a control distri-
bution. Accordingly, section 355(a)(1)(D)
could be read as permitting a control distri-
bution to occur over multiple taxable years
of the distributing corporation.
In Commissioner v. Gordon, 391 U.S.
83 (1968), the Supreme Court considered
the application of the distribution require-
ment to distributions by Pacific Telephone
and Telegraph Company (Pacific) of stock
of a newly formed, wholly owned subsidi-
ary (Northwest) over multiple taxable years
of Pacific. American Telephone and Tele-
graph Company (AT&T), which owned
approximately 90 percent of the stock of
Pacific, decided to separate Pacific into
two separate companies and, to effectuate
that separation, caused Pacific to engage in
the following transactions. First, pursuant
to a plan of reorganization submitted to its
shareholders, Pacific issued to its share-
holders (including the taxpayer) trans-
ferable rights to acquire approximately
57 percent of the stock of Northwest on
September 29, 1961. That plan of reorga-
nization also provided that Pacific had an
“expectation” that the remaining 43 per-
cent of Northwest stock would be offered
to Pacific’s shareholders. Among other rea-
sons for not distributing 100 percent of its
Northwest stock, Pacific desired to achieve
an appropriate capital structure and avoid
potential State regulatory issues. On June
12, 1963, Pacific issued to its shareholders
transferable rights to acquire the remaining
43 percent of Northwest stock. The tax-
payer contended that the 1961 and 1963
distributions collectively qualified under
section 355.
The Court concluded that neither dis-
tribution qualified under section 355,
notwithstanding Pacific’s “expectation”
regarding the second distribution and its
purposes for making multiple distributions.
Gordon, 391 U.S. at 98. In its analysis, the
Court expressed a general principle of Fed-
eral income tax that, “[a]bsent other spe-
cific directions from Congress, Code provi-
sions must be interpreted so as to conform
to the basic premise of annual tax account-
ing.” Id. at 96. With regard to the distribu-
tion requirement, the Court noted that, if
an initial transfer of less than a controlling
interest in the controlled corporation is to
be treated for Federal income tax purposes
as a mere first step in the divestiture of
control, “it must at least be identifiable as
such at the time it is made.” Id. The Court
further stated that the requirement that the
character of a transaction be determinable
“does not mean that the entire divestiture
must necessarily occur within a single tax
year,” but it does mean that, if one transac-
tion is to be characterized as a “first step,”
then “there must be a binding commitment
to take the later steps.” Id. Of particular
relevance to both the IRS’s administra-
tive function and the objective of these
proposed regulations to provide increased
certainty (see part IV of this Background),
the Court expressed that it would be wholly
inconsistent with the annual accounting
premise to hold that the essential character
of a transaction, and its Federal income tax
impact, should remain “not only undeter-
minable but unfixed for an indefinite and
unlimited period in the future, awaiting
events that might or might not happen.” Id.
The Court found that the facts and cir-
cumstances of Pacific’s staggered distri-
butions of Northwest stock, as reflected in
Pacific’s plan of reorganization, failed the
binding-commitment standard set forth by
the Court. Id. at 97. Although Pacific’s plan
of reorganization evidenced an expecta-
tion to distribute its remaining Northwest
stock within a three-year period follow-
ing its initial 57-percent distribution, the
Court emphasized that “there is obviously
no promise to sell any particular amount
of stock, at any particular time, at any par-
ticular price” set forth in that document.
Id. Instead, Pacific’s plan of reorganiza-
tion merely stated that such subsequent
distributions would occur “[a]t a time or
times related to its (Pacific’s) need for
new capital.” Id. Consequently, the Court
reasoned that, “[i]f the 1961 distribution
played a part in what later proved to be a
total divestiture of the Northwest stock, it
was not, in 1961, either a total divestiture
or a step in a plan of total divestiture.” Id.
at 97-98.
3. Retentions
Section 1.355-2(e), which reiterates the
distribution requirement, provides that the
corporate business purpose or purposes
for the distribution ordinarily will require
the distribution of all stock and securi-
ties of the controlled corporation. If the
distributing corporation retains any con-
trolled corporation stock or securities, and
if it is not established to the satisfaction
of the Commissioner that the retention
was not pursuant to a plan having as one
of its principal purposes the avoidance of
Federal income tax, section 355 does not
apply to the entire distribution (that is, the
entire distribution fails to qualify as a sec-
tion 355 transaction).
In Rev. Rul. 75-321, 1975-2 C.B. 123,
the IRS addressed whether the retention
by a widely held and publicly traded
corporation (Distributing) of stock in its
banking subsidiary (Controlled) com-
plied with section 355(a)(1)(D)(ii) (that
is, whether the retention was pursuant to
a plan having as one of its principal pur-
poses the avoidance of Federal income
tax). In this revenue ruling, Distributing
distributed 95 percent of the stock of
Controlled to Distributing’s shareholders
to comply with Federal banking laws in
a transaction that otherwise satisfied the
requirements of section 355. Distributing
retained 5 percent of Controlled’s stock
to meet collateral requirements for short-
term financing. The IRS concluded that
the retention was not pursuant to a plan
having as one of its principal purposes the
avoidance of Federal income tax, because
(i) a genuine separation of the corporate
entities was effectuated, (ii) retention of
a 5-percent stock interest in Controlled
would not enable Distributing to maintain
practical control over Controlled follow-
ing the distribution, and (iii) a sufficient
corporate business purpose existed for
Distributing’s retention of the 5-percent
interest in Controlled. See also Rev. Rul.
75-469, 1975-2 C.B. 126 (similar ruling
with respect to a distributing corporation’s
retention of controlled corporation securi-
ties to serve as collateral for a bank loan to
the distributing corporation).
Similarly, in G.C.M. 32136 (Oct. 23,
1961), the IRS considered whether the
retention by a distributing corporation
(Distributing) of stock in a newly formed
controlled corporation (Controlled) was
pursuant to a plan having as one of its
principal purposes the avoidance of Fed-
eral income tax. Under the facts described
in that memorandum, Distributing distrib-

Bulletin No. 2025–10 987 March 3, 2025
uted 80 percent of Controlled stock to Dis-
tributing’s shareholders to comply with
State banking laws in a transaction that
otherwise satisfied the requirements of
section 355, and Distributing retained 20
percent of Controlled stock. The avowed
purpose for the retention was to permit a
controlling group of Distributing’s share-
holders to maintain effective control over
Controlled. In concluding that Distribut-
ing had a Federal income tax avoidance
purpose for the retention, the IRS deter-
mined that the requirement that a retention
be specially justified “seems most likely
to be intended to insure a genuine sepa-
ration.” See also G.C.M. 32380 (Aug. 24,
1962) (reiterating that view).
II. Definitional and Operative Provisions
Regarding Reorganizations
A. Overview
Subchapter C generally includes (i)
definitional provisions, including under
section 368, and (ii) operative provisions,
including under sections 354, 356, 357,
and 361. See, for example, Microdot, Inc.
v. United States, 728 F.2d 593, 598 (2d
Cir. 1984) (“Section 368(a)(1) is a defini-
tional section, wholly distinct from [sec-
tion] 354.”). As described in greater detail
in part II.B of this Background, section
368(a)(1) defines the term “reorganiza-
tion” as seven specifically described types
of transactions under subparagraphs (A)
through (G). Qualification of a transaction
(or series of transactions) for a definitional
provision under section 368(a)(1) is the
sole manner by which the application of
an operative provision relating to a reorga-
nization can occur. This statutory structure
ensures that the tax-advantaged treatment
provided by such operative provisions
applies exclusively to those transactions
that satisfy all statutory, regulatory, and
judicial requirements for a particular
definitional provision (for example, the
continuity of interest and continuity of
business enterprise requirements). As dis-
cussed in greater detail in part III of this
Background, a primary purpose of the
“plan of reorganization” requirement is to
ensure that a transaction to which an oper-
ative provision is purported to apply is
sufficiently connected to a reorganization
defined in section 368(a)(1).
B. Section 368: Definitions relating to
corporate reorganizations
Section 368(a)(1) is the primary defi-
nitional provision of subchapter C with
regard to reorganizations. For purposes of
parts I through III of subchapter C, section
368(a)(1) defines the term “reorganiza-
tion” to mean any of the seven types of
transactions described in section 368(a)(1)
(A) through (G), including triangular reor-
ganizations (as defined in §1.358-6(b)(2))
that are variants of such transactions and
divisive reorganizations described in sec-
tion 368(a)(1)(D) and (G). Section 368(a)
(2) provides special rules that support the
definitional provisions set forth in section
368(a)(1), and section 368(a)(3) similarly
provides additional rules relating to title
11 or similar cases.
Section 368(b) and (c) also contains
definitional provisions. For purposes of
part III of subchapter C, section 368(b)
generally defines the term “a party to a
reorganization” to include (i) a corpora-
tion resulting from a reorganization, and
(ii) both corporations, in the case of a reor-
ganization resulting from the acquisition
by one corporation of stock or properties
of another. Section 368(b) defines other
corporations as parties to a transaction
depending on the type of transaction. See
also §1.368-2(f).
For purposes of subchapter C (other
than sections 304 and 385 of the Code),
section 368(c) defines the term “con-
trol” to mean the ownership of (i) stock
possessing at least 80 percent of the total
combined voting power of all classes of
stock entitled to vote, and (ii) at least 80
percent of the total number of shares of
all other classes of stock of the corpora-
tion. See also Rev. Rul. 59-259, 1959-2
C.B. 115 (requiring ownership of (i) stock
possessing at least 80 percent of the total
combined voting power of all classes of
voting stock, and (ii) at least 80 percent of
the total number of shares of each class of
outstanding non-voting stock).
C. Section 357: Assumptions of liabilities
by transferee corporations
1. Overview
Section 357 is an operative provision
that facilitates exchanges involving the
assumption of liabilities by generally pre-
venting such assumptions from (i) being
treated as the receipt of money or other
property in an exchange, and (ii) disqual-
ifying the exchange for nonrecognition
treatment. See section 357(a); see also
the anti-abuse rule in section 357(b) and
the adjusted basis limitation in section
357(c). Section 357 reflects Congress’s
view that, “[i]n typical transactions chang-
ing the form or entity of a business it is
not customary to liquidate the liabilities
of the business and such liabilities are
almost invariably assumed by the corpo-
ration which continues the business,” but
that nonrecognition treatment in section
357 should be limited solely to “bona fide
transactions of this type.” H.R. Rep. No.
76-855, at 19 (1939) (Conf. Rep.).
2. Response to United States v. Hendler
The original predecessor to cur-
rent section 357, section 112(k) of the
Internal Revenue Code of 1939 (1939
Code), was enacted by Congress as sec-
tion 213(a) of the Revenue Act of 1939
(Public Law 76-155, 53 Stat. 862, 870)
to address the adverse consequences of
judicial and taxpayer interpretations of
the Supreme Court’s decision in United
States v. Hendler, 303 U.S. 564 (1938).
See S. Rep. No. 76-648, at 3 (1939) (ref-
erencing the Hendler opinion by name).
In Hendler, the Court examined the Fed-
eral income tax consequences of a trans-
action that qualified as a reorganization
under section 112 of the Revenue Act of
1928 (Public Law 70-562, 45 Stat. 791).
As part of the reorganization, the trans-
feree corporation (Borden Company)
assumed and paid the indebtedness of
the transferor (Hendler Company). The
Court regarded the assumption and pay-
ment in substance as though the Borden
Company had made the payment directly
to the Hendler Company. Hendler, 303
U.S. at 566. Based on that treatment, the
Court viewed the Hendler Company in
substance as receiving money or other
property that it failed to distribute to its
shareholders (because that payment was
made to a Hendler Company creditor,
albeit in form by the Borden Company).
Id. Accordingly, the Court held that the
Hendler Company recognized gain in the
amount of that payment. Id. at 567.

March 3, 2025 988 Bulletin No. 2025–10
Following the Hendler decision, Con-
gress observed that the Court’s analysis
had “been broadly interpreted to require
that, if a taxpayer’s liabilities are assumed
by another party in what is otherwise a
tax-free reorganization, gain is recognized
to the extent of the assumption.” H.R. Rep.
No. 76-855, at 19 (emphasis added). In
other words, as successfully argued by the
IRS in cases following Hendler, a trans-
feree corporation’s lack of payment of the
liabilities was immaterial for the Hendler
analysis to apply to treat the transferee cor-
poration’s assumption of a transferor’s lia-
bilities as a cash payment to the transferor.
See Haass v. Comm’r, 37 B.T.A. 948, 955
(1938). The IRS advocated for this broad
interpretation in response to an aggres-
sive position taken by taxpayers, who
relied on the Hendler decision to argue
that the basis of stock they had received
in prior exchanges should be increased
by the amount of gain that should have
been recognized and taxed by reason of
the transferee corporation’s assumption of
liabilities, even though that gain had not
actually been taxed by the IRS (and that
tax had not been paid).
However, this broad interpretation
jeopardized the nonrecognition treatment
of bona fide assumptions carried out as
part of reorganizations that Congress orig-
inally had intended to facilitate through
the enactment of the reorganization pro-
visions. See H.R. Rep. No. 76-855, at 19
(“Your committee therefore believes that
such a broad interpretation as is indicated
above will largely nullify the provisions of
existing law which postpone the recogni-
tion of gain in such cases.”).
3. Enactment of Section 357(a) and (b)
Congress enacted section 112(k) of the
1939 Code to balance (i) the need to facil-
itate the bona fide assumption of liabilities
in transactions that satisfy the definitional
requirements of a reorganization, with (ii)
the need to minimize abusive tax plan-
ning through such assumptions (including
through transitory transactions). Accord-
ingly, section 112(k) of the 1939 Code
provided for both (i) the general nonrec-
ognition treatment adopted by section
357(a) of the 1954 Code and set forth in
current section 357(a), and (ii) a support-
ing anti-abuse provision adopted by sec-
tion 357(b) of the 1954 Code and set forth
in current section 357(b).
Under section 357(b)(1), the total
amount of liabilities assumed in an
assumption described in section 357(a)
is treated for purposes of section 351 or
361 (as applicable) as money received by
the transferor in the exchange if it appears
that the principal purpose of the transferor
with respect to the assumption was (i) to
avoid Federal income tax on the exchange,
or (ii) not a bona fide business purpose. In
effect, section 357(b) can apply to a trans-
action to preserve the treatment required
by Hendler for such abusive assumptions.
In making the determination required
by section 357(b)(1), the nature of the
liabilities and the circumstances under
which the arrangement for the assump-
tion was made are taken into account. In
addition, section 357(b)(2) provides that,
in any suit or proceeding in which the bur-
den is on the transferor to prove that the
liability assumption should not be treated
as money received in the exchange, the
transferor must meet that burden by a
clear preponderance of the evidence.
4. Application of Section 357(b) to
Divisive Reorganizations
In Rev. Rul. 79-258, 1979-2 C.B.
143, the IRS considered the application
of section 357(b) to the assumption by
a newly formed transferee corporation
(Controlled) of a liability incurred by the
transferor (Distributing) in close tempo-
ral proximity to, and in anticipation of,
a transaction that qualified as a divisive
reorganization under sections 355 and
368(a)(1)(D). One of the Distributing
liabilities that Distributing desired Con-
trolled to assume was a $4,000x portion
of a $25,000x long-term debt owed to an
insurance company that Distributing had
incurred in connection with the business
transferred to Controlled, and that had
been outstanding for several years before
the divisive reorganization (historical
Distributing debt). However, Distributing
could not apportion the historical Dis-
tributing debt between it and Controlled
because the insurance company refused to
relieve Distributing of its primary liability
for repayment.
Therefore, in exchange for $4,000x in
loan proceeds, Distributing issued a new
long-term note for which Distributing was
primarily liable to a bank (new Distributing
debt). Distributing then caused Controlled
to assume the new Distributing debt in the
divisive reorganization, and Distributing
was relieved of its primary repayment lia-
bility (Controlled assumption). The pro-
ceeds of the new Distributing debt were
used by Distributing to pay off $4,000x of
the historical Distributing debt. Distribut-
ing then distributed the Controlled stock to
Distributing’s shareholders.
From Distributing’s standpoint, having
Controlled assume the new Distributing
debt was desirable because, absent Con-
trolled’s assumption of this debt, Distrib-
uting’s assets would be reduced by the
value of the Controlled stock (which was
distributed to Distributing’s shareholders),
but Distributing’s liabilities would not be
reduced by the $4,000x liability attributable
to the business transferred to Controlled.
As a result, Distributing’s ability to bor-
row (and its ability to pay off the portion of
the historical Distributing debt attributable
to the business transferred to Controlled)
could be adversely affected if Controlled
did not assume the new Distributing debt.
To determine the potential applica-
tion of section 357(b), the IRS engaged
in a detailed analysis of the facts and cir-
cumstances relating to the issuance of the
new Distributing debt and the Controlled
assumption. First, the IRS observed that
Distributing used the proceeds of the new
Distributing debt to satisfy $4,000x of the
historical Distributing debt, thereby plac-
ing Distributing and Controlled in the same
net economic position after the Controlled
assumption as each corporation would
have been in had Controlled been able
to assume $4,000x of the historical Dis-
tributing debt. Second, the IRS observed
that the incurrence of the new Distributing
debt and the Controlled assumption not
only were necessary to effectuate the divi-
sive reorganization, but also were a nor-
mal adjunct to the divisive reorganization
given the non-assumable nature of part of
the historical Distributing debt. Third, the
IRS observed that Distributing’s incur-
rence of the new Distributing debt and
the Controlled assumption merely were
in substitution for Controlled’s assump-
tion of a pro rata portion of the historical
Distributing debt that Controlled could
not assume. In that regard, because the

Bulletin No. 2025–10 989 March 3, 2025
divisive reorganization resulted in Con-
trolled assuming a liability in an amount
that properly related to its business opera-
tions and would be satisfied from earnings
generated by those operations, the IRS
viewed the incurrence of the new Distrib-
uting debt and the Controlled assumption
as consistent with sound business prac-
tice. Accordingly, the IRS concluded that
tax avoidance was not a principal purpose
of the transaction and, therefore, that sec-
tion 357(b) did not apply to the Controlled
assumption.
Additionally, the IRS determined that
the acquisition of the new Distributing
debt and the Controlled assumption would
not be viewed for Federal income tax pur-
poses as if Controlled had obtained the
new Distributing debt and transferred the
proceeds to Distributing. In this regard,
the IRS found it immaterial that Distrib-
uting and Controlled may have been able
to arrange their affairs in another manner,
because the taxpayer satisfied its burden
of proof as required under section 357(b).
See Simpson v. Comm’r, 43 T.C. 900, 916
(1965) (stating that the application of
section 357(b) is limited to transactions
“arranged primarily so that the assump-
tion of the [transferor]’s liability in the
transaction itself results in tax avoidance
for the transferor, or has no bona fide busi-
ness purpose,” and that section 357(b)
was not intended to require recognition of
gain on bona fide transactions designed to
rearrange one’s business affairs in such a
manner as to minimize taxes in the future,
consistent with existing provisions of the
law); ISC Industries, Inc. v. Comm’r, T.C.
Memo. 1971-283 (concluding that peti-
tioner’s principal purpose in having a new
subsidiary assume liabilities placed upon
the assets transferred to the subsidiary was
not to avoid Federal income taxes on the
transfer, but rather was to protect lines of
credit for petitioner’s finance business,
and finding it immaterial that petitioner
may have been able to arrange its affairs
in another manner, or in a manner that
produced more tax revenue, because sec-
tion 357(b) clearly looks to the taxpayer’s
motives for doing what actually occurred).
5. Application of Section 357(c)
In the case of an exchange to which sec-
tion 351 applies (section 351 exchange) or
to which section 361 applies by reason
of a divisive reorganization that qualifies
under sections 355 and 368(a)(1)(D), sec-
tion 357(c)(1) generally provides that, if
the sum of the amount of the transferor’s
liabilities assumed by the transferee cor-
poration exceeds the total adjusted basis of
the assets transferred by the transferor to
the transferee corporation in the exchange,
then such excess is considered as a gain
from the sale or exchange of a capital
asset or of property that is not a capital
asset, as the case may be. See also section
368(a)(3)(C) (providing that a reorganiza-
tion that would qualify under both section
368(a)(1)(D) and (G) is treated as quali-
fying under section 368(a)(1)(D) for pur-
poses of section 357(c)(1)).
However, section 357(c)(2) provides
that the general rule in section 357(c)
(1) does not apply to any exchange (i) to
which section 357(b) applies, or (ii) that
is pursuant to a plan of reorganization
within the meaning of section 368(a)
(1)(G) in which no former shareholder
of the transferor receives any consid-
eration for its stock. Rev. Rul. 2007-8,
2007-1 C.B. 469, holds that the general
rule in section 357(c)(1) does not apply
to a section 351 exchange if that trans-
action also qualifies as a reorganization
described in section 368(a)(1)(A), (C),
(D) (provided the requirements of sec-
tion 354(b)(1) are satisfied), or (G) (pro-
vided the requirements of section 354(b)
(1) are satisfied).
Furthermore, under section 357(c)(3),
if the transferor transfers in a section 351
exchange (including a divisive reorga-
nization that overlaps with a section 351
exchange; see section 357(c)(3) (referenc-
ing an exchange to which section 357(c)
(1) applies)) a liability the payment of
which either would give rise to a deduc-
tion or would be described in section
736(a) of the Code (concerning payments
made in liquidation of the partnership
interest of a retiring or deceased partner),
the amount of such liability is excluded
in determining the amount of liabilities
assumed under section 357(c)(1) unless
the incurrence of the liability resulted in
the creation of (or an increase in) the basis
of any property. In addition, liabilities
the payment of which would give rise to
a capital expenditure are not included for
purposes of section 357(c)(1) unless the
incurrence of the liability resulted in the
creation of (or an increase in) the basis of
any property. See Rev. Rul. 95-74, 1995-2
C.B. 36.
D. Section 361: Distributions to
shareholders of target corporation
1. Overview
Section 361 is an operative provision
applicable to certain exchanges and dis-
tributions of property in a transaction that
satisfies the definitional requirements for
qualification as a reorganization under
section 368(a)(1). Section 361(a) and (b)
provides the Federal income tax conse-
quences to a target corporation (such as a
distributing corporation in a divisive reor-
ganization) that (i) is a party to a reorga-
nization, and (ii) pursuant to the plan of
reorganization, exchanges property with
an acquiring corporation (such as a con-
trolled corporation in a divisive reorga-
nization) that also is a party to the reor-
ganization. Section 361(c) provides the
Federal income tax consequences to the
target corporation (such as a distributing
corporation in a divisive reorganization)
of the distribution by the target corpora-
tion to its shareholders, or transfer to its
creditors, of certain property in pursuance
of or in connection with the plan of reor-
ganization that includes the exchange of
property with an acquiring corporation
(such as a controlled corporation in a divi-
sive reorganization) that also is a party to
the reorganization. See the discussion in
part III.A of this Background (noting that
the phrases “in pursuance of” and “in con-
nection with” in section 361 convey the
same meaning).
2. Enactment of Section 361(a): Purely
Paper Transactions
The original predecessor to current
section 361(a) was enacted by Congress
as part of section 202(b) of the Revenue
Act of 1918 (Public Law 65-254, 40 Stat.
1057, 1060 (1919)). The applicable part
of section 202(b) of the Revenue Act of
1918 was subsequently incorporated in
section 112 of the 1939 Code before being
adopted as section 361(a) of the 1954
Code and thereafter as current section
361(a).

March 3, 2025 990 Bulletin No. 2025–10
Congress enacted the applicable part
of section 202(b) of the Revenue Act of
1918 “to establish the rule for determining
taxable gains in the case of exchanges of
property and to negate the assertion of tax
in the case of certain purely paper trans-
actions.” S. Rep. No. 65-617, at 5 (1918).
As stated in the legislative history, the
substance of the original predecessor to
section 361(a) is that (i) when property is
exchanged for other property, the property
received in the exchange should be treated
as the equivalent of cash in the amount of
its fair market value, but (ii) when, in con-
nection with the reorganization or consol-
idation of a corporation, a person receives,
in place of stock or securities, new stock
or securities of no greater aggregate par
value, or when a person receives, in place
of property, stock of a corporation formed
to take over such property, no gain or
loss should be deemed to occur from the
exchange. See id. at 5-6.
More than a century after the enactment
of its original predecessor, section 361(a)
continues to provide generally that a cor-
poration (that is, the target corporation)
that is a party to a reorganization (such as
the distributing corporation in a divisive
reorganization) recognizes no gain or loss
if it exchanges property pursuant to the
plan of reorganization solely for stock and
securities in another corporation (that is,
the acquiring corporation) that is a party
to the reorganization (such as a controlled
corporation in a divisive reorganization).
3. Enactment of Section 361(b): Conduit
for Distribution to Shareholders
The original predecessor to current
section 361(b) was enacted by Congress
as section 203(e) of the Revenue Act of
1924 (Public Law 68-176, 43 Stat. 253,
256). Section 203(e) of the Revenue Act
of 1924 was subsequently incorporated
in section 112 of the 1939 Code before
being adopted as section 361(b) of the
1954 Code and thereafter as current sec-
tion 361(b).
Congress enacted section 203(e) of
the Revenue Act of 1924 to provide that
(i) if the corporation that sells its assets in
connection with the reorganization “acts
merely as a conduit” in passing the sale
proceeds on to its shareholders, no gain
to the corporation is to be recognized, but
(ii) if the corporation “retains the entire
amount of proceeds with the result that the
transaction is in substance a real sale, then
the gain shall be recognized.” S. Rep. No.
68-398, at 16 (1924). This stated policy is
reflected in current section 361(b)(1).
Section 361(b)(1)(A) provides that, if
section 361(a) would apply to an exchange
but for the fact that the property received
by the target corporation also includes
money or other property, no gain will be
recognized by the target corporation if it
distributes the money or other property
pursuant to the plan of reorganization.
Congress has enacted no limitation on
the aggregate amount of cash and the fair
market value of other property that a tar-
get corporation can distribute to its share-
holders (as opposed to creditors) under
section 361(b)(1)(A) (although section
368 limits the amount of money or other
property that may be received in certain
corporate reorganizations).
Section 361(b)(1)(B), which reflects
congressional intent with respect to a
target corporation’s failure to act solely
as a conduit in distributing the sale pro-
ceeds (that is, money or other property)
to its shareholders, provides that the tar-
get corporation (such as the distributing
corporation in a divisive reorganization)
recognizes gain in an amount that does
not exceed the sum of the money and fair
market value of the other property that the
corporation fails to distribute pursuant to
the plan of reorganization.
4. Section 361(c): Distributions
of Appreciated Property to Target
Corporation Shareholders
Section 361(c) originally was enacted
by Congress as section 1804(g)(1) of the
Tax Reform Act of 1986. As part of a
wholesale rewrite of section 361, Con-
gress amended section 361(c) by enacting
section 1018(d)(5)(A) of the Technical and
Miscellaneous Revenue Act of 1988 (Pub-
lic Law 100-647, 102 Stat. 3342, 3578) so
that the statute “conforms the treatment of
distributions of property by a corporation
to its shareholders in pursuance of a plan
of reorganization to the treatment of non-
liquidating distributions (under section
311).” S. Rep. No. 100-445, at 393 (1988).
Section 311(a) generally provides that,
except as provided in section 311(b) (con-
cerning distributions of appreciated prop-
erty), no gain or loss is recognized by a
corporation on the distribution (not in
complete liquidation) with respect to its
stock of (i) its stock (or rights to acquire
its stock), or (ii) property. Accordingly,
section 361(c)(1) generally provides that,
except as provided in section 361(c)(2)
(concerning distributions of appreciated
property), no gain or loss is recognized
by a target corporation that is a party to
a reorganization upon a distribution of
property to its shareholders pursuant to a
plan of reorganization.
Consistent with section 311(b), section
361(c)(2)(A) provides that, if the target
corporation distributes property other
than qualified property in a distribution
described in section 361(c)(1), and if the
fair market value of that other property
exceeds the corporation’s adjusted basis
in that other property, then gain is recog-
nized by the target corporation as if the
property were sold to the distributee at
its fair market value. The term “qualified
property” is defined in section 361(c)(2)
(B) to mean (i) any stock, right to acquire
stock, or obligation (including a security)
of the corporation, and (ii) any stock, right
to acquire stock, or obligation (including
a security) of another corporation that is a
party to the reorganization received by the
target corporation in the exchange.
Therefore, although a target corpo-
ration would recognize no gain on an
exchange described in section 361(a) (sec-
tion 361(a) exchange) if that corporation
received appreciated non-qualified prop-
erty and distributed that property to its
shareholders pursuant to section 361(b)(1)
(A), that corporation nonetheless would
recognize gain on the distribution to its
shareholders under section 361(c)(2)(A).
If any such property is subject to a liabil-
ity, or if the shareholder assumes a liabil-
ity of the target corporation in connection
with the distribution, section 361(c)(2)
(C) provides that the fair market value of
that property is treated as not less than the
amount of that liability for purposes of
section 361(c)(2)(A).
5. Safe Harbors for Transfers to
Creditors of the Distributing Corporation
Congress added section 361(b)(3) and
(c)(3) as part of the wholesale rewrite of

Bulletin No. 2025–10 991 March 3, 2025
section 361 in the Technical and Miscel-
laneous Revenue Act of 1988. Section
361(b)(3) provides that, for purposes
of section 361(b)(1), any transfer of the
money or other property received in the
exchange by the target corporation to its
creditors in connection with the reorgani-
zation is treated as a distribution pursuant
to the plan of reorganization. Similarly,
section 361(c)(3) provides that, for pur-
poses of section 361(c), any transfer of
qualified property by the target corpora-
tion to its creditors in connection with the
reorganization is treated as a distribution
to its shareholders pursuant to the plan of
reorganization.
6. Response to Supreme Court’s Decision
in Minnesota Tea Company
In Minnesota Tea Co. v. Helvering, 302
U.S. 609 (1938), the Supreme Court held
that a distribution by a target corporation
to its shareholders of cash received from
an acquiring corporation in a reorganiza-
tion was not a qualifying “distribution”
for purposes of the predecessor to section
361(b)(1)(A), because the shareholders
immediately used that distributed cash to
pay the target corporation’s creditors as
part of a prearranged plan. Citing Gregory
v. Helvering, 293 U.S. 465, 469 (1935),
as providing the “controlling principle”
for its decision, the Court determined that
the payment of indebtedness, and not the
distribution of dividends, “was, from the
beginning, the aim of the understanding
with the stockholders and was the end
accomplished by carrying that under-
standing into effect.” Minnesota Tea, 302
U.S. at 613-14. Because the Minnesota
Tea Company “received the same bene-
fit as though it had retained that amount
from [the] distribution and applied it to the
payment of such indebtedness,” the Court
concluded that the company failed to sat-
isfy the predecessor to section 361(b)(1)
(A). See id. at 613 (emphasis added).
In describing the rationale for enacting
section 361(b)(3) and (c)(3), the legislative
history explains that each provision “over-
rules the holding in Minnesota Tea Com-
pany v. Helvering.” S. Rep. No. 100-445,
at 393 n.102 (1988); see also H.R. Rep.
100-795, at 372 (1988). The legislative
history described the substance of the safe
harbor in section 361(b)(3) as providing
that “transfers of property to creditors in
satisfaction of the corporation’s indebted-
ness in connection with the reorganization
are treated as distributions pursuant to the
plan of reorganization for this purpose.” S.
Rep. No. 100-445, at 393 (1988) (empha-
sis added). Likewise, the legislative his-
tory described the corresponding safe har-
bor in section 361(c)(3) as providing that
“the transfer of qualified property by a
corporation to its creditors in satisfaction
of indebtedness is treated as a distribution
pursuant to the plan of reorganization.” Id.
(emphasis added). By treating transfers
of property to creditors in satisfaction of
indebtedness as distributions pursuant to
the plan of reorganization, Congress bal-
anced the dual policy objectives of (i) pre-
serving consistency with the fundamental
requirement of section 361 that property
be distributed, and (ii) enacting a provi-
sion to address transfers to creditors in
satisfaction of indebtedness that overruled
the holding in Minnesota Tea.
7. Adjusted Basis Limitation for Purposes
of Section 361(b)(3)
In the case of a divisive reorganization
described in sections 355 and 368(a)(1)
(D), the third sentence in section 361(b)
(3) (adjusted basis limitation) limits the
extent to which a transfer of money or
other property to a creditor is treated as a
distribution pursuant to the plan of reorga-
nization for the purposes of section 361.
Specifically, section 361(b)(3) applies
solely to the extent the sum of the money
and the fair market value of the other
property transferred to creditors of the
distributing corporation does not exceed
the aggregate adjusted bases of the assets
transferred to the controlled corporation
in the section 361(a) exchange, reduced
by the amount of the distributing corpora-
tion’s liabilities that the controlled corpo-
ration actually assumes within the mean-
ing of section 357(c).
Congress enacted the adjusted basis
limitation in section 361(b)(3) as part of
the American Jobs Creation Act of 2004
(Public Law 108-357, 118 Stat. 1418)
based on the concern stated in the legisla-
tive history that taxpayers had developed
tax-planning strategies to circumvent the
adjusted basis limitation in section 357(c)
on actual assumptions by controlled cor-
porations in divisive reorganizations. See
S. Rep. No. 108-192, at 185 (2003). Spe-
cifically, the committee report observed
that a distributing corporation (i) could
cause the controlled corporation to bor-
row money from a financial institution
and transfer that money to the distrib-
uting corporation in the section 361(a)
exchange, and then (ii) could use that
money to pay its creditors. Id. The com-
mittee report concluded that, although this
series of transactions does not involve an
actual assumption by the controlled cor-
poration within the meaning of section
357, it is “economically similar to the
actual assumption” because, at the end of
the series of transactions, the distributing
corporation has reduced its indebtedness
to its creditor and the controlled corpo-
ration has become indebted to a creditor
(albeit a different creditor) for an equal
amount. See id. Accordingly, “because
section 361(b) [did] not contain a limita-
tion on the amount that can be distributed
to creditors,” Congress limited the scope
of the section 361(b)(3) safe harbor to “the
amount of the basis of the assets contrib-
uted to a controlled corporation in a divi-
sive reorganization.” Id.
8. Express Grant of Authority
As stated previously in the Authority
section of this preamble, the second sen-
tence of section 361(b)(3) provides the
Secretary with an express grant of author-
ity to prescribe such regulations as may be
necessary to prevent avoidance of Federal
income tax through abuse of the safe har-
bors in section 361(b)(3) and (c)(3). Con-
gress included this grant of authority in
section 361(b)(3) when Congress enacted
both provisions as part of the Technical
and Miscellaneous Revenue Act of 1988.
III. Plan of Reorganization; Party to a
Reorganization
A. Overview
For more than a century, the “plan of
reorganization” requirement has served
to limit the application of the operative
provisions in subchapter C solely to those
transactions with a sufficiently proximate
relationship to transactions that satisfy the
definitional requirements in subchapter C

March 3, 2025 992 Bulletin No. 2025–10
for a reorganization (proximate relation-
ship requirement). For example, see sec-
tion 202(b) of the Revenue Act of 1918
(providing that an exchange did not qual-
ify for nonrecognition treatment unless
the transaction was “in connection with” a
reorganization). In other words, Congress
has long viewed the proximate relation-
ship requirement as an integral tool for
preventing the nonrecognition provisions
in subchapter C from applying to trans-
actions to which general gain or loss pro-
visions of the Code (for example, section
1001 of the Code) should apply.
This long-standing congressional pur-
pose is illustrated by the evolution of sec-
tion 202(c)(1) of the Revenue Act of 1921
(Public Law 67-98, 42 Stat. 227). That
provision originally provided nonrecogni-
tion treatment for an exchange of property
held for investment or for productive use in
a trade or business, with no exception for
stock or securities, and with no proximate
relationship requirement. Tax advisors took
advantage of this provision by structuring
exchanges of portfolio investment secu-
rities for other securities in transactions
that resulted in no recognition of Federal
income tax. After receiving a request from
the Treasury Department to address this
abuse, Congress amended section 202(c)
(1) by removing exchanges of stock and
securities from nonrecognition treatment
except for exchanges occurring in the
context of a reorganization. See An Act to
Amend the Revenue Act of 1921 in Respect
to Exchanges of Property, Public Law
67-545, 42 Stat. 1560 (1923); J. Seidman,
Legislative History of Federal Income Tax
Laws: 1938-1861, at 798 (1938); see also
Letter from A. W. Mellon, Secretary of
the Treasury, to Congressman William R.
Green, Acting Chairman of the Committee
on Ways and Means (Jan. 13, 1923).
Since first establishing the proximate
relationship requirement, Congress has
implemented that requirement through
various linguistic formulations over time.
However, Congress has indicated that such
variations in language were not intended to
reflect substantive differences. For exam-
ple, Congress replaced “in connection
with” in section 202(b) of the Revenue
Act of 1918 with “in the reorganization” in
section 202(c) of the Revenue Act of 1921.
When describing section 202(c) of the Rev-
enue Act of 1921, a congressional commit-
tee print explicitly referred to the proximate
relationship under that section as requiring
an “in connection with” relationship. See S.
Comm. on Finance, 68th Cong., Statement
of the Changes Made in the Revenue Act of
1921 by H.R. 6715 and the Reasons There-
for, at 5-6 (Comm. Print 1924).
In section 203(c) of the Revenue Act
of 1924, Congress restated the proximate
relationship requirement as requiring an
“in pursuance of a plan of reorganization”
relationship. This requirement, like the “in
connection with” requirement, exists in
the current definitional and operative pro-
visions of subchapter C. The legislative
history underlying section 203 of the Rev-
enue Act of 1924 explicitly refers to the “in
pursuance of the plan of reorganization”
formulation in several instances as “in
connection with the reorganization.” See
H.R. Rep. No. 68-179, at 13-16 (1924). In
particular, at one point, the Committee on
Ways and Means described the change in
formulation of the proximate relationship
requirement as a result of “minor changes
in phraseology.” See id. at 13.
B. Definition of “plan of reorganization”
The term “plan of reorganization” is
not defined in subchapter C. Instead, the
sole authoritative guidance defining this
term is set forth in the Income Tax Regu-
lations. Specifically, §1.368-2(g) provides
that the term “plan of reorganization”
refers to a “consummated transaction
specifically defined as a reorganization
under section 368(a),” and that “[s]ection
368(a) contemplates genuine corporate
reorganizations which are designed to
effect a readjustment of continuing inter-
ests under modified corporate forms.”
Section 1.368-2(g) further provides that
the term “plan of reorganization” “is not
to be construed as broadening the defini-
tion of reorganization as set forth in sec-
tion 368(a),” but rather “is to be taken as
limiting the nonrecognition of gain or loss
to such exchanges or distributions as are
directly a part of the transaction specifi-
cally described as a reorganization in sec-
tion 368(a).” Section 1.368-2(g) further
provides that the transaction (or series of
transactions) “embraced in a plan of reor-
ganization must not only come within the
specific language of section 368(a),” but
also that “the readjustments involved in
the exchanges or distributions effected in
the consummation [of the plan of reorga-
nization] must be undertaken for reasons
germane to the continuance of the busi-
ness of a corporation a party to the reor-
ganization.”
However, significant uncertainty and
confusion have arisen regarding the scope,
purpose, and application of §1.368-2(g).
As expressed by the Tax Court in an
observation often referenced by courts
and commentators, “the above definition
is imbued with qualities of flexibility and
vagueness, with the result that it does
not present precise self-executing guide-
lines.” Int’l Telephone & Telegraph Corp.
v. Comm’r, 77 T.C. 60, 75 (1981); see also
J.E. Seagram Corp. v. Comm’r, 104 T.C.
75, 96 (1995) (relying on the quote in
Int’l Telephone in observing that §1.368-
2(g) provides “substantial elasticity”). As
a result, §1.368-2(g) (including its prox-
imate relationship requirement) has cre-
ated significant uncertainty and confusion
for taxpayers and the IRS in determining
the scope of transactions that properly
should be taken into account for purposes
of applying the definitional and operative
provisions of subchapter C.
Section 1.368-1(c) further describes
the “plan of reorganization” concept and
provides important context regarding the
application of this concept and its embed-
ded proximate relationship requirement.
Specifically, §1.368-1(c) provides, in part,
that “[t]he provisions of [part III of sub-
chapter C] referred to in this paragraph are
inapplicable unless there is a plan of reor-
ganization” (emphasis added). Section
1.368-1(c) further provides that “[a] plan
of reorganization must contemplate the
bona fide execution of one of the transac-
tions specifically described as a reorgani-
zation in section 368(a) and for the bona
fide consummation of each of the requisite
acts under which nonrecognition of gain
is claimed.” That transaction, and those
acts, must be an “ordinary and necessary
incident of the conduct of the enterprise
and must provide for a continuation of the
enterprise.” Id. Finally, §1.368-1(c) pro
-
vides that a scheme involving “an abrupt
departure from normal reorganization pro-
cedure in connection with a transaction on
which the imposition of tax is imminent,
such as a mere device that puts on the form
of a corporate reorganization as a disguise

Bulletin No. 2025–10 993 March 3, 2025
for concealing its real character, and the
object and accomplishment of which is
the consummation of a preconceived plan
having no business or corporate purpose,
is not a plan of reorganization.”
Consistent with the discussion in part
III.A of this Background, §1.368-1(c)
reflects the function of the “plan of reorga-
nization” concept and its embedded prox-
imate relationship requirement—namely,
to limit the application of the definitional
and operative provisions of subchapter C
to those transactions included in the plan
of reorganization. Section 1.368-1(c) also
requires all transactions properly included
in the plan of reorganization to be con-
sistent with, and to facilitate satisfaction
of, a principal requirement for nonrecog-
nition treatment under the reorganization
provisions of subchapter C (that is, the
continuation of an enterprise). Finally,
§1.368-1(c) reflects that devices and sham
transactions cannot properly be included
in a plan of reorganization.
C. Party to a reorganization
Section 368(b) generally provides that
the term “a party to a reorganization”
includes (i) a corporation resulting from a
reorganization, and (ii) both corporations,
in the case of a reorganization resulting
from the acquisition by one corporation of
stock or properties of another. Consistent
with section 368(b), §1.368-2(f) defines
the term “party to a reorganization” as
including “a corporation resulting from a
reorganization, and both corporations in a
transaction qualifying as a reorganization
where one corporation acquires stock or
properties of another corporation.” Sec-
tion 1.368-2(f) further articulates which
entities are parties to a reorganization in
various types of reorganizations defined
in section 368(a)(1). However, the uncer-
tainty regarding the meaning of “plan of
reorganization,” described in part III.B of
this Background, has resulted in confu-
sion regarding the proper identification of
parties to a reorganization.
D. Reporting and recordkeeping
requirements for corporate
reorganizations
Section 1.368-3 sets forth reporting
and recordkeeping requirements for cor-
porate reorganizations. Section 1.368-
3(a) requires a plan of reorganization
to be adopted by each corporation that
is a party to the reorganization, and it
requires each such corporation to include
a statement with its Federal income tax
return that includes certain limited infor-
mation about the reorganization. How-
ever, §1.368-3(a) provides no additional
detail on the manner in which the plan
of reorganization must be adopted, and it
does not require the plan of reorganiza-
tion to be reflected in any documentation
or records of the parties to the reorgani-
zation.
Current §1.368-3(a) contrasts starkly
with a prior version of §1.368-3(a), which
provided that the plan of reorganization
“must be adopted by each of the corpo-
rations parties thereto; and the adoption
must be shown by the acts of its duly con-
stituted responsible officers, and appear
upon the official records of the corpora-
tion.” See §1.368-3(a) (effective from
November 26, 1960, to May 29, 2006)
(prior §1.368-3(a)).
Prior §1.368-3(a) also imposed addi-
tional requirements to facilitate the IRS’s
administration of the reorganization pro-
visions in part III of subchapter C. In
particular, prior §1.368-3(a) required the
parties to a reorganization to file with the
IRS a “copy of the plan of reorganiza-
tion, together with a statement, executed
under the penalties of perjury, showing in
full the purposes thereof and in detail all
transactions incident to, or pursuant to,
the plan.” In contrast, taxpayers currently
are not required by §1.368-3 to provide as
part of their Federal income tax return a
plan of reorganization that describes the
transactions to which taxpayers intend to
apply the nonrecognition provisions of
subchapter C.
In addition, prior §1.368-3(a) required
taxpayers to file with the IRS “a complete
statement of all facts pertinent to the non-
recognition of gain or loss in connection
with the reorganization.” Current §1.368-
3(a) contains no such requirement. There-
fore, the IRS currently does not receive
as part of a taxpayer’s Federal income
tax return a statement of facts necessary
to determine the proper application of the
nonrecognition provisions of subchapter
C to the transactions comprising a corpo-
rate reorganization.
Instead, current §1.368-3(a) merely
requires each corporate party to a reor-
ganization to include a statement, on or
with its return for the taxable year of the
exchange, that includes: (i) the names and
employer identification numbers (if any)
of all such parties; (ii) the date of the reor-
ganization; (iii) the value and basis of the
assets, stock, or securities of the target
corporation transferred in the transaction,
determined immediately before the trans-
fer in the manner described in §1.368-
3(a); and (iv) the date and control number
of any one or more private letter rulings
issued by the IRS in connection with
the reorganization. Current §1.368-3(b)
imposes similar requirements on signifi-
cant holders of stock or securities of the
target corporation.
Like prior §1.368-3(c), current §1.368-
3(d) requires taxpayers to retain their per-
manent records with respect to a corporate
reorganization.
IV. TIGTA Report to Improve
Enforcement of Corporate M&A
Transactions
In 2019, the Treasury Inspector Gen-
eral for Tax Administration (TIGTA) pub-
lished a report titled “A Strategy Is Needed
to Assess the Compliance of Corporate
Mergers and Acquisitions With Federal
Tax Requirements,” Ref. No. 2019-30-
050 (Sept. 5, 2019) (TIGTA Report). In
that report, TIGTA considered the scope
of information required to be provided
under §1.368-3(a) and expressed that “the
forms previously detailed represent only a
small portion of the information that may
be filed, and certain forms used to report
merger and acquisition (M&A) trans-
actions may not be providing sufficient
information to identify noncompliance.”
Id. at 14-15.
Accordingly, TIGTA recommended
that, if the IRS finds that the current forms
do not contain information sufficient for
identifying potential noncompliance in
M&A transactions, the IRS “should con-
sider amending the filing criteria and
information required in the forms to
develop useful compliance tools.” Id. at
14. The IRS agreed with this recommen-
dation, stating that it will continue to con-
sider how to use M&A transaction infor-
mation in its compliance efforts.

March 3, 2025 994 Bulletin No. 2025–10
V. Reporting Requirements for Section
355 Transactions
In a notice of proposed rulemaking
(REG-116085-23) published elsewhere
in the Proposed Rules section of this
issue of the Federal Register, the Trea-
sury Department and the IRS are issuing
proposed regulations to revise current
§1.355-5 (proposed §1.355-5) to enhance
the IRS’s ability to administer and enforce
the requirements of section 355. Similar
to current §1.368-3 (previously discussed
in part III.D of this Background), current
§1.355-5 requires the distributing cor-
poration and each significant distributee
(as defined in current §1.355-5(c)(1)) to
include a statement with its tax return that
includes certain limited information about
the section 355 transaction. To implement
the recommendation in the TIGTA Report
described in part IV of this Background,
proposed §1.355-5 would require taxpay-
ers to submit new IRS Form 7216, Multi-
Year Reporting Related to Section 355
Transactions (or any successor form), to
provide the IRS with additional informa-
tion to help the IRS identify potential non-
compliance in section 355 transactions.
VI. Revenue Procedure 2024-24 and
Notice 2024-38
On May 2, 2024, the Treasury Depart-
ment and the IRS released Rev. Proc.
2024-24, 2024-21 I.R.B. 1214, to provide
procedures for requesting private letter
rulings from the IRS regarding certain
matters relating to section 355 transac-
tions. Rev. Proc. 2024-24 superseded Rev.
Proc. 2018-53, 2018-43 I.R.B. 667, and
made several significant changes to the
requirements of that revenue procedure
and to Rev. Proc. 2017-52, 2017-41 I.R.B.
283.
Also on May 2, 2024, the Treasury
Department and the IRS released Notice
2024-38, 2024-21 I.R.B. 1211, to describe
their views and concerns relating to cer-
tain matters addressed in Rev. Proc. 2024-
24, and to solicit feedback on the provi-
sions set forth in Rev. Proc 2024-24. In
section 2.01 of Notice 2024-38, the Trea-
sury Department and the IRS requested
that such feedback take into account the
following three objectives for potential
future guidance: (i) the guidance will be
consistent with all relevant provisions of
the Code (compliance objective); (ii) the
guidance will provide certainty to tax-
payers and the IRS regarding the appli-
cation of all relevant provisions of the
Code to purported section 355 transac-
tions (increased certainty objective); and
(iii) the guidance will be responsive to the
manner in which section 355 transactions
are engaged in by taxpayers and reflect
current market practices and preferences
(transaction facilitation objective), to the
extent that such approach does not conflict
with the first two objectives.
Explanation of Provisions
The purpose of these proposed regu-
lations is to establish a comprehensive
set of rules to implement certain core
definitional and operative provisions of
subchapter C that address corporate sep-
arations, incorporations, and reorganiza-
tions. The current regulatory framework
underlying these provisions is incomplete,
outdated, and not reflective of their impor-
tance 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 provi-
sions of subchapter C.
Accordingly, providing comprehen-
sive 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 pro-
visions also address incorporations and
acquisitive reorganizations. Therefore, the
proposed regulations would implement
those statutory provisions for all corpo-
rate 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 cer-
tainty objective, and the transaction facil-
itation 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 tax-
payers 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 pro-
vide, through publicly accessible author-
itative guidance, core definitional and
operative provisions. This guidance is
intended to facilitate the ability for tax-
payers 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 let-
ter 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 Fed-
eral income tax compliance concerns, and
consequently improve the organization
and focus of their private letter ruling sub-
missions. Similarly, these proposed reg-
ulations are intended to increase the effi-
ciency 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

Bulletin No. 2025–10 995 March 3, 2025
in response to Notice 2024-38. Such feed-
back has informed the development of
these proposed regulations. This Expla-
nation of Provisions also references pro-
posed regulations, published elsewhere in
the Proposed Rules section of this issue of
the Federal Register, that would imple-
ment 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 reg-
ulations is conditioned on the IRS’s abil-
ity to track the execution of these trans-
actions throughout their lifecycle, and the
enhanced reporting requirements for sec-
tion 355 transactions would facilitate the
IRS’s ability to carry out its administrative
function with respect to these transactions.
I. Distinction Between Delayed
Distributions and Retentions; Rules for
Qualifying Retentions
A. Notice 2024-38
Section 2.02(1) of Notice 2024-38
stated the view of the Treasury Depart-
ment and the IRS that the Code provides
separate and distinct treatment for three
instances in which a distributing corpo-
ration temporarily continues to hold con-
trolled corporation stock or securities fol-
lowing the date on which the distributing
corporation has distributed an amount of
controlled corporation stock constituting
control (within the meaning of section
368(c)) (control distribution date). These
three instances are: (i) a delayed distri-
bution of controlled corporation stock or
securities that is “part of the distribution”
(within the meaning of section 355(a)(1)
(D)); (ii) a delayed distribution of con-
trolled corporation stock or securities that
is “in pursuance of the plan of reorganiza-
tion” (within the meaning of section 361);
and (iii) a retention of controlled corpora-
tion stock or securities.
Section 2.02(2) of Notice 2024-38
stated the view of the Treasury Depart-
ment and the IRS that section 355(a)(1)
(D) effectively creates a rebuttable pre-
sumption that any retention evidences
a plan to achieve a Federal income tax
avoidance purpose. Section 2.02(2) of
Notice 2024-38 also stated that the Trea-
sury Department and the IRS are con-
sidering the degree to which connections
between the distributing corporation and
the controlled corporation (and, as appro-
priate, the DSAG and the CSAG) after the
control distribution date would prevent a
transaction from qualifying under section
355. (The terms “DSAG” and “CSAG”
mean the separate affiliated group (as
defined in section 355(b)(3)(B)) of which
the distributing corporation or the con-
trolled corporation, respectively, is the
common parent.)
Section 2.02(2) of Notice 2024-38 also
stated the view of the Treasury Depart-
ment and the IRS that overlapping direc-
tors, officers, or key employees and the
existence of continuing contractual agree-
ments between the distributing corpora-
tion (and other members of the DSAG)
and the controlled corporation (and other
members of the CSAG) that include pro-
visions that are not arm’s-length weigh
against a determination of qualification
under section 355.
B. Stakeholder input
1. Existence of Rebuttable Presumption
under Section 355(a)(1)(D)(ii)
As an initial matter, some stakeholders
have contended that section 355(a)(1)(D)
(ii) does not create a rebuttable presump-
tion that a retention evidences a plan with
a principal purpose of avoiding Federal
income tax, notwithstanding the explicit
statutory requirement that the Secretary
must be satisfied that such a purpose
does not exist. Instead, these stakehold-
ers have asserted that Congress’s intent in
including the “no tax avoidance purpose”
language in section 355(a)(1)(D)(ii) is
unclear, and that the legislative history of
section 355 does not give further details
about the meaning of this language.
Accordingly, these stakeholders have
suggested that, rather than include a rebut-
table presumption, the proposed regula-
tions should place greater emphasis on
(i) an examination of the corporate busi-
ness purpose for the section 355 transac-
tion, and (ii) a determination of whether
the retained controlled corporation stock
is disposed of as “part of the distribution”
(see section 355(a)(1)(D)) or “in pursuance
of the plan of reorganization” (see section
361(c)). These stakeholders contend that
their view is supported by sections 354,
355, and 361, as well as by §1.368-2(g),
which requires readjustments involved in
the exchanges or distributions effected in
consummating a plan of reorganization to
be “undertaken for reasons germane to the
continuance of the business of a corpora-
tion a party to the reorganization.”
2. Application of Plan of Reorganization
with Regard to Section 355(a)(1)(D)(ii)
Stakeholders also have requested clar-
ification in the proposed regulations that
all delayed distributions, whether before
or after the control distribution date, are
treated as part of the distribution (within
the meaning of section 355(a)(1)(D)) if
they are effectuated pursuant to the plan
of reorganization. Relatedly, stakeholders
have recommended that the proposed reg-
ulations employ the same standard (that is,
the same level of proximate relationship)
in considering whether a transaction is
“part of the distribution” and “in pursu-
ance of a plan of reorganization.” Stake-
holders have further requested confirma-
tion in the proposed regulations that the
“no tax avoidance purpose” requirement
in section 355(a)(1)(D)(ii) applies only to
the extent a delayed distribution fails to
qualify under the operative provisions.
Based on their analogy to their view
of the “plan of reorganization” concept,
these stakeholders have contended that the
“as part of the distribution” requirement in
section 355(a)(1)(D) provides substantial
flexibility to the distributing corporation
regarding the timing and manner of dis-
positions of controlled corporation stock
(for example, in a delayed distribution of
controlled corporation stock to sharehold-
ers of the distributing corporation). In this
regard, stakeholders have recommended
that the phrase “as part of the distribution”
be interpreted to provide section 355 qual-
ification for situations in which the dis-
tributing corporation contemplates—but
provides no further level of commitment
to—a spectrum of potential dispositions

March 3, 2025 996 Bulletin No. 2025–10
of controlled corporation stock, so long
as the distributing corporation eventually
achieves one or more of those contem-
plated possibilities or related variants.
As described by such stakeholders, the
distributing corporation need not identify
the timing of those dispositions (regard-
less of whether they span multiple taxable
years of the distributing corporation), the
potential recipients of controlled corpora-
tion stock (for example, creditors of the
distributing corporation), or the method of
disposing of that stock.
The stakeholder input described in the
foregoing paragraphs ultimately focuses
on two aspects of the IRS private letter
ruling program for section 355 transac-
tions: (i) the requirement set forth in sec-
tion 3.03(3)(a)(ii) of Rev. Proc. 2024-24
(the so-called “pick a lane” requirement);
and (ii) the elimination under that revenue
procedure of so-called “backstop retention
rulings.”
With regard to the “pick a lane” require-
ment, these stakeholders read section
3.03(3)(a)(ii) of Rev. Proc. 2024-24 as pro-
viding that the IRS will entertain a request
for rulings that: (i) a delayed distribution
of controlled corporation stock or secu-
rities will be, as applicable, “part of the
distribution” (within the meaning of sec-
tion 355(a)(1)(D)) or “in pursuance of the
plan of reorganization” (within the mean-
ing of section 361); and (ii) a retention of
controlled corporation stock or securities
that is not included in a ruling request
described in clause (i) of this sentence will
not be in pursuance of a plan having as one
of its principal purposes the avoidance of
Federal income tax (within the meaning
of section 355(a)(1)(D)(ii)). Stakeholders
have further stated that, to comply with
the so-called “pick a lane” requirement, a
taxpayer must specify the portions of con-
trolled corporation stock remaining after
the control distribution (i) to which the tax-
payer intends section 361(c) to apply, and
(ii) which the taxpayer intends to retain and
not dispose of under section 361(c). See
section 3.03(3)(d) of Rev. Proc. 2024-24.
In practice, the “pick a lane” require-
ment requires a taxpayer to identify to the
IRS those transactions that the taxpayer
intends to carry out as part of its plan of
reorganization. However, stakeholders
have contended that this requirement is
problematic because Rev. Proc. 2024-
24 also has eliminated the availability of
“backstop retention rulings,” which stake-
holders have described as “protective rul-
ings” affording taxpayers a determination
by the IRS, before the first step of a divi-
sive reorganization, that a retention at no
point will have failed to satisfy the “no tax
avoidance purpose” requirement in sec-
tion 355(a)(1)(D)(ii).
Stakeholders have contended that these
changes in private letter ruling policy,
combined with the requirement that all
controlled corporation stock or securities
be distributed within 12 months of the date
of the first distribution (first distribution
date) to receive a ruling that the distribu-
tion qualifies for nonrecognition treatment
under section 355 (see section 3.03(2)(b)
(ii) of Rev. Proc. 2024-24), have created
an unnecessary risk for taxpayers that an
intended divisive reorganization could
fail to qualify under section 355 (section
355(a)(1)(D)(ii) risk). For purposes of
these proposed regulations, the term “first
distribution” means the earliest distribu-
tion in a series of distributions made pur-
suant to the plan of distribution or plan of
reorganization, as appropriate.
Specifically, these stakeholders have
asserted that, because transactions
intended to qualify for nonrecognition
treatment under section 361(c) often
require most of a year to complete, tax
advisors now are faced with three unde-
sirable options. First, tax advisors could
recommend the premature termination of
such transactions, which otherwise would
have been effectuated for bona fide busi-
ness purposes for corporate taxpayers.
Second, tax advisors could attempt, in an
unreasonably short timeframe, to receive
from the IRS a supplemental private letter
ruling that the “springing retention” (that
is, a retention that arises unexpectedly
during the 12-month period) satisfies the
“no tax avoidance purpose” requirement.
Third, tax advisors could provide an opin-
ion that the springing retention satisfies
the “no tax avoidance purpose” require-
ment, notwithstanding the lack of authori-
tative guidance on that issue.
C. Proposed regulations
Consistent with the statement in sec-
tion 2.02(2) of Notice 2024-38, proposed
§1.355-10(c)(1) would reflect the presump-
tion that a retention is pursuant to a plan
having as one of its principal purposes the
avoidance of Federal income tax. How-
ever, the Treasury Department and the IRS
appreciate the views of stakeholders regard-
ing delayed distributions and retentions. In
particular, the Treasury Department and the
IRS are sensitive to the potential negative
impacts of the “pick a lane” requirement
and related requirements in Rev. Proc.
2024-24 on divisive reorganizations, and
to the lack of clear, authoritative guidance
regarding the “no tax avoidance purpose”
requirement of section 355(a)(1)(D)(ii).
Therefore, and consistent with the compli-
ance, increased certainty, and transaction
facilitation objectives of these proposed
regulations, the Treasury Department and
the IRS have proposed rules to address the
uncertainty highlighted by stakeholders in
a manner that facilitates the ability of (i)
taxpayers to carry out bona fide section 355
transactions, and (ii) the IRS to ensure that
such transactions comply with all require-
ments of the Code.
1. Proposed Safe Harbor to Address
Section 355(a)(1)(D)(ii) Risk
a. Overview
In response to stakeholder concerns
regarding the section 355(a)(1)(D)(ii) risk,
these proposed regulations would provide
a safe harbor that incorporates objectively
verifiable conditions for retentions not to be
treated as pursuant to a plan having as one
of its principal purposes the avoidance of
Federal income tax (qualifying retentions).
The Treasury Department and the IRS have
proposed this safe harbor to enable taxpay-
ers to satisfy the requirements of section
355(a)(1)(D)(ii) with greater certainty even
in the absence of a private letter ruling from
the IRS – thereby achieving an increased
certainty and transaction facilitation objec-
tives. For taxpayers that do not satisfy the
requirements of the proposed safe harbor,
the proposed regulations would provide for
a general facts-and-circumstances determi-
nation for whether a retention is a qualify-
ing retention.
b. Section 355(a)(1)(D)(ii) safe harbor
Under the section 355(a)(1)(D)(ii) safe
harbor in proposed §1.355-10(c)(3), a dis-

Bulletin No. 2025–10 997 March 3, 2025
tributing corporation would be treated as
satisfying the general facts-and-circum-
stances test in proposed §1.355-10(c)(2)
(ii) for a qualifying retention if all six of the
following conditions are satisfied. First,
the distributing corporation must have a
specific corporate business purpose for the
retention as of the date of adoption of the
plan of distribution or plan of reorganiza-
tion, as appropriate, and at all times during
the period of retention. Second, stock of
the controlled corporation must be widely
held during the period of retention after
the first distribution date. Third, any over-
lap between the officers, directors, or key
employees of the DSAG and of the CSAG
must be limited in the manner described
in proposed §1.355-10(c)(3)(iv). Fourth,
any continuing arrangements between the
distributing corporation and the controlled
corporation during the period of retention
either (i) must be negotiated on and reflect
arm’s-length terms, or (ii) within two
years after the first distribution date, must
be terminated or renegotiated to reflect
arm’s-length terms. Fifth, the plan of
distribution or plan of reorganization, as
appropriate, must reflect a definite intent
in the official records of the distributing
corporation that the distributing corpora-
tion dispose of all retained controlled cor-
poration stock (or securities) by the end of
the five-year period beginning on the first
distribution date. Sixth, the disposition of
retained controlled corporation stock (or
securities) must not result in less Federal
income tax to the distributing corpora-
tion (determined based on the fair market
value and adjusted basis of that stock (or
securities) as of the first distribution date)
than if that stock (or securities) had been
distributed in the first distribution. The
distributing corporation must include in
its plan of distribution or plan of reorga-
nization (as applicable) a description of
each agreement and transaction that estab-
lishes the satisfaction of the foregoing six
conditions.
c. Rationale for section 355(a)(1)(D)(ii)
safe harbor
The safe harbor in proposed §1.355-
10(c)(3) is intended to balance taxpayers’
need for certainty with the IRS’s need to
ensure taxpayer compliance with section
355(a)(1)(D)(ii). As discussed in part IV
of the Background, TIGTA recommended
that the IRS consider amending the filing
criteria and information required in cur-
rent forms to develop useful compliance
tools. The inclusion of objective require-
ments in the section 355(a)(1)(D)(ii) safe
harbor is consistent with both TIGTA’s
recommendation and the compliance,
increased certainty, and transaction facili-
tation objectives for guidance described in
section 2.01 of Notice 2024-38.
Moreover, under proposed §1.355-5
and new IRS Form 7216 (see part V of
the Background), and consistent with the
recommendation in the TIGTA Report, a
taxpayer would be required to report key
information that would enable the IRS to
ensure that the taxpayer, during each tax-
able year of the retention period, contin-
ues to comply with the requirements of
the section 355(a)(1)(D)(ii) safe harbor.
Thus, the section 355(a)(1)(D)(ii) safe
harbor, coupled with the enhanced report-
ing requirements for section 355 transac-
tions, would increase taxpayer certainty
(by reducing the so-called section 355(a)
(1)(D)(ii) risk) and would facilitate IRS
administration of section 355(a)(1)(D)(ii).
The Treasury Department and the IRS are
of the view that these two proposals would
significantly help achieve all three objec-
tives of these proposed regulations.
The proposed regulations would not
incorporate the stakeholders’ recommen-
dation that the requirements of section
355(a)(1)(D)(ii) be treated as satisfied
so long as the distributing corporation
disposes of all controlled corporation
stock pursuant to the plan of reorgani-
zation. Such an approach would conflict
with long-standing §1.355-2(e)(2), which
requires the consideration of factors aside
from the manner in which the distributing
corporation disposes of its retained con-
trolled corporation stock (for example, if
the distribution would be treated to any
extent as a distribution of “other property”
under section 356). The stakeholders’
recommendation would not be consistent
with section 355(a)(1)(D)(ii), because
that recommendation, by itself, would not
ensure a genuine separation.
In addition, the proposed regulations
would not incorporate stakeholders’ rec-
ommendation that a strong corporate
business purpose for a section 355 trans
-
action be treated as sufficient to satisfy
the requirements under section 355(a)
(1)(D)(ii). This suggestion is inconsis-
tent with the plain reading of the statute,
which requires a determination that the
avoidance of Federal income tax was not
a principal purpose of the retention. In
other words, the distributing corporation
could possess a strong corporate business
purpose for the section 355 transaction in
general and for the retention in particu-
lar, and yet also possess a principal pur-
pose for the retention of avoiding Federal
income tax.
Ultimately, the stakeholders’ recom-
mended approaches would conflict with
the purpose of section 355(a)(1)(D),
which is to ensure genuine separations
between the distributing and controlled
corporations—a policy reflected in the
legislative history of section 355(a)(1)(D)
and the long-standing view of the Trea-
sury Department and the IRS regarding
that purpose as fundamental to all section
355 transactions. The legislative history of
section 355(a)(1)(D) indicates that Con-
gress’s initial preference was to provide
no exception to the complete-distribution
requirement under section 355(a)(1)(D)
(i), and that the exception for retentions
originated through a subsequent Senate
amendment. See H.R. Rep. No. 83-1337,
at A121 (1954); S. Rep. No. 83-1622, at
266 (1954). Indeed, Treasury regulations
that predated the enactment of section
355(a)(1)(D), and that tax advisors have
acknowledged as the basis for section
355(a)(1)(D), provided that the busi-
ness reasons supporting a distribution of
controlled corporation stock ordinarily
required the distribution of all controlled
corporation stock owned by the distribut-
ing corporation. See §29.112(b)(11)-2(c)
of Regulation 111 (issued under section
112(b)(11) of the 1939 Code, the prede-
cessor to section 355 of the 1954 Code);
see also §1.355-2(e)(2), which continues
to reflect this language). Long-standing
revenue rulings and general counsel mem-
oranda also reflect the view that, under the
plain reading of section 355(a)(1)(D)(ii),
Congress intended to subject retentions to
heightened scrutiny to ensure that the sec-
tion 355 transaction effectuates a genuine
separation of the distributing corporation
and the controlled corporation. See Rev.
Rul. 75-469; Rev. Rul. 75-321; see also
G.C.M. 32136 (Oct. 23, 1961).

March 3, 2025 998 Bulletin No. 2025–10
2. Facts-and-Circumstances Test for
Determining Compliance with Section
355(a)(1)(D)(ii)
If a taxpayer fails to satisfy the require-
ments of the section 355(a)(1)(D)(ii) safe
harbor in proposed §1.355-10(c)(3), the
taxpayer may establish compliance with
section 355(a)(1)(D)(ii) through satisfac-
tion of the facts-and-circumstances test
in proposed §1.355-10(c)(2)(ii). As with
qualification for the proposed section
355(a)(1)(D)(ii) safe harbor, satisfaction
of the proposed facts-and-circumstances
test would require a determination that the
distributing corporation and the controlled
corporation have genuinely separated,
among other requirements. This pro-
posed facts-and-circumstances approach
combined with the proposed safe harbor
would provide taxpayers and the IRS with
increased certainty regarding the applica-
tion of section 355(a)(1)(D)(ii).
Under the facts-and-circumstances
approach of proposed §1.355-10(c)(2)
(ii), the distributing corporation first must
establish that the distribution resulted in a
genuine separation of the DSAG and the
CSAG. Second, the distributing corpora-
tion must establish that the retention does
not allow the DSAG to retain any practical
control over the CSAG. Third, there must
be a sufficient corporate business purpose
for the retention as of the date the plan
of distribution or the plan of reorganiza-
tion (as applicable) is adopted. Fourth,
there must be a sufficient corporate busi-
ness purpose for the retention at all times
during the period of retention. Fifth, the
disposition of retained controlled corpora-
tion stock (or securities) must not result in
less Federal income tax to the distributing
corporation (determined based on the fair
market value and adjusted basis of that
stock (or securities) as of the first distribu-
tion date) than if that stock (or securities)
had been distributed in the first distribu-
tion.
Consistent with the views set forth
in section 2.02(2) of Notice 2024-38,
the existence of (i) overlapping officers,
directors, or key employees between the
DSAG and the CSAG, and (ii) non-arm’s-
length continuing contractual agreements
between the DSAG and the CSAG, would
be facts and circumstances indicating that
the retention fails the requirements under
section 355(a)(1)(D)(ii). For purposes of
proposed §1.355-10(c)(2)(ii), the relative
weight of those indicia would depend
upon all facts and circumstances, includ-
ing the corporate business purpose for
the section 355 transaction. For example,
such continuing relationships particularly
would weigh against a determination that
the retention satisfies the requirements
under section 355(a)(1)(D)(ii) if the pur-
ported corporate business purpose for the
section 355 transaction is so-called “fit
and focus” (that is, a separation to enhance
the success of the separated businesses by
resolving management, systemic, or other
problems that arise by virtue of the distrib-
uting corporation’s operation of different
businesses within a single corporation or
affiliated group).
3. Consistent Voting Requirements
Regardless of whether a section 355
transaction qualifies for the section 355(a)
(1)(D)(ii) safe harbor, if the section 355
transaction involves a retention, proposed
§1.355-10(c)(2)(iii) would require the
DSAG to vote any retained controlled cor-
poration stock in proportion to the votes
cast by the controlled corporation’s other
shareholders (other than persons related
to the distributing corporation). This pro-
posed requirement is consistent with the
long-standing position of the Treasury
Department and the IRS with regard to
section 355(a)(1)(D)(ii), as expressed
through several revenue rulings, reve-
nue procedures, and other sub-regulatory
guidance.
4. Plan of Distribution
Consistent with long-standing guid-
ance, the Treasury Department and the
IRS continue to agree with stakeholders
that the plan of reorganization is rele-
vant for determining the applicability of
the definitional and operative provisions
under subchapter C to dispositions of con-
trolled corporation stock. Compare Rev.
Rul. 2002-85, 2002-2 C.B. 986 (conclud-
ing that an acquiring corporation’s contri-
bution of a target corporation’s assets to
a subsidiary corporation subsequent to a
transaction otherwise qualifying as a reor-
ganization under section 368(a)(1)(D) was
“pursuant to the plan of reorganization”;
therefore, the continuity of business enter-
prise (COBE) requirement was not vio-
lated); Rev. Rul. 69-142, 1969-1 C.B. 107
(concluding that an acquiring corpora-
tion’s exchange of its debentures for those
held by bondholders of the target corpo-
ration was not part of the reorganization
exchange; therefore, the “solely for vot-
ing stock” requirement in section 368(a)
(1)(B) was satisfied). In this regard, the
“plan of reorganization” concept provides
a useful analogy for distinguishing distri-
butions to which section 355 should apply
from those to which other sections of the
Code (such as section 311) should apply.
Accordingly, proposed §1.355-4 would
set forth a series of provisions pursuant to
which a taxpayer would establish its plan
of distribution for distributions to which
section 355(c) is purported to apply. These
proposed rules generally would parallel
the proposed plan of reorganization provi-
sions in proposed §1.368-4, as discussed
in more detail in part III.C of this Expla-
nation of Provisions.
Specifically, under the proposed rules,
section 355 would apply to those distribu-
tions that are properly included in the plan
of distribution and, therefore, are treated
as “part of the distribution” within the
meaning of section 355(a)(1)(D). Thus,
for example, proposed §1.355-4(d)(2)(iii)
would provide that distributions that are
carried out in close temporal proximity
with a section 355(c) distribution are not
properly included in the plan of distribu-
tion and therefore would not qualify for
nonrecognition treatment under section
355 unless Federal income tax principles
(including the step transaction doctrine)
would apply to determine that those dis-
tributions are in substance part of the plan
of distribution for the section 355(c) dis-
tribution.
Additionally, a distribution that is
merely one of several (if not more) con-
templated possibilities would not be prop-
erly included in the plan of distribution.
Instead, proposed §1.355-4(d)(1) would
require the distributing corporation to evi-
dence a definite intent to carry out the dis-
tribution through a written commitment in
one or more official records that substanti-
ate the plan of distribution. As previously
discussed in part I.B of this Explanation
of Provisions, the Treasury Department
and the IRS disagree with the stakehold-

Bulletin No. 2025–10 999 March 3, 2025
ers’ view that a plan of distribution should
reflect mere transactional possibilities
under a “wait and see” approach. Adop-
tion of this stakeholder recommendation
would conflict with the requirement of
section 355(a)(1)(D)(ii) that the non-tax
avoidance nature of a retention be “estab-
lished to the satisfaction of the Secretary,”
because it would not be possible for the
Secretary to establish the actual nature
of a hypothetical transaction. In addition,
adopting this stakeholder recommenda-
tion would both significantly compro-
mise the IRS’s ability to administer and
enforce the requirements of section 355
and reduce certainty regarding section 355
qualification.
Under proposed §1.355-4(a)(2)(i) and
(b)(1), the term “plan of distribution” gen-
erally would mean a plan of distribution
established by a distributing corporation
that satisfies all requirements set forth in
proposed §1.355-4(c) and that is filed with
the IRS pursuant to proposed §1.355-5.
Proposed §1.355-4(a)(2)(iii) and (b)(2)
would provide that a plan of distribution
also may be established based on cor-
rections to the taxpayer-filed plan by the
Commissioner based on all relevant facts
and circumstances, all relevant provi-
sions of the Code, and general principles
of Federal income tax law (including the
step transaction doctrine). If the taxpayer
fails to file a plan of distribution under
proposed §1.355-5, proposed §1.355-4(a)
(2)(iv) and (b)(2) would provide that the
Commissioner may identify a plan of dis-
tribution for the transaction.
Consistent with the objectives for guid-
ance described in section 2.01 of Notice
2024-38, the proposed plan of distribu-
tion provisions are intended to facilitate
taxpayer certainty in identifying distribu-
tions to which section 355 properly should
be applied. See, for example, proposed
§1.355-4(c)(3)(i)(B) (providing a safe
harbor presumption for timely prosecuting
the plan of distribution) and (d) (provid-
ing rules for determining whether a distri-
bution is properly included in the plan of
distribution).
In addition, the plan of distribution
would provide the IRS with a single,
timely document that identifies all rele-
vant distributions necessary to determine
the appropriate Federal income tax treat-
ment of the purported section 355(c) dis-
tribution. This proposal, combined with
the enhanced reporting requirements for
section 355 transactions under proposed
§1.355-5, would reestablish an appropri-
ate line of sight for the IRS into taxpayer
compliance under section 355, thereby
helping to achieve the compliance and
increased certainty objectives. Compare
former §1.355-5 (effective from Novem-
ber 26, 1960, to May 29, 2006) (requiring
the taxpayer to “attach to its return for the
year of the distribution a detailed state-
ment setting forth such data as may be
appropriate in order to show compliance
with the provisions of [section 355]”).
5. Treatment of Delayed Distributions
and Retentions
The Treasury Department and the IRS
appreciate the feedback received from
stakeholders regarding the similarities
between delayed distributions and reten-
tions. The Treasury Department and the
IRS agree with stakeholders that, because
a section 355 transaction requires the dis-
tribution of controlled corporation stock
by the distributing corporation, each of the
following could apply to the same trans-
action: (i) the “part of the distribution”
requirement in section 355(a)(1)(D); (ii)
the “in pursuance of the plan of reorga-
nization” requirement in section 361; and
(iii) the retention requirements in section
355(a)(1)(D)(ii).
In particular, the Treasury Department
and the IRS share the stakeholders’ view
that, if the distributing corporation does
not distribute all its controlled corporation
stock in the first distribution, the “delayed
distribution” and “retention” labels give
rise to a distinction without a difference
in determining the existence of a genuine
separation between the distributing cor-
poration and the controlled corporation.
In this respect, proposed §1.355-2(e)(2)
(iii) would focus on whether a genuine
separation has occurred, without regard to
whether the controlled corporation stock
not distributed as part of the first distribu
-
tion is disposed of through a distribution
or transfer under section 361(c) or a tax-
able sale under section 1001.
However, the Treasury Department
and the IRS continue to view the “part of
the distribution” requirement in section
355(a)(1)(D), the “in pursuance of the plan
of reorganization” requirement in section
361, and the “no tax avoidance purpose”
requirement in section 355(a)(1)(D)(ii) as
discrete requirements that address discrete
issues reflective of discrete policies. The
“part of the distribution” requirement in
section 355(a)(1)(D) serves as a scoping
provision for the applicability of section
355(a)(1)(D)(i) and (ii) to distributions of
controlled corporation stock. As discussed
in parts I.C.4 and III.C of this Explana-
tion of Provisions, the proposed plan of
distribution and plan of reorganization
rules would facilitate the determination of
which distributions are “part of the distri-
bution.”
As reflected in the legislative history of
section 361, the “in pursuance of the plan
of reorganization” requirement serves
in large part to limit the application of
the operative provisions in subchapter C
to those transactions with a sufficiently
proximate relationship with transactions
that qualify under a definitional provision
in subchapter C. See part II.A of the Back-
ground.
Lastly, the “no tax avoidance purpose”
requirement in section 355(a)(1)(D)(ii)
serves to ensure there is a genuine sepa-
ration of the distributing corporation and
the controlled corporation in situations
in which the distributing corporation
continues to hold controlled corporation
stock following the first distribution. This
requirement applies regardless of whether
that controlled corporation stock is dis-
posed of pursuant to the plan of reorgani-
zation under section 361(c).
6. Timing Requirement for Control
Distribution
Consistent with the Supreme Court’s
decision in Gordon (discussed in part I.D.2
of the Background), proposed §1.355-2(e)
(2) would require a distributing corpora-
tion, pursuant to a plan of distribution or
plan of reorganization, as appropriate, to
distribute an amount of stock of the con-
trolled corporation constituting control
(within the meaning of section 368(c))
either (i) within a single taxable year, or
(ii) over two taxable years, but only if all
distributions up to and including the con-
trol distribution are effectuated pursuant
to a binding commitment that is described
in the plan of distribution or plan of reor-

March 3, 2025 1000 Bulletin No. 2025–10
ganization (as applicable). A two-year
limitation for distributing control would
provide taxpayers with additional trans-
actional flexibility while facilitating the
IRS’s ability to administer and enforce the
requirements of section 355. This approach
would help achieve the increased certainty
and transaction facilitation objectives of
these proposed regulations.
7. Requirements for Nonrecognition
Treatment
In accordance with the foregoing dis-
cussion in this part I.C, these proposed
regulations would revise §1.355-2(e) to
provide that a distribution does not qual-
ify for nonrecognition treatment under
section 355(a)(1) unless the following
requirements are satisfied. First, proposed
§1.355-2(e)(2)(i) and (ii) would provide
that the distributing corporation must
distribute an amount of stock of the con-
trolled corporation constituting control
(within the meaning of section 368(c))
either (i) within a single taxable year, or
(ii) during two taxable years, subject to
the “binding commitment” requirement
described in part I.C.6 of this Explanation
of Provisions. Second, proposed §1.355-
2(e)(2)(iii) would provide that any con-
trolled corporation stock not distributed
as part of the first distribution must satisfy
the requirements for a qualifying retention
in proposed §1.355-10(c).
As previously discussed in parts I.C.1
through 3 of this Explanation of Provi-
sions, to satisfy the requirements for a
qualifying retention (and to thereby rebut
the presumption of a tax avoidance pur-
pose for the retention), the distributing
corporation must: (i) either qualify for
the section 355(a)(1)(D)(ii) safe harbor
in proposed §1.355-10(c)(3) or satisfy the
facts-and-circumstances test in proposed
§1.355-10(c)(2)(ii); and (ii) vote any
retained controlled corporation stock in
proportion to votes cast by the controlled
corporation’s other shareholders (other
than distributing corporation related per-
sons). See proposed §1.355-10(c)(2)(iii).
II. Non-Substantive Modifications to
Section 355 Regulations
These proposed regulations would
make certain non-substantive revisions to
current §§1.355-1 and 1.355-4. For exam-
ple, these proposed regulations would
modify current §1.355-1 by adding gen-
eral definitions that apply for purposes of
the section 355 regulations, incorporating
the rules in current §1.355-4 as proposed
§1.355-1, and moving the applicability
dates from current §1.355-1(a) to pro-
posed §1.355-1(e). These revisions are not
intended to make any substantive change.
III. Plan of Reorganization; Party to a
Reorganization
A. Notice 2024-38
As stated in section 2.02(4) of Notice
2024-38, the Treasury Department and
the IRS understand that confusion and
disagreement exists regarding the appli-
cation of the “plan of reorganization”
requirement to divisive reorganizations.
For example, some stakeholders view
the applicability of the “plan of reorga-
nization” requirement to be potentially
obviated by the temporal requirements
set forth in section 3.04(6) of Rev. Proc.
2018-53 (concerning delayed satisfaction
of distributing corporation debt). It is the
view of the Treasury Department and the
IRS that this is incorrect.
Section 2.02(4) of Notice 2024-38
further states that, although the “plan of
reorganization” requirement incorporates
a degree of transactional flexibility, such
flexibility is limited by current §§1.368-
1(c) and 1.368-2(g), and the Treasury
Department and the IRS view this require-
ment as helpful to ensure that delayed dis-
tributions are not used to avoid the repeal
of the General Utilities doctrine (see part
I.A.2 of the Background).
B. Stakeholder input
The Treasury Department and the IRS
have received a broad spectrum of feed-
back from stakeholders regarding the
“plan of reorganization” requirement.
However, consistent with the view of the
Treasury Department and the IRS set forth
in Notice 2024-38, stakeholders uniformly
have contended that this requirement
should be applied in a flexible manner.
Certain stakeholders have described the
guidance in current §1.368-2(g) regard-
ing the meaning and scope of the “plan
of reorganization” requirement as circu-
lar and incomplete. Those stakeholders
similarly have described §1.368-1(c) as
providing only conceptual guidance as to
which transactions are properly included
in a plan of reorganization. These stake-
holders also have described §1.368-3(a)
as requiring each party to the reorganiza-
tion to adopt that plan but then failing to
provide any guidance on how such parties
are to satisfy that requirement. Stakehold-
ers have aptly noted that Notice 2024-38
provided little additional clarity regarding
the “plan of reorganization” requirement.
Additionally, certain stakeholders have
noted that few cases address the meaning
and scope of the “plan of reorganization”
concept, and that, even within such cases,
courts often have applied the step transac-
tion doctrine and the substance-over-form
doctrine to determine the existence of a
plan of reorganization. For example, one
stakeholder highlighted King Enterprises,
Inc. v. United States, 418 F.2d 511 (Ct. Cl.
1969), in which the U.S. Court of Federal
Claims applied the step transaction doc-
trine to treat the acquisition of stock of a
target corporation (Tenco), followed by
the merger of the target corporation into
the acquiring corporation (Minute Maid),
as a reorganization qualifying under sec-
tion 368(a)(1)(A). The court identified the
threshold issue as “whether the transfer
of Tenco stock to Minute Maid is to be
treated for tax purposes as an independent
transaction of sale, or as a transitory step
in a transaction qualifying as a corporate
reorganization,” which dictated the reso-
lution of the central issue of “whether the
initial exchange of stock was a step in a
unified transaction pursuant to a ‘plan of
reorganization’.” King Enterprises
, 418
F.2d at 514-15. Based on an analysis of
the “operative facts in this case,” the court
applied the step transaction doctrine to
conclude that the two transactions com-
prised a single, unified transaction. Id. at
515-16, 519. Even though no formal plan
of reorganization existed, the court relied
on those facts and that analysis to identify
a plan of reorganization for that unified
transaction. Id. at 519 n.11 (relying on
Redfield v. Commissioner, 34 B.T.A. 967
(1936), for the proposition that “[a] formal
plan or reorganization is not necessary if
the facts of the case show a plan to have
existed”).

Bulletin No. 2025–10 1001 March 3, 2025
In Seagram Corp. v. Commissioner,
104 T.C. 75 (1995), the Tax Court consid-
ered whether to integrate (i) an acquisition
of stock of a target corporation (Conoco)
through a first-step tender offer made by
a subsidiary of an acquiring corporation
(DuPont Tenderor and DuPont, respec-
tively), and (ii) a subsequent merger of
Conoco into DuPont Tenderor. The court
acknowledged that the tender offer and
subsequent merger each possessed inde-
pendent significance, and that the subse-
quent merger was subject to several con-
tingencies. Seagram, 104 T.C. at 93-94.
However, the court emphasized that
DuPont and DuPont Tenderor “were under
a binding and irrevocable commitment to
complete the culminating merger—the
second step—upon the successful com-
pletion of the DuPont tender offer—the
first step.” Id. at 98. Based on all facts and
circumstances of the tender offer and sub-
sequent merger, including official records
of DuPont and DuPont Tenderor, the court
identified the existence of a plan of reorga-
nization, reasoning that, “because DuPont
was contractually committed to undertake
and complete the second-step merger once
it had undertaken and completed the first-
step tender offer, these carefully integrated
transactions together constituted a plan of
reorganization within the contemplation
of section 354(a).” Id. at 98-99 (relying
principally on, and noting satisfaction of,
the Supreme Court’s binding commitment
standard in Gordon).
Stakeholders also have noted that
the Tax Court in Seagram characterized
the “plan of reorganization” concept
expressed in §1.368-2(g) as one of “sub-
stantial elasticity,” relying on the court’s
prior observations on that concept in Int’l
Telephone. Seagram, 104 T.C. at 96. (In
Int’l Telephone, the Tax Court noted that
§1.368-2(g) “is imbued with qualities of
flexibility and vagueness, with the result
that it does not present precise self-exe-
cuting guidelines.” 77 T.C. at 75.) The Tax
Court in Seagram also relied on scholarly
commentary for the proposition that, even
though §1.368-2(g) at that time required a
plan of reorganization to be filed with the
IRS, it was self-evident that the IRS and
the courts could identify the existence of
a plan of reorganization in the event the
taxpayer either did not file one or filed one
that was inaccurate. See Seagram, 104
T.C. at 96 (quoting Peter L. Faber, The
Use and Misuse of the Plan of Reorgani-
zation Concept, 38 Tax L. Rev. 515, 523
(1982-1983)).
Stakeholders also have commented on
temporal considerations relating to plans
of reorganization. Stakeholders have con-
tended that the length of time between
transactions effectuating a plan of reorga-
nization should not prevent any particular
transaction from being considered part of
the plan. Conversely, these stakeholders
have contended that the temporal proxim-
ity of one transaction to another transac-
tion that is properly included in a plan of
reorganization should not be determina-
tive as to whether the other transaction is
properly included in the plan. Stakehold-
ers also have contended that imposing a
time limitation for completing a plan of
reorganization would be inappropriate.
Additionally, some stakeholders have
recommended granting taxpayers the flex-
ibility to either execute the steps identified
in the plan of reorganization or change
them at any time, based on each taxpay-
er’s judgment on how best to achieve the
objectives of their transaction. However,
other stakeholders have recommended
clarifying that entering into a new transac-
tion not contemplated by the plan, even in
the alternative, is not treated as pursuant
to the plan of reorganization.
In sum, stakeholders uniformly have
described the current regulations address-
ing the “plan of reorganization” require-
ment as lacking sufficient clarity and
comprehensiveness. Accordingly, some
stakeholders have requested guidance
regarding the metrics needed for a tax-
payer to establish a plan of reorganization.
Specifically, stakeholders have requested
guidance regarding (i) the means by which
parties to a reorganization can adopt a
plan of reorganization (in particular, some
stakeholders have recommended allow-
ing actions of a corporation’s authorized
representatives, and not just formal writ-
ten actions of the board, to be taken into
account for this purpose), (ii) transactions
that may occur at a future time, are con-
tingent, or are in the alternative, and (iii)
transactions that may develop as a result
of events arising after the plan of reorga-
nization is adopted.
The stakeholder input received has
highlighted not only the deficiencies
in authoritative guidance regarding the
meaning and scope of the “plan of reorga-
nization” requirement, but also the impor-
tance of this requirement in determining
whether the operative provisions of sub-
chapter C apply to a particular transaction.
C. Proposed regulations
1. Overview
The Treasury Department and the IRS
agree with stakeholders that the current
guidance regarding the “plan of reorga-
nization” requirement is inadequate and
creates significant confusion. Consis-
tent with stakeholder recommendations,
the proposed regulations would clarify,
among other items, (i) the metrics needed
for a taxpayer to establish a plan of reor-
ganization, (ii) the manner whereby par-
ties to a reorganization can adopt a plan
of reorganization, and (iii) the require-
ments for prosecuting a plan of reorgani-
zation (including in the event of a change
in circumstances following adoption of
the plan). In proposing this guidance, the
Treasury Department and the IRS have
endeavored to balance the importance of
providing taxpayers with transactional
flexibility to effectuate bona fide business
transactions with the need to facilitate IRS
administration of the reorganization pro-
visions of subchapter C. Accordingly, the
Treasury Department and the IRS believe
that this guidance would help achieve
the compliance, increased certainty, and
transaction facilitation objectives of these
proposed regulations. (See the discussion
of the objectives for guidance in part VI of
the Background; see also the discussion of
the TIGTA Report in part IV of the Back-
ground.)
2. Proposed Rules Regarding Plan of
Reorganization
a. Purpose and effect of plan of
reorganization
The Treasury Department and the IRS
view a plan of reorganization as serving
two related purposes. First, a plan of reor-
ganization serves to identify those trans-
actions to which the definitional and oper-
ative provisions of subchapter C apply.
Second, a plan of reorganization serves

March 3, 2025 1002 Bulletin No. 2025–10
to distinguish transactions the Federal
income tax treatment of which is gov-
erned by the reorganization provisions of
subchapter C from transactions to which
the general recognition provisions of the
Code (such as section 1001) apply.
However, under the proposed regu-
lations, a taxpayer’s failure to set forth a
plan of reorganization in a single, compre-
hensive document neither would be deter-
minative as to the existence or scope of
a plan of reorganization for a transaction
nor would govern the application of any
definitional or operative provision to that
transaction. See proposed §1.368-4(a)(3).
b. Determination of plan of
reorganization
The proposed regulations would permit
a plan of reorganization to be determined in
several different manners. Under the man-
ner preferred by the Treasury Department
and the IRS, a taxpayer would prepare a
single, comprehensive document that satis-
fies all requirements set forth in proposed
§1.368-4(d) and file that document with the
IRS as required by proposed §1.368-3(a)
(5) (taxpayer-filed plan of reorganization).
See proposed §1.368-4(b)(1). The taxpay-
er-filed plan of reorganization would con-
tain the information required by prior and
current §1.368-3(a) and incorporate recom-
mendations of the TIGTA Report.
Specifically, proposed §1.368-4(d)
would set forth the following require-
ments. First, the proposal would require
the taxpayer-filed plan of reorganization
to identify (i) all parties to the reorganiza-
tion (as required by current §1.368-3(a)),
(ii) all transactions properly included in
the plan of reorganization (as required by
prior §1.368-3(a)), and (iii) all liabilities
(including debt) to be assumed by the
acquiring corporation and the obligees (or
creditors) of those liabilities, and (iv) all
debt of the target corporation that will be
satisfied with section 361 consideration
and the creditors of that debt. Second,
the proposal would require such plan to
describe the intended Federal income tax
treatment of those transactions (which
would facilitate implementing the recom-
mendations of the TIGTA Report). Third,
the proposal would require such plan to
describe the corporate business purpose
for each transaction (consistent with cur-
rent §1.368-2(g)). Lastly, the proposal
would require such plan to establish that
each transaction facilitates the contin-
uance of the business of a corporation a
party to the reorganization (consistent
with current §1.368-2(g)). See proposed
§1.368-4(d)(1).
The proposed regulations would reflect
a preference that taxpayers will timely
file a complete and accurate plan of reor-
ganization. See proposed §1.368-4(c)(1).
Accordingly, the Federal income tax con-
sequences of the subject transactions gen-
erally would be determined in accordance
with that plan. See proposed §1.368-4(a)
(2)(i). Throughout the duration of the
transaction or series of transactions,
which potentially could span several tax-
able years, the IRS would possess the abil-
ity to monitor the taxpayer’s execution of
that plan of reorganization (for example,
through the taxpayer’s annual filing of
Form 7216 for divisive transactions). The
Treasury Department and the IRS intend
the proposed approach (i) to increase
taxpayer certainty regarding the Federal
income tax treatment of transactions prop-
erly included in a plan of reorganization,
and (ii) to facilitate IRS administration of
the reorganization provisions of subchap-
ter C.
However, if a taxpayer files a plan of
reorganization with the IRS that fails to
satisfy any requirement set forth in pro-
posed §1.368-4(d), or if the taxpayer fails
to file a plan of reorganization with the
IRS in accordance with proposed §1.368-
3(a)(5), proposed §1.368-4(c)(2)(i) recog-
nizes that the Commissioner may correct
or identify a plan of reorganization. Under
proposed §1.368-4(c)(2)(ii), the Commis-
sioner may determine that a transaction or
series of transactions should be included
in, or excluded from, a plan of reorgani-
zation based on (i) all facts and circum-
stances regarding the transaction or series
of transactions, and (ii) all relevant provi-
sions of the Code and general principles of
Federal income tax law, including the step
transaction doctrine.
The proposed approach is consistent
with long-standing caselaw indicating that
the existence and proper scope of a plan
of reorganization can be determined in the
absence of formal documentation. See, for
example, Redfield, 34 B.T.A.at 973 (“It is
not necessary, however, that such a plan
of reorganization be evidenced by a for-
mal written document, such as a contract
or corporate minutes. It is sufficient if the
circumstances indicate that the various
steps taken were pursuant to a definite
plan of reorganization.”); Fry v. Comm’r,
5 T.C. 1058, 1070 (1945) (similar). The
proposed regulations would reflect this
long-standing position because condition-
ing the applicability of the definitional and
operative provisions of subchapter C on
whether a plan of reorganization formally
was prepared and filed would, in particu-
lar and contrary to law, make the reorgani-
zation regime entirely elective.
Nonetheless, the Treasury Department
and the IRS are of the view that formal
documentation requirements for taxpay-
er-filed plans of reorganization are neces-
sary to facilitate the IRS’s administration
of the reorganization provisions of sub-
chapter C. See
part III of the Background.
Moreover, the preference for complete
and accurate taxpayer-filed plans of reor-
ganization under proposed §1.368-4(c)(1)
requires adequate substantiation with the
IRS, which would be provided by objec-
tively verifiable, official corporate doc-
uments. Accordingly, proposed §1.368-
4(d) would enhance the current reporting
requirements for plans of reorganization.
c. Agreement by parties to plan of
reorganization; beginning of plan of
reorganization
Proposed §1.368-4(d)(2) would pro-
vide that, prior to the first step of a reor-
ganization, the plan of reorganization or
an original plan of reorganization that
becomes the amended plan of reorganiza-
tion, as applicable, must be finalized and
adopted by the party to the reorganization.
Taxpayers would demonstrate satisfaction
of this requirement through (i) the acts
of duly authorized officers and directors
of the corporation, and (ii) the official
records of the party to the reorganization.
The Treasury Department and the IRS
are of the view that the proposed approach
would provide greater taxpayer certainty
regarding the means by which parties to a
reorganization can adopt a plan of reorga-
nization than current §1.368-3(a), which
provides only that “[t]he plan of reorga-
nization must be adopted by each of the
corporations that are parties thereto.” As

Bulletin No. 2025–10 1003 March 3, 2025
previously discussed in part III.B of this
Explanation of Provisions, the current
regulations have created significant uncer-
tainty due to the lack of guidance on what
constitutes an “adoption” by the parties.
The proposed regulations would address
this uncertainty in a manner consistent
with prior §1.368-3(a) and statutory law.
See section 806(g)(3) of the Tax Reform
Act of 1976 (Public Law 94-455, 90 Stat.
1520, 1606) (describing how a corpora-
tion is considered to have adopted a plan
of reorganization for purposes of deter-
mining the effective date of certain modi-
fications to sections 382 and 383).
In addition, the proposed substantiation
requirements would facilitate the IRS’s
administrative function by marking the
beginning of the taxpayer’s plan of reor-
ganization—a feature that the Tax Court
also views as important. See Seagram,
104 T.C. at 98 (emphasizing in its plan of
reorganization analysis that the DuPont/
Conoco Agreement “provides a discrete
start and finish”).
d. Timing requirement for completion of
plan of reorganization
i. General “Expeditious Completion”
Requirement
Proposed §1.368-4(d)(3)(i)(A) and (ii)
(A) would require that, taking into account
all facts and circumstances (including the
one or more corporate business purposes
for a reorganization), all parties to the reor-
ganization must complete the plan of reor-
ganization as expeditiously as practicable,
and in the manner described in that plan.
The proposed approach takes into account
taxpayers’ need for transactional flexibility
and reflects the long-standing principle that
the passage of time is not determinative of
whether a transaction is part of a plan of
reorganization. See, for example, Wilson
v. Comm’r, T.C. Memo. 1961-135 (“The
mere lapse of time is not decisive. The
important thing is that the steps which are
taken evidence a consistent performance of
the reorganization plan and purpose.”).
ii. Presumption of Satisfaction if
Completion within 24 Months
However, the Treasury Department
and the IRS are concerned that the lack
of a time limitation for completing a plan
of reorganization raises administrability
concerns for the IRS. Accordingly, the
Treasury Department and the IRS are (i)
issuing proposed §1.355-5, and (ii) intro-
ducing new Form 7216, to provide the
IRS with information regarding divisive
transactions that span multiple tax years.
See part V of the Background.
Additionally, temporal guidelines
would provide greater certainty to tax-
payers. In this regard, stakeholders have
requested the inclusion of safe harbors
in these proposed regulations to mitigate
uncertainty arising from conceptual rules
and facts-and-circumstances determina-
tions. Based on this feedback, proposed
§1.368-4(d)(3)(i)(B) would provide that
the “expeditious completion” requirement
is presumed to be satisfied if all parties
to a reorganization complete the plan
of reorganization within the 24-month
period beginning on the date of the first
step of the plan of reorganization. This
increased certainty would help achieve
the transaction facilitation objective of
these proposed regulations, and provid-
ing a 24-month safe harbor would help
achieve the compliance objective of these
proposed regulations.
e. Requirements for transactions to be
treated as properly included in plan of
reorganization
i. Overview
Stakeholders have recommended var-
ious standards and approaches for deter-
mining whether a transaction is properly
included in a plan of reorganization. As
noted by stakeholders, neither current
guidance nor the caselaw regarding the
“plan of reorganization” requirement ade-
quately addresses this issue. The proposed
regulations would synthesize the overar-
ching principles of this caselaw into rules
that could be applied by taxpayers and the
IRS with significantly greater certainty
than under current Treasury guidance and
the caselaw.
ii. Definite Intent Requirement
As a threshold requirement, proposed
§1.368-4(e)(1)(i) would require that, prior
to the first step of a plan of reorganization
or an original plan of reorganization that
becomes the amended plan of reorgani-
zation, one or more parties to the reorga-
nization must evidence a definite intent
to carry out the transaction. This definite
intent must be evidenced through a writ-
ten commitment in one or more official
records of the party that substantiate the
plan of reorganization. Under this pro-
posal, the existence of contingencies or
conditions would not be conclusive in
determining whether a party to the reorga-
nization satisfies this requirement.
The “definite intent” standard is
intended to provide sufficient transac-
tional flexibility to encourage bona fide
business transactions in a manner consis-
tent with long-standing caselaw. The ori-
gins of the “definite intent” standard can
be traced back to judicial opinions of the
Board of Tax Appeals (BTA), the prede-
cessor to the Tax Court. For example, in
Fry v. Commissioner, the BTA relied on
this standard for determining the existence
of a plan of reorganization from “what
appear[ed] on the minutes of the meeting
of the stockholders and the meeting of the
board of directors of the old bank,” which
had articulated the business objectives and
transaction steps for the reorganization. 5
T.C. at 1070; see also Redfield, 34 B.T.A. at
973 (noting that, although a formal written
plan of reorganization is not necessary, the
circumstances evidencing that a reorgani-
zation occurred need to indicate that the
various steps taken in pursuance thereof
were taken “pursuant to a definite plan of
reorganization”) (emphasis added); Sea-
gram, 104 T.C. at 97 (observing that the
DuPont/Conoco Agreement “definitively
states the terms for ‘the acquisition of
[Conoco] by [DuPont Tenderor and]’ sets
out ... the series of transactions which in
their totality were intended to accomplish
a section 368 reorganization”).
In contrast, courts have determined that
transactions subject to a lesser degree of
intent or predominated by uncertainty are
not properly included in a plan of reorga-
nization. For example, in National Bank
of Commerce in Memphis v. United States,
87 F. Supp. 302 (W.D. Tenn. 1949), the
court concluded that a transaction con-
templated prior to the plan of reorganiza-
tion was not properly included in that plan
because the transaction was uncertain and
indefinite as of the time of the first step

March 3, 2025 1004 Bulletin No. 2025–10
of the plan of reorganization. 87 F. Supp.
at 304. The court emphasized that “[a]n
element in a plan of reorganization that
cannot be legally enforced and, in addi-
tion is fraught with much uncertainty, is
indefinite and not necessary to the reorga-
nization, cannot be considered as one of
the steps resulting in the completed trans-
action.” Id. Accordingly, if the parties did
not anticipate or otherwise contemplate
a transaction prior to the adoption of
the plan of reorganization, that transac-
tion cannot be included in that plan. See
Atwood Grain & Supply Co. v. Comm’r,
60 T.C. 412, 423 (1973) (observing that
“[t]here [wa]s no evidence that issuance
of the preferred stock was contemplated
either in the merger negotiations or in the
merger agreement,” and reasoning that,
“[i]n order to include events occurring
after a merger in the plan of merger there
must be some anticipation of the event in
the merger”).
Stakeholders have noted that a “plan
of reorganization” concept that includes
every possibility considered by any tax-
payer in connection with a reorganization
would be overbroad and meaningless.
Indeed, a commenter relied upon by the
Tax Court for its analysis in Seagram
noted that “[t]he contemplated possibility
standard is too broad.... A more appro-
priate standard would be to link the later
transaction to the earlier one only if there
is a firm commitment to consummate it.”
Faber, The Use and Misuse of the Plan of
Reorganization Concept, 38 Tax L. Rev.
at 547. The Treasury Department and the
IRS agree that such a standard would not
be appropriate for the proposed regula-
tions. Accordingly, proposed §1.368-4(e)
(1)(iii)(A) would provide that mere con-
templation that a transaction may be car-
ried out would not be sufficient to satisfy
the “definite intent” requirement, regard-
less of whether that contemplated transac-
tion is included in an official record of the
party.
However, the Treasury Department
and the IRS recognize that the “contem-
plated possibility” standard is relevant for
certain plan of reorganization determina-
tions. Accordingly, proposed §1.368-4(e)
(1)(iii)(B) would provide that a party’s
mere contemplation of a transaction may
be relevant for purposes of the correction
or identification of a plan of reorganiza-
tion by the Commissioner. As previously
discussed in part III.C.2.b. of this Expla-
nation of Provisions, the Commissioner’s
determination under proposed §1.368-4(c)
(2)(ii) would be based on all facts and cir-
cumstances pertaining to the transaction
and the application of all relevant Code
provisions and Federal income tax prin-
ciples, including the step transaction doc-
trine.
Permitting the IRS to determine the
outer reaches of the scope of transactions
potentially includable in a plan of reorga-
nization through an analysis of all facts
and circumstances and Federal income tax
principles would be consistent with judi-
cial authorities that have applied a “con-
templated possibility” test. For example,
in Anheuser-Busch, Inc. v. Commissioner,
40 B.T.A. 1100 (1939), the BTA relied on
substance-over-form principles to deter-
mine the scope of transactions included in
a plan of reorganization, based on its deter-
mination that a first-step transfer to a par-
ent corporation was “transitory and with-
out real substance.” 40 B.T.A. at 1106. As
part of its analysis, the court observed that
the parent had “contemplated,” but was
not obligated to carry out, the immediate
transfer of the property received to its sub-
sidiary, and the court expanded the scope
of the plan of reorganization to include
that second-step transfer. Id. at 1106-07
(relying on the substance-over-form anal-
ysis of Helvering v. Bashford, 302 U.S.
454, 458 (1938)). Other judicial opinions
similarly have used the existence of a con-
templated possibility in this manner. See,
for example, Avco Mfg. Corp. v. Comm’r,
25 T.C. 975, 984-85 (1956) (noting that
a “subsequent transfer of the property ...
was a contemplated possibility under the
plan that actually eventuated” and was
properly included within the scope of the
plan of reorganization under the mutual
interdependence test); Transport Products
Corp. v. Comm’r, 25 T.C. 853, 857-58
(1956).
Once a definite intent is established,
the existence of contingencies and other
conditions that could affect prosecu-
tion of the plan of reorganization are not
treated as diminishing that level of intent.
See, for example, Seagram, 104 T.C. at
96 (“DuPont had an indisputable legal
obligation to complete the Merger with
Conoco, notwithstanding the possibility
of intervening legal impediments, or con-
tingencies, which in fact, never material-
ized”). Accordingly, proposed §1.368-4(e)
would provide that, for purposes of deter-
mining whether a party to a reorganization
satisfies the “definite intent” requirement,
the existence of contingencies or condi-
tions is not conclusive.
Section 355 transactions would be sub-
ject to a special definite intent requirement
under proposed §§1.355-4(d)(1)(ii) and
1.368-4(e)(1)(ii). Specifically, if a control
distribution occurs in a later taxable year
than the first distribution, the distributing
corporation would not be treated as estab-
lishing a definite intent unless all distri-
butions up to and including the control
distribution are effectuated pursuant to a
binding commitment. This proposed spe-
cial “definite intent” requirement would
reflect the Supreme Court’s decision in
Gordon. See also the discussion in part
I.D.2 of the Background.
iii. Proximate Relationship Requirement
(a) Overview
The proposed regulations would set
forth standards for determining whether a
transaction shares a sufficient relationship
with other transactions to which a defi-
nitional or operative provision applies.
To reflect the distinct purposes for, and
requirements of, the definitional provi-
sions and the operative provisions in sub-
chapter C, the proposed regulations would
set forth two different sets of proximate
relationship requirements.
(b) Necessary or integral test for
qualification under definitional provisions
Under proposed §1.368-4(e)(2)(i)(A),
a transaction would be treated as part of
the plan of reorganization for a reorgani-
zation to which a definitional provision
can apply only if, on its own or as part
of a series of transactions, the transaction
either (i) is necessary to satisfy one or
more requirements of the definitional pro-
vision, or (ii) is an integral part of a series
of transactions carried out to satisfy the
requirements of the definitional provision.
In practice, the “integral part” test gen-
erally would be relevant for transactions
that are not “necessary to satisfy” one or

Bulletin No. 2025–10 1005 March 3, 2025
more requirements of a definitional pro-
vision. The proposed regulations would
require satisfaction of either condition to
be evidenced by a written commitment in
one or more official records of the party to
the reorganization. See proposed §1.368-
4(e)(2)(i)(A).
The “necessary to satisfy” condition is
intended to convey, with more precision,
a requirement set forth in current §1.368-
2(g). Section 1.368-2(g) states, in part,
that “[t]he term plan of reorganization has
reference to a consummated transaction
specifically defined as a reorganization
under section 368(a).” In addition, cur-
rent §1.368-2(g) provides that “[t]he term
is not to be construed as broadening the
definition of ‘reorganization’ as set forth
in section 368(a).” The Treasury Depart-
ment and the IRS view the “necessary to
satisfy” condition as already clear (given
that the definitional provisions in section
368(a)(1) describe the steps necessary for
qualification) but have rearticulated this
standard to eliminate the circularity and
vagueness that courts and stakeholders
have identified in current §1.368-2(g).
See Int’l Telephone, 77 T.C. at 75 (noting
such vagueness); Seagram, 104 T.C. at 96
(highlighting the Tax Court’s observation
in Int’l Telephone).
The “integral part” condition also is
embedded in current §1.368-2(g), which
provides that the term “plan of reorganiza-
tion” is to be taken as limiting the nonrec-
ognition of gain or loss to “such exchanges
or distributions as are directly a part of the
transaction specifically described as a
reorganization in section 368(a)” (empha-
sis added). The Treasury Department and
the IRS view this “directly a part” stan-
dard as less stringent than the “necessary
to satisfy” standard but nonetheless view
it as mandating that a transaction must be
essential to qualifying a series of transac-
tions as a reorganization. Accordingly, the
proposed regulations would replace the
phrase “directly a part of the transaction”
with an “integral part” standard.
The proposed “integral part” stan-
dard is intended to reflect the structure of
section 368(a)(1) and the long-standing
position of the IRS and the courts. For
example, a distributing corporation that
retains controlled corporation stock may
qualify under section 355—and there-
fore ultimately may satisfy a condition in
section 368(a)(1)(D)—through multiple
types of dispositions of controlled corpo-
ration stock. In each instance, such dispo-
sition may be viewed as integral to sec-
tion 368(a)(1)(D) qualification. (See also
the requirements for qualifying retentions
previously discussed in part I.C of this
Explanation of Provisions.)
The foregoing principle is reflected in
Rev. Rul. 57-518, 1957-2 C.B. 253, which
addressed whether a transaction satisfied a
prior version of section 368(a)(1)(C) that
did not yet impose a liquidation require-
ment. In Rev. Rul. 57-518, a target corpo-
ration transferred 70 percent of its assets
to an acquiring corporation for acquiring
corporation voting stock. The target cor-
poration then disposed of all its remaining
assets in recognition transactions (that is,
not under the operative nonrecognition
provisions of subchapter C) and liqui-
dated. Although the liquidation was not
described in, or required by, that prior
version of section 368(a)(1)(C), the IRS
concluded that the liquidation was part of
the plan of reorganization. Like the dis-
position by a distributing corporation of
retained controlled corporation stock in a
transaction to which section 1001 applies,
the target corporation liquidation was not
necessary to achieve qualification under
section 368(a)(1), but it was an integral
part of a series of transactions carried out
to satisfy the requirements of that defini-
tional provision.
(c) But for, or integral to, test for
application of operative provision
Under proposed §1.368-4(e)(2)(i)(B),
a transaction would be treated as part of
the plan of reorganization to which an
operative provision can apply only if, on
its own or as part of a series of transac
-
tions, the transaction either (i) would not
have occurred but for the reorganization
that is covered by the plan of reorganiza-
tion, or (ii) is an integral part of a series
of transactions carried out to satisfy the
requirements of the definitional provision
intended to apply to the reorganization.
The proposed regulations would require
satisfaction of either condition to be evi-
denced by a written commitment in one
or more official records of the party to the
reorganization. Both of these conditions
are intended to replace the “directly a part
of” standard set forth in current §1.368-
2(g) with standards that are clearer and
more reflective of the purpose and require-
ments of the operative provisions in sub-
chapter C.
The proposed “but for” condition
is embedded within the “directly a part
of” requirement in current §1.368-2(g).
Among other objectives, this proposed
condition is intended to help clarify the
determination of whether an operative
provision applies to a distribution that
occurs within close temporal proximity
to one or more transactions that are prop-
erly included in a plan of reorganization.
For example, in determining whether
section 361(b) should apply to a distri-
bution by a distributing corporation to its
shareholders in close temporal proximity
to a divisive reorganization, the proposed
“but for” test would clarify that section
361(b) treatment would be applicable
only if that distribution would not have
occurred “but for” the divisive reorga-
nization. See the examples in proposed
§1.361-3(f)(2) through (5).
An “integral part” standard also would
increase taxpayer certainty as compared to
the current “directly a part of” standard,
particularly because courts historically
have applied an “integral part” standard.
For example, in Sheldon v. Commissioner,
6 T.C. 510 (1946), the Tax Court found that
a transaction was integral to a merger even
though the transaction was not necessary
for qualification for a definitional provi-
sion under section 368(a)(1). In Sheldon,
the Tax Court considered whether a pre-
merger distribution should be included in
the plan of reorganization for the merger.
6 T.C. at 517-18. The court emphasized
that the pre-merger distribution was made
to equalize values of the target corporation
and the acquiring corporation so that the
merger could be one of equals, thereby
satisfying a condition for executing the
merger. Id. In its analysis, the court pro-
vided that “[t]he purpose of this distribu-
tion, its place in the sequence of events,
and the surrounding circumstances, lead
to but one conclusion. They all demon-
strate that it was an integral part of the
reorganization transaction as a whole and
must be treated in connection with it.” Id.
at 517. See also Int’l Telephone, 77 T.C.
at 76 (noting the absence of “a binding
agreement or other factors indicating that

March 3, 2025 1006 Bulletin No. 2025–10
conversion [of debentures] was an integral
part of the plans of reorganization”).
Additionally, the Treasury Depart-
ment and the IRS are of the view that
replacing the “directly a part of” standard
in current §1.368-2(g) with the standards
in proposed §1.368-4(e)(2)(i)(B) would
improve taxpayer certainty in determin-
ing the applicability of an operative pro-
vision of subchapter C. Proposed §1.368-
4(e) would provide additional certainty
by requiring the “but for” standard to
be applied in tandem with the “definite
intent” requirement set forth in proposed
§1.368-4(e)(1). In other words, a transac-
tion would not be properly included in a
plan of reorganization if the party to the
reorganization failed to evidence a defi-
nite intent to carry out that transaction,
regardless of whether the transaction
would not have occurred “but for” the
reorganization.
This implementation of the “but for”
standard would be consistent with judi-
cial authorities, including those cited
by stakeholders. For example, in Inter-
national Telephone, the Tax Court con-
sidered exchanges involving debentures
that could not have occurred but for the
execution of a reorganization that qual-
ified under section 368(a)(1)(C). 77 T.C.
at 72-78. Although the court observed the
existence of that “but for” relationship,
the court reasoned that “[t]he fact that [the
acquiring corporation] assumed the con-
version obligation as part of the plans of
reorganization does not mean ... that the
subsequent conversions and retirement of
the debentures were also part of the reor-
ganizations.” Id. at 76. Based on the lack
of indicia indicating satisfaction of the
proposed “direct intent” requirement, the
Tax Court concluded that such exchanges
were not properly included in the plan of
reorganization. See id. at 76-77 (noting
the lack of any binding agreement, any
other type of obligation, or other facts that
would indicate satisfaction of the “direct
intent” requirement). See also Becher
v. Comm’r, 22 T.C. 932 (1954) (treating
a distribution as not part of the plan of
reorganization under the predecessor to
section 368(a)(1)(D), and therefore not
“boot,” based on an examination of the
facts and circumstances of the distribution
and the transactions comprising the reor-
ganization).
(d) Independent legal significance;
temporal proximity
Proposed §1.368-4(e)(2)(ii) would
confirm that the independent signifi-
cance of a transaction (for example, the
fact that the transaction has a separate
business motive apart from the reorga-
nization) does not preclude satisfaction
of the proximate relationship require-
ments in proposed §1.368-4(e)(2)(i)(A)
and (B). The Treasury Department and
the IRS view this approach as consistent
with established caselaw (see Seagram,
104 T.C. at 91-93) and reflective of the
realities of bona fide business transac-
tions. It has long been the understanding
of the Treasury Department and the IRS
that a transaction could be included in
the plan of reorganization even though it
may have separate business motives, or
separate and permanent legal, economic,
and business consequences, apart from
the reorganization.
Additionally, proposed §1.368-4(e)
(2)(iii) would provide that a transaction
occurring in close temporal proximity
to one or more other transactions is not
properly included in a plan of reorganiza-
tion unless Federal income tax principles
(including the step transaction doctrine)
would apply to determine that the transac-
tion was, in substance, part of the plan of
reorganization.
iv. Business Purpose Consistency
Requirement
Lastly, in order for a transaction to be
treated as properly included in a plan of
reorganization, proposed §1.368-4(e)(3)
would require the transaction (on its own,
or as part of a series of transactions) to be
consistent with, and directly related to,
one or more corporate business purposes
for the reorganization (for example, the
transaction directly furthers one or more
corporate business purposes for the reor
-
ganization).
The Treasury Department and the IRS
view the proposed corporate business pur-
pose consistency requirement as reflective
of established caselaw. See Seagram, 104
T.C. at 83, 97 (noting that the tender offer
and the merger shared the same corporate
business purpose of enabling DuPont to
acquire all the stock of Conoco). In addi-
tion, the Treasury Department and the IRS
view this proposed rule as conceptually
grounded in current §1.368-2(g), which
provides that “the readjustments involved
in the exchanges or distributions effected
in the consummation [of the reorganiza-
tion] must be undertaken for reasons ger-
mane to the continuance of the business
of a corporation a party to the reorgani-
zation.”
f. Amended plan of reorganization
The Treasury Department and the IRS
recognize that, in certain circumstances,
taxpayers may need to amend their plans
of reorganization. Accordingly, proposed
§1.368-4(f)(1) would provide that, if a
taxpayer amends a plan of reorganiza-
tion after the first step of the original plan
(amended plan of reorganization), those
amendments do not cause the taxpayer
to fail to satisfy the “plan of reorganiza-
tion” requirements set forth in proposed
§1.368-4(d) only if the following require-
ments are satisfied. First, the amendments
to the plan must be in direct response to
an identifiable, unexpected, and material
change in market or business conditions
that occurs after the date on which the
original plan of reorganization is adopted
by the party to the reorganization. Sec-
ond, the amendments must be necessary
to effectuate the reorganization. Third, the
amended plan of reorganization must sat-
isfy all requirements set forth in proposed
§1.368-4(d) to qualify as a plan of reorga-
nization.
If the taxpayer satisfies the require-
ments in proposed §1.368-4(f)(1), pro-
posed §1.368-4(f)(2)(i) would provide
that the definitional and operative pro-
visions described in proposed §1.368-
1(c)(2)(i) and (ii) would apply to the
transactions identified in, and carried
out pursuant to, the amended plan of
reorganization. In other words, the pro-
posed regulations would confirm that
the Federal income tax consequences of
all transactions properly included in the
amended plan of reorganization would
be determined based on that plan of reor-
ganization (and not on the original plan
of reorganization). However, proposed
§1.368-4(f)(2)(ii) would provide that, if
the amended plan of reorganization fails
to satisfy the requirements in proposed

Bulletin No. 2025–10 1007 March 3, 2025
§1.368-4(f)(1), the Commissioner may
correct or identify the amended plan of
reorganization.
3. Proposed Rules Regarding Party to a
Reorganization
In addition to providing rules regarding
the determination, adoption, and prosecu-
tion of a plan of reorganization, the pro-
posed regulations would revise current
§1.368-2(f) to further clarify (i) which
persons are parties to a reorganization,
and (ii) the consequences of determining
that a person is (or is not) a party to a reor-
ganization.
Proposed §1.368-2(f)(1) generally
would provide that the definitional and
operative provisions described in §1.368-
1(c)(2)(i) and (ii), respectively, apply
solely to a transaction that is carried out
by, between, or among one or more par-
ties to a reorganization. For purposes of
determining the scope of transactions to
which those provisions apply, the term
“party to a reorganization” would be
limited under proposed §1.368-2(f)(2)
through (4) solely to a corporation that
(i) engages in a transaction or series of
transactions that satisfies a definitional
provision set forth in section 368(a)(1),
and (ii) is determined to be a party to a
reorganization, as further described in
the following paragraph.
In general, proposed §1.368-2(f)(4)(i)
would provide that a corporation’s status
as a party to a reorganization is estab-
lished solely by the inclusion and iden-
tification of the corporation as a party to
the reorganization in a plan of reorgani-
zation filed with the IRS pursuant to pro-
posed §1.368-3(a)(5). However, proposed
§1.368-2(f)(4)(ii) would provide that the
corporation’s status as a party to a reor-
ganization may be determined by the
Commissioner based on (i) all facts and
circumstances regarding the transaction or
series of transactions, and (ii) all relevant
provisions of the Code and general princi-
ples of tax law, including the step transac-
tion doctrine.
Proposed §1.368-2(f)(3)(ii) would
retain the rules in current §1.368-2(f)
regarding the impact of certain transfers
of assets or stock in a reorganization on
a person’s status as a party to the reorga-
nization.
IV. Application of Substance-Over-Form,
Agency, and Other Relevant Theories
to Intermediated Exchanges and Direct
Issuance Transactions
A. Notice 2024-38
In section 2.02(5) of Notice 2024-38,
the Treasury Department and the IRS
announced that they are continuing to
study the application of the Code, as well
as general principles of Federal income
tax law (including substance-over-form,
agency, or other relevant theories), to
monetization transactions involving sec-
tion 361 consideration. In particular, this
study continues to focus on intermediated
exchanges, which occur through (i) the
acquisition by an intermediary (such as an
investment bank) of historical distributing
corporation debt from holders of that debt,
and (ii) the subsequent satisfaction of that
debt by the distributing corporation using
section 361 consideration.
As capital market transactions have
evolved, this study also has focused
increasingly on direct issuance transac-
tions, which typically occur through: (i)
the issuance of new debt by a distributing
corporation to an intermediary for cash in
anticipation of a divisive reorganization;
(ii) the use of that cash by the distributing
corporation to satisfy historical distribut-
ing corporation debt, during a potentially
indefinite period; and (iii) the satisfaction
of that new debt by the distributing corpo-
ration through the transfer of section 361
consideration to the intermediary.
This study reflects the long-stand-
ing position of the Treasury Department
and the IRS that general principles of
Federal income tax law (including sub-
stance-over-form, agency, or other rel-
evant theories) apply to determine the
Federal income tax consequences of all
transactions, including such monetization
transactions. See United States v. Frue-
hauf Corp., 577 F.2d 1038, 1068 (6th Cir.
1978) (“The incidence of federal taxation
has always depended upon the substance
of transactions ...”). Indeed, this position
is consistent with nearly a century of
Supreme Court precedent beginning with
the Court’s decision in Gregory v. Helver-
ing, which established that the application
of the Code to a transaction (or series of
transactions) turns on the substance of the
transaction. See Gregory, 293 U.S. at 467-
70 (concluding that the “reorganization
attempted was without substance and must
be disregarded [and] [t]o hold otherwise
would be to exalt artifice above reality and
to deprive the statutory provision in ques-
tion of all serious purpose”); United States
v. Iles, 906 F.2d 1122, 1127 (6th Cir. 1990)
(“The Supreme Court has recognized, at
least as far back as Gregory v. Helvering
... that substance over form governs fed-
eral taxation.”) (citations omitted).
The application of substance-over-form
and similar doctrines can affect qualifica-
tion for nonrecognition treatment under
section 361. Notice 2024-38 conveyed
the long-standing view of the Treasury
Department and the IRS that the appli-
cation of agency principles to an inter-
mediated exchange involving so-called
“old and cold” distributing corporation
debt could cause that transaction to be
recharacterized for Federal income tax
purposes such that the distributing corpo-
ration would not be treated as transferring
section 361 consideration to a creditor in
satisfaction of distributing corporation
debt. In other words, if the intermediary
were found to be acting on behalf of the
distributing corporation under agency
principles, transfers of section 361 consid-
eration to the intermediary would not sat-
isfy the requirements for nonrecognition
under section 361. With respect to a direct
issuance transaction in which the distrib-
uting corporation issues and redeems the
new debt in close temporal proximity,
the Treasury Department and the IRS are
of the view that the transaction could be
recast under general principles of Federal
income tax law such that the nonrecogni-
tion requirements under section 361 are
not satisfied.
B. Stakeholder input
1. Intermediated Exchanges
Stakeholders have contended that inter-
mediated exchanges should not be sub-
ject to recharacterization, provided that
the distributing corporation establishes
the intermediary’s status as a creditor
acting for its own account under agency
principles. Stakeholders have stated that
this approach would be consistent with
Rev. Rul. 2017-9, 2017-21 I.R.B. 1244,

March 3, 2025 1008 Bulletin No. 2025–10
because intermediated exchanges (i) do
not conflict with the underlying policy
of section 361(c)(3), (ii) do not avoid the
result intended by section 361(c)(3) (that
is, the reallocation of historical distrib-
uting corporation liabilities to the con-
trolled corporation), and (iii) do not pro-
duce results that are inconsistent with the
underlying intent of section 361(c)(3). In
other words, stakeholders have suggested
that, in determining whether an intermedi-
ated exchange should be recharacterized,
the relevant question is whether the dis-
tributing corporation debt acquired by the
intermediary was issued with a purpose
of avoiding any requirement or limitation
under section 361.
In this regard, one stakeholder has
requested guidance providing that steps
of an intermediated exchange will not be
recast under Federal income tax princi-
ples if (i) the intermediary acts on its own
account in acquiring distributing corpo-
ration debt from third parties (that is, the
intermediary becomes the owner of such
debt for Federal income tax purposes and
the acquisition is not funded or guaran-
teed by the distributing corporation), (ii)
the intermediary assumes the risk that the
distributing corporation may default on its
debt while such debt is held by the inter-
mediary, and (iii) the distributing corpora-
tion debt acquired by the intermediary was
not issued with a purpose of avoiding the
requirements or limitations of section 361.
Another stakeholder has recommended
that the Treasury Department and the IRS
refrain from issuing substantive guidance
given the fact-intensive nature of determin-
ing whether an intermediated exchange
should be recast. The stakeholder has rec-
ommended that the IRS continue to issue
private letter rulings on a case-by-case
basis to taxpayers that are able to estab-
lish an intermediary’s status as a creditor
acting for its own account by reference to
the factors specified in a series of techni-
cal advice memoranda previously issued
by the IRS. See T.A.M. 8815003 (Dec. 11,
1987); T.A.M. 8738003 (May 22, 1987);
T.A.M. 8735007 (May 18, 1987); T.A.M.
8735006 (May 18, 1987).
2. Direct Issuances
Stakeholders have provided various
recommendations to the Treasury Depart-
ment and the IRS regarding the treatment
of direct issuance transactions. Stakehold-
ers uniformly have contended that the pro-
posed regulations should recast or rechar-
acterize a direct issuance transaction only
if the transaction presents an abuse within
the meaning of section 361(b)(3). In
addition, stakeholders consistently have
contended that the policy of section 361
confirms that direct issuance transactions
satisfy the requirements for nonrecogni-
tion treatment under section 361. Although
one stakeholder has acknowledged that, in
some circumstances, the Treasury Depart-
ment and the IRS may have a legitimate
concern that a direct issuance transaction
should be treated as a sale of controlled
corporation stock to the intermediary, the
stakeholder has noted that delineating the
exact bounds of an abusive transaction as
it relates to section 361(b)(3) and (c)(3)
would be difficult. Accordingly, stake-
holders generally have recommended
that the Treasury Department and the IRS
continue to address the section 361 qual-
ification of direct issuance transactions
through the IRS’s private letter ruling pro-
gram rather than through Treasury regu-
lations.
Alternatively, stakeholders have rec-
ommended that the proposed regulations
set forth specific safe harbors for direct
issuance transactions that, after ade-
quately taking into account commercial
considerations (which one stakeholder has
referred to as “commercially grounded
carveouts”), clearly would not present
evidence of abuse. One stakeholder has
recommended that a direct issuance trans-
action be respected as a borrowing if: (i)
the newly issued debt qualifies as debt for
Federal income tax purposes; (ii) the new
debt issuance and the exchange agree-
ment with the intermediary (regarding
satisfaction of the newly issued debt with
controlled corporation stock or securities)
are pursuant to two legally separate agree-
ments; (iii) the distributing corporation is
not under economic compulsion to satisfy
the newly issued debt with controlled cor-
poration stock or securities at the time of
issuance because the distributing corpora-
tion has sufficient other resources to repay
the debt; (iv) the newly issued debt is sat-
isfied with controlled corporation stock or
securities having a fair market value equal
to the principal amount and unpaid inter-
est on the debt; and (v) the distributing
corporation retains tax ownership of the
controlled corporation stock or securities
until the time of repayment.
Another stakeholder has suggested
additional factors to be considered,
including (i) the number of days the
newly issued debt is outstanding before
the exchange of that debt for controlled
corporation stock or securities, and (ii)
whether the intermediary participating in
the direct issuance transaction is a mem-
ber of a syndicate of lenders that has his-
torically provided debt financing to the
distributing corporation. Additionally, a
stakeholder has recommended (i) limiting
permissible direct issuance transactions
to situations in which the proceeds of the
new debt are used to retire historical debt,
and (ii) including a general anti-avoidance
rule based on the distributing corpora-
tion’s business purpose for entering into
the direct issuance transaction.
C. Proposed regulations
1. Overview
The Treasury Department and the IRS
continue to be of the view that, under
certain circumstances, intermediated
exchanges and direct issuance transac-
tions can be recast or otherwise recharac-
terized under Federal income tax princi-
ples. Certain stakeholders have described
the aforementioned concerns of the Trea-
sury Department and the IRS with respect
to such transactions as new or as deriving
primarily from direct issuance transac-
tions or refinancing transactions.
However, these concerns are neither
new nor unique. As confirmed almost
a century ago by the Supreme Court in
Gregory v. Helvering, the application of
substance over form and other general
Federal income tax principles is insep-
arable from the application of the Code
itself. See also Newman v. Comm’r, 894
F.2d 560, 562 (2d Cir. 1990) (empha-
sizing that, “in reviewing a transaction
for tax consequences, the substance of
the agreement takes precedence over its
form”). Accordingly, one objective of
these proposed regulations is to clarify
that general Federal income tax princi-
ples apply with regard to the application
of section 361 just as such principles

Bulletin No. 2025–10 1009 March 3, 2025
would apply with regard to the applica-
tion of other Code provisions.
With regard to the application of sec-
tion 361 to intermediated exchanges, the
Treasury Department and the IRS note
that concerns regarding agency and sub-
stance over form date back decades to a
series of technical advice memoranda that
considered the application of a prior ver-
sion of section 108 of the Code to concep-
tually similar intermediated exchanges of
stock and securities. See T.A.M. 8815003
(Dec. 11, 1987); T.A.M. 8738003 (May
22, 1987); T.A.M. 8735007 (May 18,
1987); T.A.M. 8735006 (May 18, 1987).
The so-called “5/14 standard” in corpo-
rate private letter rulings developed out
of concerns similar to those discussed in
those memoranda. (Under this standard,
rulings generally would be issued by the
IRS if: (i) the intermediary purchased
distributing corporation debt; (ii) after
at least five days, the intermediary and
the distributing corporation entered into
an agreement to exchange the purchased
distributing corporation debt for section
361 consideration; and (iii) the exchange
occurred at least 14 days after the inter-
mediary purchased the distributing cor-
poration debt.)
With regard to the application of sec-
tion 361 to direct issuance transactions,
the Treasury Department and the IRS
have expressed similar concerns for more
than a decade. In particular, the Treasury
Department and the IRS ceased consid-
ering certain private letter ruling requests
under section 361 in part due to this type
of section 361 monetization transaction.
See section 5.01(10) of Rev. Proc. 2013-3,
2013-1 I.R.B. 113. As explained by Trea-
sury Department and IRS officials at that
time, these transactions raised issues con-
cerning the application of general princi-
ples of Federal income tax, including the
substance-over-form doctrine. Stakehold-
ers also raised similar issues at that time.
In addition, certain stakeholders have
mischaracterized the concerns of the Trea-
sury Department and the IRS as focused
principally on (i) whether the new debt
should be respected as a debt instru-
ment for Federal income tax purposes, or
(ii) temporal proximity. With regard to the
former point, certain stakeholders have
provided feedback on Notice 2024-38
emphasizing debt-equity factors or have
noted that, outside of Federal income tax
(for example, under securities law), new
debt issued by a distributing corporation
in a direct issuance transaction would be
treated as debt.
However, as previously discussed in
this part IV.C.1, the Treasury Department
and the IRS are concerned with the appli-
cation of the Code and Federal income tax
principles—not commercial law or other
non-Federal income tax law—to inter-
mediated exchanges and direct issuance
transactions. In particular, as expressed in
Notice 2024-38, the concern is not simply
the status of the newly issued distribut-
ing corporation debt as debt for Federal
income tax purposes, but also that the
form of those debt-elimination transac-
tions should be respected and not rechar-
acterized under Federal income tax prin-
ciples.
With regard to the latter point, the Trea-
sury Department and the IRS replaced the
5/14 standard for private letter rulings in
Rev. Proc. 2018-53 with a standard based
on a facts-and-circumstances analysis.
This change was made due to concerns
that the 5/14 standard provided a tempo-
ral requirement that was indifferent to the
particular facts and circumstances of the
transaction, including the intermediary’s
relationship with the distributing corpo-
ration. As a consequence, the Treasury
Department and the IRS observed that the
5/14 standard created confusion for tax-
payers as to whether temporal proximity
is the sole consideration with regard to
the application of agency or substance-
over-form principles to intermediated
exchanges and direct issuance transac-
tions.
The Treasury Department and the IRS
also continue to be of the view that Rev.
Rul. 2017-9 and other revenue rulings
mentioned by stakeholders in their sub-
mitted feedback do not (and cannot) set
forth broadly applicable principles that
would dictate the positions set forth in
these proposed regulations. One reason
is that there are long-established limita-
tions on the precedential value of revenue
rulings. Specifically, “[r]evenue rulings
published in the [Internal Revenue] Bul-
letin do not have the force and effect of
Treasury Department regulations (includ-
ing Treasury Decisions), but are published
to provide precedents to be used in the
disposition of other cases, and may be
cited and relied upon for that purpose.”
Section 601.601(d)(2)(v)(d) of the State-
ment of Procedural Rules (codifying sec-
tion 7.01(4) of Rev. Proc. 89-14, 1989-8
I.R.B. 20). In addition, “[e]ach revenue
ruling represents the conclusion of the
Service as to the application of the law to
the entire statement of facts involved,” as
opposed to an application outside of that
entire statement of relevant facts. Sec-
tion 601.601(d)(2)(v)(d) (codifying sec-
tion 7.01(6) of Rev. Proc. 89-14). Based
on these limitations, “taxpayers, Service
personnel, and others concerned are cau-
tioned against reaching the same conclu-
sion in other cases unless the facts and
circumstances are substantially the same.”
Section 601.601(d)(2)(v)(e).
Another reason is that, in almost all
instances, the facts and circumstances set
forth in the revenue rulings mentioned
by stakeholders are not substantially the
same as the transaction facts considered
by the Treasury Department and the IRS
in developing these proposed regulations.
See Rev. Rul. 2017-9 (providing that “[t]
his revenue ruling provides guidance
regarding the federal tax treatment of
certain transactions referred to as ‘north-
south’ transactions,” rather than inter-
mediated exchanges or direct issuance
transactions); Rev. Rul. 59-197, 1959-1
C.B. 77 (considering the potential effect
of a “cash sale to the key employee” of
the distributing corporation on section
355 qualification, rather than an inter-
mediated exchange or a direct issuance
transaction). Accordingly, those revenue
rulings address entirely different provi-
sions of the Code. See Rev. Rul. 2017-9
(addressing the application of, and
qualification under, sections 301, 351,
355, and 361(b)(1) and (2) (not section
361(b)(3) and (c)(3)); Rev. Rul. 59-197
(addressing the application of the device
and continuity of interest requirements
under section 355, not section 361(b)(3)
and (c)(3)).
However, the Treasury Department and
the IRS are of the view that the facts and
analysis set forth in Rev. Rul. 79-258 are
relevant for purposes of developing pro-
posed regulations under section 357(b).
Accordingly, based on a de novo consid-
eration of the analysis set forth in that rev-
enue ruling, proposed §1.357-3(d)(4)(ii)

March 3, 2025 1010 Bulletin No. 2025–10
(B) would incorporate that analysis into
proposed rules regarding the assumption
by a controlled corporation of distributing
corporation debt issued in close proximity
to a divisive reorganization. See the dis-
cussion in part VIII.C.3.b of this Expla-
nation of Provisions. For the reasons dis-
cussed in this part IV.C.1, the Treasury
Department and the IRS do not view it as
appropriate for these proposed regulations
to extend the analysis of Rev. Rul. 79-258
to proposed rules addressing the applica-
tion of section 361.
2. General Approach of Proposed
Regulations
The Treasury Department and the IRS
appreciate the feedback received from
stakeholders on intermediated exchanges
and direct issuance transactions. As
emphasized in Notice 2024-38, and con-
sistent with other aspects of these pro-
posed regulations, the proposed rules
addressing these topics are intended (i) to
be consistent with all relevant provisions
of the Code (that is, the compliance objec-
tive); (ii) to provide certainty to taxpay-
ers and the IRS regarding the application
of all relevant provisions of the Code to
purported section 355 transactions (that is,
the increased certainty objective); and (iii)
to be responsive to the manner in which
section 355 transactions are engaged in by
taxpayers and reflect current market prac-
tices and preferences (that is, the transac-
tion facilitation objective), to the extent
that doing so does not conflict with the
compliance and increased certainty objec-
tives.
With regard to the increased certainty
objective, the Treasury Department and
the IRS have leveraged the expertise of
IRS audit and examination personnel to
develop proposed rules that, to the extent
practicable, employ bright-line safe har-
bors, objectively verifiable conditions for
qualification, and other similar architec-
ture that can be readily reflected on Form
7216. These rules reflect the express del-
egation of authority to the Secretary to
prevent avoidance of tax through abuse of
section 361(b)(3) or (c)(3). The Treasury
Department and the IRS have endeavored
to balance this increased certainty objec-
tive with the transaction facilitation objec-
tive.
3. Specific Aspects of Proposed
Regulations
a. General requirements for deemed
distribution treatment
Proposed §1.361-5 would implement
section 361(b)(3) and (c)(3) by setting
forth requirements that, if satisfied, would
cause a transfer of section 361 consider-
ation by the distributing corporation to its
creditor to be treated as a distribution by
the distributing corporation to its share-
holders pursuant to the plan of reorgani-
zation. First, the creditor of the distrib-
uting corporation must be a qualifying
creditor, as determined under proposed
§1.361-5(b). Second, the distributing cor-
poration debt that is satisfied with section
361 consideration must constitute eligible
distributing corporation debt, as deter-
mined under proposed §1.361-5(c)(2).
Third, the amount of distributing corpora-
tion debt that can be eliminated under the
safe harbors of section 361(b)(3) and (c)
(3) cannot exceed a maximum amount, as
determined under proposed §1.361-5(d).
Lastly, the transfer by the distributing cor-
poration of section 361 consideration in
exchange for eligibledistributing corpora-
tion debt must be carried out as part of a
qualifying debt elimination transaction, as
determined under proposed §1.361-5(e).
Notwithstanding the satisfaction of the
foregoing requirements, proposed §1.361-
5(f)(1)(i) would provide that the amount of
section 361 consideration treated as trans-
ferred by the distributing corporation to a
creditor of the distributing corporation in
a qualifying debt elimination transaction
is reduced by the amount of distributing
corporation debt that is transitorily elimi-
nated. See the discussion in part VII.C of
this Explanation of Provisions regarding
transitorily eliminated distributing corpo-
ration debt.
b. Qualifying creditors
Proposed §1.361-5(b)(1) would require
each creditor to which the distributing
corporation transfers section 361 consid-
eration in a divisive reorganization to be
a creditor that holds eligible distributing
corporation debt (as described in proposed
§1.361-5(c)). Additionally, proposed
§1.361-5(b)(1) and (b)(2)(i) generally
would prohibit the distributing corpora-
tion from satisfying eligible distributing
corporation debt held by a person related
(within the meaning of section 267(b) or
section 707(b)(1)) (see proposed §1.361-
1(b)(47)) to the distributing corporation
(distributing corporation related person),
the controlled corporation (controlled
corporation related person), or a related
person with regard to a distributing cor-
poration related person or a controlled
corporation related person (collectively,
non-qualifying creditors). Creditors that
hold eligible distributing corporation debt,
and that are not otherwise disqualified as
non-qualifying creditors under proposed
§1.361-5(b)(2), are referred to as “quali-
fying creditors.”
Proposed §1.361-5(b)(2)(ii) would
provide an exception to the general
related-creditor prohibition in proposed
§1.361-5(b)(2)(i) for a creditor that is a
distributing corporation related person or a
related person with regard to a distributing
corporation related person if three require-
ments are satisfied. First, as part of the
plan of reorganization, proposed §1.361-
5(b)(2)(ii)(A) would provide that the sec-
tion 361 consideration must be transferred
to a creditor that is neither a distributing
corporation related person nor a related
person with regard to a distributing corpo-
ration related person (unrelated ultimate
creditor). Specifically, if the section 361
consideration is money or other property,
proposed §1.361-5(b)(2)(ii)(A)(1) would
provide that it must be transferred to an
unrelated ultimate creditor pursuant to the
plan of reorganization no later than the end
of the 12-month period beginning on the
date the distributing corporation receives
the money or other property (as appropri-
ate). If the section 361 consideration is
qualified property (as defined in proposed
§1.361-1(b)(43)), proposed §1.361-5(b)
(2)(ii)(A)(2) would provide that it must be
transferred to an unrelated ultimate credi-
tor in an expeditious manner pursuant to
the plan of reorganization under proposed
§1.368-4(d)(3). Second, proposed §1.361-
5(b)(2)(ii)(B)(1) would provide a general
provision that all debt for which section
361 consideration is exchanged must be in
existence as of the earliest applicable date.
Proposed §1.361-5(b)(2)(ii)(B)(2) would
provide that distributing corporation debt
held directly by a distributing corporation

Bulletin No. 2025–10 1011 March 3, 2025
related person or a related person with
regard to a distributing corporation related
person must qualify as historical distrib-
uting corporation debt described in pro-
posed §1.361-5(c)(2)(i). Third, proposed
§1.361-5(b)(2)(ii)(C) would provide that
each transaction (including each inter-
mediate and unrelated ultimate creditor
transfer), creditor (including the unrelated
ultimate creditor), and debt satisfied with
section 361 consideration must be identi-
fied and described in the plan of reorgani-
zation with regard to the divisive reorga-
nization.
For purposes of the requirements in
proposed §1.361-5(b)(2)(ii)(A), proposed
§1.361-5(b)(2)(ii)(A)(3) would permit
one or more intermediate transfers of sec-
tion 361 consideration between or among
distributing corporation related persons or
related persons with regard to distribut-
ing corporation related persons to satisfy
debts (including the initial distributing
corporation debt) if those intermediate
transfers culminate in a transfer of section
361 consideration to an unrelated ultimate
creditor. Under proposed §1.361-5(b)(2)
(iii), a person’s status as a distributing
corporation related person or a controlled
related person, or as a related person
with regard to any distributing corpora-
tion related person or as a related person
with respect to any controlled corpora-
tion related person, would be determined
at the time of that person’s receipt of the
section 361 consideration in exchange for
the satisfaction and retirement of debt in a
transfer or series of transfers described in
proposed §1.361-5(b)(2)(ii)(A).
c. Eligible distributing corporation debt
i. In General
Proposed §1.361-5(c)(1) would pro-
vide that distributing corporation debt is
not eligible to be satisfied with section 361
consideration under proposed §1.361-5(a)
unless that debt qualifies as eligible dis-
tributing corporation debt.
(a) Historical distributing corporation
debt
In general, proposed §1.361-5(c)(2)
(i) would provide that distributing cor-
poration debt that qualifies as historical
distributing corporation debt is eligible
to be satisfied with section 361 consider-
ation. In general, distributing corporation
debt qualifies as historical distributing
corporation debt if that debt was incurred
before the “earliest applicable date,” and
that debt has an original term that ends
after the date of the exchange described
in §1.361-2(a) or 1.361-3(a) and is iden-
tified in the plan of reorganization or orig-
inal plan of reorganization (if amended).
The “earliest applicable date” is defined
in proposed §1.361-1(b)(27) as the earli-
est date of three specified events: (i) the
date of the first public announcement (as
defined in §1.355-7(h)(10)) of the divisive
reorganization or a similar transaction;
(ii) the date the distributing corporation
entered into a written agreement to effec-
tuate the divisive reorganization or a sim-
ilar transaction; and (iii) the date the dis-
tributing corporation’s board of directors
approved the divisive reorganization or a
similar transaction.
However, the Treasury Department and
the IRS are of the view that a debt refi-
nancing exception would be appropriate
to help achieve the transaction facilitation
objective. Specifically, proposed §1.361-
5(c)(2)(ii) would provide that distributing
corporation debt incurred by the distribut-
ing corporation after the earliest applica-
ble date is treated as historical distribut-
ing corporation debt only if the following
four requirements are met. First, proposed
§1.361-5(c)(2)(ii)(A) would provide that
the distributing corporation debt must be
(i) a refinancing of historical distributing
corporation debt, or (ii) a refinancing of
refinanced historical distributing corpora-
tion debt (that is, the debt must be traced
directly through one or more refinancings
to debt that qualifies as historical distrib-
uting corporation debt). Second, proposed
§1.361-5(c)(2)(ii)(B) would provide that
the refinanced historical distributing cor-
poration debt must not have been incurred
as part of a plan to incur debt in addition
to historical distributing corporation debt
determined under proposed §1.361-5(c)
(2)(i) (or an amount of debt in addition
to the amount of historical distributing
corporation debt determined under para-
graph (d) of that section, without regard
to proposed §1.361-5(d)(2)(iv)) in antici-
pation of the divisive reorganization (for
example, the incurrence of the refinanced
historical distributing corporation debt
would have occurred without regard to the
divisive reorganization). Third, proposed
§1.361-5(c)(2)(ii)(C) would provide that
the distributing corporation must engage
in a qualifying debt elimination transac-
tion solely under proposed §1.361-5(e)
(3) or (4) to eliminate that refinanced
historical distributing corporation debt.
Fourth, proposed §1.361-5(c)(2)(ii)(D)
would provide that the qualifying debt
elimination transaction must be described
and identified in the plan of reorganiza-
tion or original plan of reorganization (if
amended) for the divisive reorganization.
Proposed §1.361-5(c)(2)(iii) would
provide that a revolving credit agreement
to which the distributing corporation is a
debtor qualifies as historical distributing
corporation debt only if the following
requirements are met. First, the distrib-
uting corporation must have entered into
the agreement before the earliest applica-
ble date. Second, the agreement does not
expire until after the date of the exchange
described in proposed §1.361-2(a) or
1.361-3(a). Third, the agreement is iden-
tified in the plan of reorganization or orig-
inal plan of reorganization (if amended).
The Treasury Department and the IRS
request comments regarding whether
there are other arrangements similar to
revolving credit agreements that, based
on the same rationale employed by these
proposed regulations, should be treated
similarly.
(b) Qualifying trade payables
Proposed §1.361-5(c)(2)(iv) would
provide that qualifying trade payables
are eligible to be satisfied with section
361 consideration. For purposes of that
qualification, the following requirements
must be met. First, the trade payables
must be described in a plan of reorgani-
zation or original plan of reorganization
(if amended). Second, the trade payables
must have been incurred in the ordinary
course of business of the distributing cor-
poration. Third, the satisfaction of such
trade payables is necessary (A) to ensure
the allocation to the controlled corpora-
tion of all liabilities properly associated
with the business assets transferred to that
corporation and (B) to result in the con-
trolled corporation being allocated liabil-

March 3, 2025 1012 Bulletin No. 2025–10
ities in an amount that properly relates
to its business operations, the earnings
of which will be used to properly satisfy
those liabilities.
(c) Direct issuance debt
These proposed regulations would
also provide that direct issuance debt is
eligible to be satisfied with section 361
consideration. Specifically, proposed
§1.361-5(c)(2)(v) would provide that
direct issuance debt incurred as part of a
direct issuance transaction (as defined in
proposed §1.361-1(b)(17)) satisfying the
requirements of proposed §1.361-5(e)(4)
is eligible to be satisfied with section 361
consideration. See the discussion in part
IV.C.3.d.iv regarding qualifying direct
issuance transactions.
ii. Amount of Distributing Corporation
Debt Repaid
Under proposed §1.361-5(d)(1), the
maximum amount of distributing corpo-
ration debt that can be satisfied with sec-
tion 361 consideration under proposed
§1.361-5(a) would equal the amount
obtained by subtracting the aggregate
amount of distributing corporation debt
that the controlled corporation assumes
(in accordance with proposed §§1.357-2
through 1.357-4) pursuant to the plan of
reorganization from the lesser of (i) the
aggregate amount of distributing corpora-
tion debt (as determined under proposed
§1.361-5(c)(3)), and (ii) the aggregate
amount of distributing corporation debt
determined under the eight-quarterly-av-
erage test set forth in proposed §1.361-
5(d)(2). The Treasury Department and the
IRS are of the view that incorporating the
IRS’s long-standing, quarterly average
test for advance ruling purposes (which
was expanded to an eight-quarterly-av-
erage test in Rev. Proc. 2018-53 to pro-
vide a more accurate determination) into
this computation would help achieve the
increased certainty objective of these pro-
posed regulations.
(a) Aggregate amount of distributing
corporation debt
Under proposed §1.361-5(c)(3)(ii), the
aggregate amount of distributing corpora-
tion debt would include solely the amounts
described in proposed §1.361-5(c)(3)(ii)
(A) through (E), as applicable, taking into
account any reduction required by pro-
posed proposed §1.361-5(c)(3)(iii) (that
is, offsetting debts). Specifically, proposed
§1.361-5(c)(3)(ii)(A) would provide that
the aggregate amount of historical distrib-
uting corporation debt would equal the
aggregate remaining principal amount, as
of the earliest applicable date, of all his-
torical distributing corporation debt other
than historical distributing corporation
debt that is eliminated as part of a qual-
ifying direct issuance transaction. With
regard to refinanced distributing corpora-
tion debt, proposed §1.361-5(c)(3)(ii)(B)
would provide that, if the distributing cor-
poration relies on the refinancing excep-
tion for historical distributing corporatrion
debt under proposed §1.361-5(c)(2)(ii),
then the amount of that debt distributing
corporation debt would equal the lesser
of (i) the original principal amount of the
refinanced distributing corporation debt
and (ii) the principal amount of the origi-
nal historical distributing corporation debt
(that is, the distributing corporation debt
to which the refinanced distributing cor-
poration debt is traced) as of the earliest
applicable date. With regard to a revolving
credit agreement that satisfies the require-
ments set forth in §1.361-5(c)(2)(iii), pro-
posed §1.361-5(c)(3)(ii)(C) would pro-
vide that the amount of that debt would
be the lesser of (i) the balance under that
agreement as of the earliest applicable date
(and not the maximum amount that could
be incurred by the distributing corporation
under that agreement), and (ii) the lowest
balance under the agreement beginning on
the earliest applicable date and ending on
the control distribution date.
Additionally, proposed §1.361-5(c)
(3)(ii)(D) would provide that the amount
of qualifying trade payables would equal
the aggregate amount of those payables
on the date of the exchange described in
proposed §1.361-2(a) or 1.361-3(a). With
regard to direct issuance debt, proposed
§1.361-5(c)(3)(ii)(E) would provide that
the amount of that debt would equal the
aggregate principal amount of that debt on
the date exchange described in proposed
§1.361-2(a) or 1.361-3(a).
Lastly, proposed §1.361-5(c)(3)(iii)
would require the aggregate amount of
distributing corporation debt be reduced
to reflect certain offsetting debts. That is,
if the distributing corporation is a credi-
tor, and if the debtor with respect to that
debt is a creditor with respect to distribut-
ing corporation debt, the distributing cor-
poration would be required to reduce the
aggregate principal amount of its distrib-
uting corporation debt by the aggregate
principal amount of debt issued to that
other person for purposes of the compu-
tation under proposed §1.361-5(c)(3)(ii).
This proposed rule also would include
reductions to account for revolving credit
agreements.
(b) Eight-quarterly-average test
Proposed §1.361-5(d)(2)(i) would
provide that, under the eight-quarter-
ly-average test, the aggregate amount of
distributing corporation debt generally
would equal the average of the amount
of distributing corporation debt owed to
persons other than distributing corpo-
ration related persons as of the close of
each of the eight fiscal quarters that end
immediately before the earliest applicable
date. Proposed §1.361-5(d)(2)(ii) and (iii)
would provide additional rules to address
(i) the calculation of distributing corpora-
tion debt at the close of each quarter, and
(ii) distributing corporation debt held by
distributing corporation related persons.
d. Qualifying debt elimination
transactions
i. Overview
The Treasury Department and the IRS
are proposing bright-line rules for qual-
ifying debt elimination transactions to
achieve the transaction facilitation and
increased certainty objectives for these
proposed regulations. The determination
of whether a debt elimination transaction
qualifies under section 361(b)(3) and (c)
(3), and the extent of that qualification,
has created more uncertainty for taxpay-
ers and the IRS than perhaps any other
issue arising from divisive reorganiza-
tions. With these proposed rules, the Trea-
sury Department and the IRS are seeking
to strike a balance that would facilitate
intermediated exchanges and direct issu-
ance transactions in a manner that (i) is

Bulletin No. 2025–10 1013 March 3, 2025
consistent with the Code (particularly sec-
tions 355, 361, and 368) and underlying
legislative history, and (ii) facilitates IRS
administration and enforcement.
ii. Section 361 Transactions in which No
Intermediary is Used
Proposed §1.361-5(e)(2) would set
forth rules for qualifying original creditor
exchanges. Specifically, proposed §1.361-
5(e)(2) would provide that the satisfaction
of distributing corporation debt with sec-
tion 361 consideration in an exchange not
described in proposed §1.361-5(e)(3) or
(4) is treated as a qualifying debt elimi-
nation transaction (that is, the exchange
will be treated as a nonrecognition trans-
action for Federal income tax purposes)
if all applicable requirements set forth in
proposed §1.361-5(b) through (d) are sat-
isfied. In particular, proposed §1.361-5(c)
(2)(ii)(C) would provide that the refinanc-
ing exception set forth in proposed §1.361-
5(c)(2)(ii) would not apply to distributing
corporation debt that is refinanced and
then eliminated in a qualifying original
creditor exchange. In other words, for a
distributing corporation to apply that refi-
nancing exception, the distributing cor-
poration would be required to engage in
a qualifying intermediated exchange or a
qualifying direct issuance transaction (as
discussed in parts IV.C.3.d.iii and iv of
this Explanation of Provisions).
iii. Qualifying Intermediated Exchanges
Under proposed §1.361-5(e)(3), an
intermediated exchange would not qualify
as a qualifying debt elimination transac-
tion unless certain requirements are sat-
isfied. First, proposed §1.361-5(e)(3)(i)
(A) generally would prohibit the holder
of historical distributing corporation debt
that will be satisfied with section 361 con-
sideration from holding that debt for the
benefit of the distributing corporation, the
controlled corporation, a distributing cor-
poration related person, or a controlled
corporation related person. However,
under proposed §1.361-5(e)(3)(i)(B) this
prohibition would not apply to a collateral
benefit (such as the efficient purchase by
an intermediary of historical distributing
debt on the open market) received by a
distributing corporation or a distributing
corporation related person, from the inter-
mediary’s facilitation of the transfer of
section 361 consideration in satisfaction
of historical distributing corporation debt.
Second, proposed §1.361-5(e)(3)(ii)
would prohibit the intermediary from
acquiring historical distributing corpora-
tion debt that is satisfied with section 361
consideration from the distributing corpo-
ration, the controlled corporation, or any
distributing corporation related person
or controlled corporation related person.
However, under proposed §1.361-5(c)(2)
(ii)(A) the refinancing exception set forth
in proposed §1.361-5(c)(2)(ii) would be
available for distributing corporations
that engage in qualifying intermediated
exchanges. The Treasury Department and
the IRS are of the view that this exception
would help achieve the transaction facili-
tation objective by providing distributing
corporations with significant flexibility to
engage in debt elimination transactions
under section 361 with debt refinanced
after the earliest applicable date.
Third, the proposed regulations would
impose long-standing requirements con-
sistent with the analysis in the afore-
mentioned technical advice memoranda
addressing intermediated exchanges under
former section 108. Specifically, proposed
§1.361-5(e)(3)(iii) would require the
intermediary and the distributing corpora-
tion to effectuate the exchange of section
361 consideration for historical distribut-
ing corporation debt based on terms and
conditions arrived at by the parties bar-
gaining at arm’s length.
Fourth, proposed §1.361-5(e)(3)(iv)
would prohibit the distributing corpora-
tion, the controlled corporation, and any
distributing corporation related person
or controlled corporation related person
from (i) participating in any profit gained
by the intermediary upon the exchange of
section 361 consideration, or (ii) limiting
the intermediary’s profit by agreement or
other arrangement.
Fifth, proposed §1.361-5(e)(3)(v)(A)
and (B) would require the intermediary
(i) to act for its own account with regard
to all components of the intermediated
exchange, and (ii) bear the risk of loss
with regard to the historical distributing
corporation debt and any subsequent dis-
position of any section 361 consideration
received in the exchange. Accordingly,
proposed §1.361-5(e)(3)(v)(C) would pro-
hibit the intermediary from entering into
a variable pricing agreement or similar
arrangement with the distributing corpo-
ration, the controlled corporation, or any
distributing corporation related person or
controlled corporation related person (for
example, agreements between the inter-
mediary and the distributing corporation
requiring “true-up” payments would be
prohibited).
Finally, proposed §1.361-5(e)(3)(vi)
would require the intermediary to hold the
historical distributing corporation debt for
a period of not less than 30 days ending
on the control distribution date. Based on
feedback from stakeholders, the Treasury
Department and the IRS are of the view
that providing a bright-line rule would
help achieve the transaction facilitation
and increased certainty objectives of these
proposed regulations. The proposed rule
would depart from the facts-and-circum-
stances approach set forth in Rev. Proc.
2018-53.
iv. Qualifying Direct Issuance
Transaction
Under proposed §1.361-5(e)(4), a direct
issuance transaction would not qualify as
a qualifying debt elimination transaction
unless certain requirements are satisfied.
For this purpose, proposed §1.361-1(b)
(17) would define the term “direct issu-
ance transaction” to mean a transaction, or
a series of transactions (or similar trans-
action or series of transactions), in which
(i) the distributing corporation incurs dis-
tributing corporation debt with a creditor
after the earliest applicable date, (ii) the
distributing corporation uses the proceeds
of the newly incurred distributing corpo-
ration 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 corpo-
ration.
First, proposed §1.361-5(e)(4)(i)
(A) would require that a direct issuance
transaction be determined to comprise
a transfer by the distributing corpora-
tion of section 361 consideration to the
creditor in exchange for the satisfaction
of distributing corporation debt held by

March 3, 2025 1014 Bulletin No. 2025–10
that creditor (direct issuance debt), and
not a sale by the distributing corpora-
tion of section 361 consideration to the
creditor for the proceeds of that direct
issuance debt, for Federal income tax
purposes. Proposed §1.361-5(e)(4)(i)(B)
would provide that that determination is
made based on all relevant provisions of
the Code and general principles of Fed-
eral income tax law, including the step
transaction doctrine. Proposed §1.361-
5(e)(4)(i)(B) also would provide that the
substance of the direct issuance transac-
tion must be determined, pursuant to all
relevant provisions of the Code and gen-
eral principles of Federal income tax law,
before the requirements of section 361
can be applied.
Second, proposed §1.361-5(e)(4)(ii)(A)
would provide that, unless the transaction
satisfies the safe harbor under proposed
§1.361-5(e)(4)(iii), the determination of
whether a direct issuance transaction is
an exchange under section 361, and not
a sale, is made using a facts-and-circum-
stances test. For this purpose, proposed
§1.361-5(e)(4)(ii)(B) would provide a
set of factors to be used in determining
whether the direct issuance transaction
exchange qualifies as an exchange under
section 361. Proposed §1.361-5(e)(4)(ii)
(B) would provide that each of the spec-
ified factors represents either evidence of
qualification or non-qualification as an
exchange. The strength of evidence pro-
vided by the factors is determined based
on an analysis of all relevant facts and cir-
cumstances.
(a) Prescribed factors for facts-and-
circumstances test
First, proposed §1.361-5(e)(4)(ii)(B)
(1) would provide that an exchange of
section 361 consideration by the distrib-
uting corporation with a creditor occurs
pursuant to an arrangement that comprises
part of a prearranged, integrated plan is
substantial evidence of non-qualification,
whereas, an exchange that does not occur
pursuant to an arrangement that comprises
part of a prearranged, integrated plan is
evidence of qualification.
Second, proposed §1.361-5(e)(4)(ii)
(B)(2)(i) would provide that, if any one
of the following requirements are not
met, the failure of any one requirement
is evidence of non-qualification: (1) an
exchange of section 361 consideration
for refinanced historical distributing
corporation debt between the distribut-
ing corporation and the creditor must be
effectuated based on arm’s-length terms
and conditions; (2) neither the distribut-
ing corporation, controlled corporation,
nor any distributing controlled corpora-
tion related person or controlled corpo-
ration related person participates in any
profit gained by the creditor upon the
exchange of section 361 consideration,
or limits by agreement or other arrange-
ment any profit of the creditor gained
upon the exchange of section 361 con-
sideration; (3) the creditor acts for its
own account with regard to all compo-
nents of the direct issuance transaction;
and (4) the creditor bears the risk of loss
with respect to the refinanced historical
distributing corporation debt and any
subsequent sale or other disposition of
section 361 consideration transferred to
the creditor in satisfaction of the refi-
nanced historical distributing corpo-
ration debt. However, pursuant to pro-
posed §1.361-5(e)(4)(ii)(B)(2)(iii), the
satisfaction of all these aforementioned
requirements is substantial evidence of
qualification.
Third, proposed §1.361-5(e)(4)(ii)
(B)(3) would provide that, if the creditor
holds the refinanced historical distribu-
tion corporation debt for a period of less
than 30 days ending on the control dis-
tributing date, then that fact is evidence of
non-qualification. Conversely, if the cred-
itor holds that debt for a period of at least
30 days ending on control distribution,
then that fact is evidence of qualification.
Fourth, proposed §1.361-5(e)(4)(ii)
(B)(4) would provide that if the distrib-
uting corporation has legal or practical
dominion or control over any proceeds
of the refinanced historical distributing
corporation debt (as determined in accor-
dance with §1.357-(e)(2)), then that fact is
substantial evidence of non-qualification.
However, the distributing corporation’s
lack of legal or practical dominion or con-
trol over any of those proceeds is substan-
tial evidence of qualification.
Fifth, proposed §1.361-5(e)(4)(ii)(B)
(5) provides that if the distributing corpo-
ration issued the refinanced historical dis-
tributing corporation debt with a principal
purpose of avoiding any of the require-
ments or limitations of section 361, then
that fact is evidence of non-qualification.
(b) Safe harbor for direct issuance
transactions
Proposed §1.361-5(e)(4)(iii) would
provide a safe harbor for direct issuance
transactions. A direct issuance transac-
tion would qualify under the safe harbor
to be treated as a qualifying debt elimi-
nation transaction only if all the follow-
ing requirements are satisfied: (1) the
distributing corporation does not have,
at any time, legal or practical dominion
or control over any proceeds of the refi-
nanced historical distributing corporation
debt, as determined in accordance with
§1.357-(e)(2); (2) the creditor holds the
refinanced historical distributing corpo-
ration debt for a period of not less than 30
days ending on the control distribution
date; (3) each exchange of section 361
consideration for refinanced historical
distribution corporation debt between the
distributing corporation and the creditor
is effectuated on arm’s-length terms and
conditions; (4) none of the distributing
corporation, controlled corporation, or
any distributing controlled corporation
related person or controlled corporation
related person participates in any profit
gained by the creditor upon the exchange
of section 361 consideration, or limits
by agreement or other arrangement any
profit gained by the creditor upon the
exchange of section 361 consideration;
(5) the creditor acts for its own account
with regard to all components of the direct
issuance transaction; and (6) the creditor
bears the risk of loss with respect to the
refinanced historical distributing corpo-
ration debt and any subsequent sale or
other disposition of section 361 consid-
eration transferred to the creditor in sat-
isfaction of the refinanced historical dis-
tributing corporation debt. For purposes
of the proceeding requirement, proposed
§1.361-5(e)(4)(iv) would provide that the
creditor is not treated as bearing the risk
of loss with respect to the refinanced his-
torical distributing corporation debt if the
creditor enters into a variable pricing or
similar arrangement with the distributing
corporation (or a controlled corporation,
distributing corporation related person,

Bulletin No. 2025–10 1015 March 3, 2025
or controlled corporation related person)
with regard to any section 361 consider-
ation.
V. Federal Income Tax Treatment and
Consequences of Post-Distribution
Payments
A. Notice 2024-38
As stated in section 2.02(6) of Notice
2024-38, the Treasury Department and
the IRS are considering the application of
the Code to post-distribution payments.
Proposed §1.361-1(b)(42) would define a
“post-distribution payment” as a transfer
of money or other property by the con-
trolled corporation to the distributing cor-
poration (or vice versa) after the control
distribution date pursuant to the plan of
reorganization.
In Notice 2024-38, the Treasury
Department and the IRS expressed the
view that a post-distribution payment
is treated as section 361 consideration
only if the taxpayer establishes that (i)
the character of the payment for Federal
income tax purposes is section 361 con-
sideration, (ii) as of the first distribution
date, the fair market value of the distrib-
uting corporation’s right to receive the
payment was not (or will not be) reason-
ably ascertainable (see Burnet v. Logan,
283 U.S. 404, 413 (1931)), and (iii) the
payment will be properly accounted for
when received. For the avoidance of
doubt, the Treasury Department and the
IRS also expressed the view in Notice
2024-38 that Arrowsmith v. Commis-
sioner, 344 U.S. 6 (1952), applies solely
to the requirement described in clause
(i) of the preceding sentence (that is,
characterization of the post-distribution
payment for Federal income tax pur-
poses).
B. Stakeholder input
As an initial matter, stakeholders have
stated in their feedback that post-distri-
bution payments between the distributing
corporation and the controlled corpo-
ration in connection with both section
355(c) transactions and divisive reor-
ganizations are subject to different doc-
trines (for example, Arrowsmith or the
open transaction doctrine) depending on
the facts and circumstances. Due to the
variable fact patterns, the non-recurring
nature of such payments, and the com-
plex interplay of the legal provisions
governing such payments, one stake-
holder has contended that additional
substantive guidance (for example, in
the form of Treasury regulations) would
not be appropriate, and that the Treasury
Department and the IRS should continue
to address this topic through the IRS’s
private letter ruling program.
Stakeholders also have contended that
indemnification payments made under the
governing transaction documents, which
constitute the overwhelming majority of
post-distribution payments, clearly are
subject to the Arrowsmith doctrine and
should be characterized as either (i) a con-
tribution by the distributing corporation to
the controlled corporation, or (ii) a pay-
ment of section 361 consideration by the
controlled corporation to the distributing
corporation, unless the transaction doc-
uments result in the assumption of a lia-
bility under section 357(d). Accordingly,
other than limited guidance with respect
to the treatment of so-called “indemnity
purges” (that is, the distributing corpora-
tion’s satisfaction of a liability with cash
on hand and subsequent reimbursement
by the controlled corporation), stakehold-
ers have expressed the view that substan-
tive guidance is unnecessary.
With regard to such indemnity purges,
stakeholders have recommended differ-
ent approaches for the proposed regula-
tions. One stakeholder has recommended
(i) treating the distributing corporation’s
receipt of the indemnity payment from
the controlled corporation as section 361
consideration, and (ii) treating the dis-
tributing corporation’s payment of the
indemnified liability as a transfer of such
section 361 consideration to a creditor
in satisfaction of section 361(b)(3) (that
is, a post-distribution payment). Alterna-
tively, other stakeholders have suggested
(i) treating the liability giving rise to
the indemnity payment as having been
assumed by the controlled corporation
under the principles of section 357(d),
and (ii) treating the distributing corpo-
ration as having received payment from,
and as making a payment to satisfy the
liability as an agent of, the controlled
corporation.
C. Proposed regulations
1. General Treatment of Target
Corporations under Section 361(a)
Consistent with section 361(a), these
proposed regulations generally would
provide that a target corporation (includ-
ing a distributing corporation) that is a
party to a reorganization does not recog-
nize gain or loss on its transfer of property
to an acquiring corporation (including a
controlled corporation) if the following
three requirements are satisfied. First,
proposed §1.361-2(a)(1) would require
that the acquiring corporation (or a cor-
poration controlling the acquiring corpo-
ration) must be a party to the reorgani-
zation. Second, proposed §1.361-2(a)(2)
would require that the target corporation
must receive solely stock or securities of
the acquiring corporation (or the corpora-
tion controlling the acquiring corporation)
in exchange for the transferred property.
Third, proposed §1.361-2(a)(3) would
require that the exchange must occur pur-
suant to the plan of reorganization.
2. Receipt of Money or Other Property
a. In general
If proposed §1.361-2(a) would apply to
an exchange between a target corporation
and an acquiring corporation but for the
fact that the target corporation receives
money or other property in addition to
stock and securities of the acquiring cor-
poration (or of a corporation controlling
the acquiring corporation), then proposed
§1.361-3 would govern the exchange. See
§§1.361-2(b) and 1.361-3(a)(1).
In general, proposed §1.361-3(b)(1)
and (2) would provide that, in an acquisi-
tive reorganization, the target corporation
does not recognize gain on the receipt of
money or other property provided that,
pursuant to the plan of reorganization, the
target corporation distributes the money
or other property to its shareholders or
transfers that property to a creditor in sat-
isfaction of target corporation debt.
Additional requirements would apply
in the case of a divisive reorganization. In
that case, proposed §1.361-3(c)(1) would
provide that the distributing corporation
does not recognize gain on the exchange

March 3, 2025 1016 Bulletin No. 2025–10
if, pursuant to the plan of reorganization,
(i) the distributing corporation deposits the
money received in the exchange in a seg-
regated account, and (ii) the distributing
corporation distributes the money or other
property received in the exchange to the
distributing corporation’s shareholders no
later than the end of the 12-month period
beginning on the date of the exchange.
Under proposed §1.361-3(c)(2)(i), similar
rules would apply with respect to transfers
of the money or other property received in
the exchange to creditors of the distribut-
ing corporation in satisfaction of distribut-
ing corporation debt.
However, under proposed §1.361-3(c)
(2)(ii), the aggregate amount of money
and the fair market value of other prop-
erty transferred to creditors that is treated
as distributed to shareholders would be
limited to the amount by which the aggre-
gate adjusted basis of the assets trans-
ferred by the distributing corporation to
the controlled corporation exceeds the
aggregate amount of distributing corpora-
tion liabilities assumed by the controlled
corporation. Moreover, transfers to credi-
tors of the distributing corporation would
be subject to the requirements set forth in
proposed §1.361-5. See the prior discus-
sion in part IV.C.3 of this Explanation of
Provisions. Consistent with the Treasury
Department’s and the IRS’s efforts to
encourage taxpayers to undertake bona
fide corporate reorganizations by provid-
ing sufficient transactional flexibility, the
proposed regulations governing transfers
of section 361 consideration to creditors
would be based in part on whether such
transfers occur pursuant to a target corpo-
ration’s (including a distributing corpo-
ration’s) plan of reorganization. See the
prior discussion in part III.C of this Expla-
nation of Provisions.
Under proposed §1.361-3(d), the fail-
ure to distribute the money or other prop-
erty received in the exchange in the man-
ner set forth in proposed §1.361-3(b) or (c)
would result in the recognition of gain by
the target corporation. The amount of gain
recognized would not exceed the sum of
(i) the amount of money received but not
distributed, and (ii) the fair market value
of the other property received but not dis-
tributed. Consistent with section 361(b)
(2), proposed §1.361-3(e) would provide
that the target corporation does not recog-
nize a loss if it receives money or other
property in addition to stock or securities
of the acquiring corporation.
b. Treatment of post-distribution
payments
i. In General
Proposed §1.361-3(c)(3) would pro-
vide that, in a divisive reorganization
in which the distributing corporation
receives a post-distribution payment, the
distributing corporation does not recog-
nize any gain under proposed §1.361-3(c)
(1) or (2) only if three conditions are sat-
isfied. First, the post-distribution payment
constitutes section 361 consideration for
Federal income tax purposes. Second,
the distributing corporation places the
post-distribution payment in a segregated
account pursuant to the plan of reorgani-
zation. Third, pursuant to the plan of reor-
ganization, the distributing corporation
distributes the post-distribution payment
to its shareholders or to its creditors (in
satisfaction of distributing corporation
debt in a transfer meeting the require-
ments set forth in proposed §1.361-5)
by the later of (i) 90 days after the date
on which the distributing corporation
receives the post-distribution payment,
or (ii) the end of the 12-month period
beginning on the date of the exchange
described in proposed §1.361-3(a)(1).
For purposes of proposed §1.361-3(c)
(3), a post-distribution payment would
constitute section 361 consideration (and
not, for example, a separate payment for
goods or services) for Federal income tax
purposes only if the three requirements
in proposed §1.361-3(c)(3)(i) are satis-
fied. First, the payment must properly be
characterized for Federal income tax pur-
poses as consideration that the distribut-
ing corporation receives in the exchange
described in proposed §1.361-3(a)(1).
See generally Arrowsmith, 344 U.S. 6.
Second, the fair market value of the dis-
tributing corporation’s right to receive the
post-distribution payment must not be rea-
sonably ascertainable as of the exchange
date. See generally Burnet, 283 U.S. 404.
Third, the distributing corporation must
properly account for the payment upon
receipt, in accordance with the plan of
reorganization.
Similar rules would apply to the
receipt of a post-distribution payment by
a controlled corporation. In this respect,
proposed §1.361-3(c)(4) would provide
that, if a controlled corporation receives
a post-distribution payment, the aggre-
gate adjusted basis of the assets trans-
ferred by the distributing corporation to
the controlled corporation is increased
for purposes of proposed §1.361-3(c)(2)
(ii) only if three requirements similar to
those described in the prior paragraph are
satisfied.
ii. Treatment of Payments under
Indemnification Agreements
These proposed regulations would not
treat payments made in respect of indem-
nification agreements as post-distribu-
tion payments in certain circumstances.
Instead, proposed §1.357-2(e)(2)(iii)(A)
would treat (i) the underlying liability as
having been assumed by the controlled
corporation, and (ii) the receipt of the
indemnification payment as not within the
legal or practical dominion or control of
the distributing corporation for purposes
of proposed §1.357-2(e)(1). See the dis-
cussion in part VIII.B.3.b of this Explana-
tion of Provisions.
3. Treatment of Distributions
a. Qualified property
Consistent with section 361(c)(1),
proposed §1.361-4(a)(1) generally would
provide that a target corporation (includ-
ing a distributing corporation) recognizes
no gain or loss on a distribution of qual-
ified property to its shareholders pursu-
ant to a plan of reorganization. Proposed
§1.361-4(a)(2)(i) would provide that the
target corporation in an acquisitive reorga-
nization is treated as distributing qualified
property to its shareholders for purposes
of proposed §1.361-4(a)(1) if the target
corporation transfers qualified property to
a creditor pursuant to the plan of reorga-
nization and in satisfaction of target cor-
poration debt. To obtain similar treatment
in the case of a divisive reorganization,
proposed §1.361-4(a)(2)(ii) would pro-
vide that the distributing corporation’s
transfer of qualified property to a creditor
in satisfaction of distributing corporation

Bulletin No. 2025–10 1017 March 3, 2025
debt also must meet the requirements in
§1.361-5.
b. Appreciated nonqualified property
Under proposed §1.361-4(b)(1) and
(c), if a target corporation distributes
appreciated nonqualified property to its
shareholders pursuant to a plan of reor-
ganization, the target corporation would
recognize gain (but not loss) as if it sold
the property to its shareholders at the
property’s fair market value. Proposed
§1.361-4(b)(2) would provide that, if
such property is subject to a liability, or
if a shareholder assumes a liability of the
target corporation in connection with the
distribution, the fair market value of that
property for purposes of proposed §1.361-
4(b)(1) is treated as an amount not less
than the amount of that liability.
For this purpose, proposed §1.361-1(b)
(4) would define “appreciated nonquali-
fied property” as property other than qual-
ified property that, at the time of the dis-
tribution of that property, has a fair market
value that exceeds its adjusted basis in
the hands of the target corporation. For
example, appreciated nonqualified prop-
erty would include controlled corporation
stock or securities held by the distributing
corporation prior to the exchange under
section 361. The definition in proposed
§1.361-1(b)(4) also would include all
controlled corporation stock or securities
that (i) is treated as other property under
section 355(a)(3)(B), (ii) is distributed in
a disqualified distribution (as defined in
section 355(d)(2)), or (iii) is distributed by
a distributing corporation pursuant to an
acquisition described in section 355(e)(2).
VI. Effect of Transaction Related to
Divisive Reorganization on Controlled
Securities
A. Notice 2024-38
As stated in section 2.02(7) of Notice
2024-38, the Treasury Department and
the IRS are considering the impact of the
application of general Federal income tax
principles (including the substance-over-
form doctrine and other relevant theories)
to acquisitions of a controlled corporation
following the control distribution date that
result in a modification of the controlled
corporation’s securities. For example, the
Treasury Department and the IRS are con-
sidering whether general Federal income
tax principles could preclude qualification
under section 361(c)(3) if (i) the controlled
corporation issued securities that were
treated by the distributing corporation
as section 361 consideration that could
be used to satisfy its creditors, and (ii)
the controlled corporation subsequently
merged into an acquiring corporation in a
transaction resulting in the modification of
those securities. In response to feedback
received following the publication of Rev.
Proc. 2018-53, Notice 2024-38 stated the
view of the Treasury Department and the
IRS that Rev. Rul. 98-27, 1998-1 C.B.
1159, is not relevant for determining
whether any such transaction or series
of transactions should cause the divisive
reorganization to be recast, because that
revenue ruling addresses solely whether
the controlled corporation was a “con-
trolled corporation” under section 355(a)
immediately before the distribution. See
also generally Rev. Rul. 98-44, 1998-2
C.B. 315.
B. Stakeholder input
Stakeholders have suggested that the
focus on debt instrument modifications
in Notice 2024-38 is directed toward
transactions involving a post-distribution
merger of a controlled corporation into a
third-party corporation and whether the
purported controlled corporation debt
should be treated as qualified property for
purposes of section 361(c)(2)(B). Stake-
holders have requested clarification that
controlled corporation debt will not be
treated as non-qualified property to the
extent that (i) modifications of such debt
are not “significant modifications” within
the meaning of §1.1001-3 (disregarded
modifications), or (ii) the modifications
are a “significant modification” under
§1.1001-3 as a result of which the holder
of such debt is treated as receiving a new
debt instrument in a nonrecognition trans-
action (nonrecognition modifications).
Stakeholders also have recommended
that a deemed or unplanned transaction
occurring after the distribution should not
cause the controlled corporation’s debt to
be treated as something other than con-
trolled corporation debt for purposes of
section 361(c). Additionally, stakeholders
have asserted that (i) step transaction prin-
ciples should not be applied to the extent
the result of the transaction is consistent
with the policies of section 361, and (ii) a
recast of the transaction would be at odds
with the provisions of §1.1001-3 applica-
ble to nonrecognition modifications.
Stakeholders have recommended that,
if guidance is issued on this topic, safe
harbors should be provided with respect
to both disregarded modifications and
nonrecognition modifications to allow
controlled corporation debt to be treated
as qualified property under section 361(c).
C. Proposed regulations
The Treasury Department and the IRS
anticipate providing proposed guidance
on this topic as part of a guidance package
that includes the finalization of these pro-
posed regulations. The Treasury Depart-
ment and the IRS believe that additional
study and stakeholder feedback would be
appropriate, rather than the publication of
proposed rules at this time. It is the position
of the Treasury Department and the IRS
that the series of transactions described in
section 2.02(7) of Notice 2024-38 merit
additional scrutiny but, until the comple-
tion of this study, should be addressed
by the IRS on a case-by-case basis. With
regard to additional stakeholder feedback
on this topic, the Treasury Department
and the IRS particularly would welcome
suggestions on appropriate bright-line
rules or safe harbors, as well as support-
ing analysis that discusses how those sug-
gestions would balance the compliance,
increased certainty, and transaction facili-
tation objectives that guide these proposed
regulations.
As set forth in section 2.02(7) of Notice
2024-38, the Treasury Department and the
IRS do not view Rev. Rul. 98-27 and Rev.
Rul. 98-44 as determinative for questions
regarding the impact of the application of
general Federal income tax principles to
acquisitions of a controlled corporation
following the control distribution date that
result in a modification of the controlled
corporation’s securities. For the avoidance
of doubt, and consistent with the discus-
sion in part IV.C.1 of this Explanation
of Provisions, this view of the Treasury
Department and the IRS also directly

March 3, 2025 1018 Bulletin No. 2025–10
extends to Rev. Rul. 2003-79, 2003-29
I.R.B. 80. None of Rev. Rul. 98-27, Rev.
Rul. 98-44, or Rev. Rul. 2003-79 sets forth
broadly applicable principles regarding
the application of the step transaction or
substance-over-form doctrines beyond the
fact patterns directly addressed by those
rulings.
VII. Replacement of Distributing Debt
A. Notice 2024-38
As stated in section 2.02(8) of Notice
2024-38, the Treasury Department and
the IRS are considering the application of
the Code to borrowings by a distributing
corporation that replace distributing cor-
poration debt satisfied with section 361
consideration in a divisive reorganization.
The Treasury Department and the IRS are
concerned that, in certain circumstances,
the replacement of distributing corpora-
tion debt that was satisfied with section
361 consideration could be used as an
artifice for increasing the aggregate debt
and other liabilities of the distributing cor-
poration and the controlled corporation.
As one example, the Treasury Depart-
ment and the IRS have considered situ-
ations in which, as of the date on which
assets are contributed to a controlled
corporation in a divisive reorganization,
the distributing corporation anticipates
entering into a borrowing that effec-
tively reverses the de-leveraging achieved
through the distribution of section 361
consideration pursuant to the plan of
reorganization. Such a borrowing would
render the de-leveraging merely transi-
tory and without real economic effect.
As emphasized in Notice 2024-38, the
Treasury Department and the IRS are
concerned that this result resembles a
partial sale of the controlled corporation
that would not qualify for nonrecognition
treatment under section 361.
B. Stakeholder input
Stakeholders have acknowledged the
aforementioned potential for abuse and the
potential treatment of such transactions as
partial sales. However, stakeholders have
contended that distributing corporations
generally do not plan to replace historical
debt satisfied in the section 355 transac-
tion. Accordingly, stakeholders have sug-
gested that any substantive guidance on
this issue (i) should be narrowly tailored
to address abusive structures that do not
reflect the policies of section 361, and (ii)
should take into account distributing cor-
porations’ need to borrow in the ordinary
course of business and obtain funding for
circumstances unrelated to the section 355
transaction. Stakeholders also have sug-
gested that the main difficulty in issuing
guidance will be identifying clear anti-
abuse principles that sufficiently differ-
entiate between artificial post-distribution
re-leveraging transactions (which should
be disallowed) and genuine post-distri-
bution re-leveraging transactions with a
bona fide commercial purpose unrelated
to the divisive transaction (which should
be allowed).
One stakeholder has recommended
providing a safe harbor for transactions
that do not raise debt replacement con-
cerns, in order to increase certainty for
taxpayers pursuing bona fide transactions.
According to the stakeholder, the common
factors in those transactions that should be
included in such a safe harbor are: (i) a
genuine non-tax business purpose for the
re-leveraging transaction; (ii) use of the
re-leveraging proceeds in a manner con-
sistent with such business purpose; and
(iii) a non-tax economic effect of the re-le-
veraging transaction.
The stakeholder has further recom-
mended evaluating re-leveraging transac-
tions that fall outside the aforementioned
safe harbor based on all facts and circum-
stances. According to the stakeholder,
factors that would support respecting
the re-leveraging as a new borrowing for
Federal income tax purposes include: (i)
the existence of a non-tax business pur-
pose supporting the re-leveraging trans-
action; (ii) the use of re-leveraging pro-
ceeds in a manner consistent with such
business purpose; (iii) the absence of a
plan to enter into the re-leveraging trans-
action at the time of the distribution; (iv)
the passage of time between the distrib-
uting corporation’s satisfaction of debt
with section 361 consideration and the
re-leveraging transaction; (v) the occur-
rence of the re-leveraging transaction in
the ordinary course of business and/or
the consistency of the transaction with
historical practices; and (vi) evidence
that, as a result of the de-leveraging
transaction, the distributing corporation
was appropriately leveraged from a capi-
tal markets perspective.
In contrast, according to the stake-
holder, the following factors would not
support respecting the re-leveraging
as a new borrowing. First, the lenders
with regard to the re-leveraging trans-
action are the same as those with regard
to the distributing corporation debt sat-
isfied in the de-leveraging transaction.
Second, the terms of the new distribut-
ing corporation debt are the same as (or
substantially similar to) the terms of the
distributing corporation debt satisfied in
the de-leveraging transaction. Third, the
proceeds of the re-leveraging transaction
are retained (unless such retention is con-
sistent with the business purpose for the
re-leveraging). Finally, the de-leveraging
transaction, when taken together with the
re-leveraging transaction, has little or no
economic effect.
C. Proposed regulations
1. Overview
The Treasury Department and the
IRS appreciate the feedback provided by
stakeholders regarding transitory borrow-
ings. In developing these proposed regu-
lations, the Treasury Department and the
IRS have attempted to balance the com-
pliance and increased certainty objectives
with the understanding that distributing
corporations should be able to borrow in
the ordinary course of business and obtain
financing for circumstances demonstrably
unrelated to the divisive reorganization
(that is, the transaction facilitation objec-
tive).
2. General Rule
Proposed §1.361-5(f)(1) generally
would reduce the amount of section 361
consideration that the distributing cor-
poration is treated as transferring to a
creditor in a qualifying debt elimination
transaction by the amount of eligible dis-
tributing corporation debt that is “transi-
torily eliminated.” Proposed §1.361-5(f)
(2)(i) would treat a distributing corpora-
tion as transitorily eliminating an amount
of eligible distributing corporation debt

Bulletin No. 2025–10 1019 March 3, 2025
equal to the amount of such debt that the
distributing corporation or a distributing
corporation related person replaces after
the earliest applicable date, directly or
indirectly, with borrowing that the dis-
tributing corporation or any distributing
corporation related person expects or
is committed to, directly or indirectly,
before that date. For this purpose, relat-
edness to the distributing corporation
would be determined by examining all
relevant relationships immediately after
the earliest applicable date.
The proposed regulations would set
forth the earliest applicable date as the
relevant date for examining the issuance
of distributing debt that potentially could
give rise to a transitory elimination of eli-
gible distributing corporation debt. Prin-
cipally, the Treasury Department and the
IRS have selected the earliest applicable
date as the relevant date for purposes of
these proposed rules because that date
also would serve generally under these
proposed regulations as the bright line for
determining whether distributing corpora-
tion debt qualifies as historical distributing
corporation debt. Therefore, a proposed
rule that focused on distributing corpora-
tion borrowings after that date, and which
the distributing corporation expected or
was committed to before that date, would
connect logically to the proposed earliest
applicable date for determining historical
distributing corporation debt. Connecting
such proposed rules to a single relevant
date (that is, the earliest applicable date)
is intended to help achieve the increased
certainty objective of these proposed reg-
ulations, and consequently the compliance
and transaction facilitation objectives as
well.
3. Exceptions to General Transitory Debt
Elimination Rule
Based on feedback from stakehold-
ers, proposed §1.361-5(f)(2)(ii) and (iii)
would provide exceptions to the general
transitory debt elimination rule for ordi-
nary course borrowings and borrowings
resulting from unexpected events. With
regard to each of these exceptions, the
intent of the Treasury Department and the
IRS is to provide safe harbors for borrow-
ings that could not have had any connec-
tion to the distributing corporation’s elim-
ination of eligible distributing corporation
debt because such borrowings would have
occurred regardless of the occurrence of
the divisive reorganization. In proposing
these exceptions, the Treasury Department
and the IRS are guided conceptually by
existing regulations under section 355(e)
(section 355(e) regulations) addressing
non-plan factors for determining the exis-
tence of a plan. The intent of extending
those principles to these proposed regula-
tions is to increase certainty for taxpayers
and the IRS by providing rules based on
long-standing Treasury regulations.
a. Ordinary course borrowings
The Treasury Department and the IRS
have proposed an ordinary course bor-
rowing exception in proposed §1.361-
5(f)(2)(iii) to help achieve the increased
certainty and transaction facilitation
goals of these proposed regulations. Spe-
cifically, the Treasury Department and
the IRS do not intend for the safeguards
against transitorily eliminated distribut-
ing corporation debt to prevent the dis-
tributing corporation from engaging in
its ordinary course business activities.
Although the Treasury Department and
the IRS agree with stakeholders that pro-
posed rules on this issue would be chal-
lenging to provide in bright-line form,
the purpose of these proposed rules is
to reduce uncertainty by removing from
consideration of the general rule those
borrowings that the distributing corpora-
tion readily could identify as part of its
ordinary course business operations.
Consequently, the proposed regula-
tions would provide that a replacement
borrowing is not treated as transitorily
eliminating eligible distributing corpo-
ration debt if the replacement borrowing
(i) is incurred in the ordinary course of
business of the distributing corporation
or distributing corporation related person,
and (ii) would have been incurred with-
out regard to the divisive reorganization
(or any transaction related to the divisive
reorganization). See proposed §1.361-5(f)
(2)(iii). The Treasury Department and the
IRS based this proposed rule conceptu
-
ally on §1.355-7(b)(4)(vi) (“In the case
of an acquisition either before or after a
distribution, the distribution would have
occurred at approximately the same time
and in similar form regardless of the
acquisition or a similar acquisition.”).
b. Unexpected borrowings
In addition, proposed §1.361-5(f)
(2)(ii) would provide that certain bor-
rowings are not treated as expected (or
otherwise committed) borrowings and,
therefore, are not within the scope of
the general rule of proposed §1.361-5(f)
(2)(i) if two conditions are met. First,
proposed §1.361-5(f)(2)(ii)(A) would
require that a borrowing after the earli-
est applicable date must result from an
event unrelated to the divisive reorgani-
zation and not in the ordinary course of
business of the distributing corporation.
Second, proposed §1.361-5(f)(2)(ii)(B)
would require that the borrowing must
result from changed circumstances not
expected prior to the control distribu-
tion date. The Treasury Department and
the IRS are proposing this exception to
provide increased certainty and facilitate
bona fide transactions by reinforcing that
a borrowing not in the ordinary course of
business also should be excepted from
application of the general rule, provided
that the distributing corporation estab-
lishes that such borrowing results from
an event that could not have been related
to the divisive reorganization.
In formulating the foregoing proposed
rules, the Treasury Department and the
IRS have relied on the same standard
employed by the section 355(e) regula-
tions for determining the existence of a
plan. See §1.355-7(b)(4)(ii) (“In the case
of an acquisition after a distribution, there
was an identifiable, unexpected change in
market or business conditions occurring
after the distribution that resulted in the
acquisition that was otherwise unexpected
at the time of the distribution.”) and (iv)
(“In the case of an acquisition before a
distribution, there was an identifiable,
unexpected change in market or business
conditions occurring after the acquisition
that resulted in a distribution that was
otherwise unexpected.”). It is the intent
of the Treasury Department and the IRS
that exceptions based on the established
section 355(e) regulations would facilitate
bona fide transactions in the same manner
that the section 355(e) regulations facili-
tate such transactions while addressing the

March 3, 2025 1020 Bulletin No. 2025–10
challenging issue of determining the exis-
tence of a plan.
VIII. Application of Section 357 to
Assumptions of Liabilities
A. Overview of proposed regulations
The Treasury Department and IRS
appreciate the feedback received from
stakeholders addressing the interaction
and separate operation of sections 357 and
361. From the perspective of the Treasury
Department and the IRS, such feedback
was insightful and has been helpful in the
development these proposed regulations,
particularly in achieving the three objec-
tives discussed in section 2.01 of Notice
2024-38. Leveraging this feedback,
the Treasury Department and IRS have
attempted to balance the objectives of (i)
facilitating compliance with sections 357
and 361, (ii) providing certainty to taxpay-
ers and the IRS, and (iii) permitting bona-
fide corporate readjustments with respect
to the assumption of liabilities (including
assuming refinanced distributing corpora-
tion debt) and the satisfaction of debt with
section 361 consideration. In other words,
in these proposed regulations, the Trea-
sury Department and IRS have attempted
to provide taxpayers with an appropriate
level of transactional flexibility that is
consistent, and therefore compliant, with
the operation of sections 357 and 361.
B. Liability assumptions under section
357
1. General Rules
Consistent with section 357(a), pro-
posed §1.357-2(a) generally would pro-
vide that, if a transferor receives property
that would be permitted to be received
under section 351 or 361 without the
recognition of gain to the transferor if
that property were the sole consideration
received by the transferor, and if, as part
of the consideration, the transferee corpo-
ration assumes a liability of the transferor,
then the transferee corporation’s assump-
tion of that liability (i) will not be treated
as the receipt of money or other property
by the transferor, and (ii) will not prevent
the exchange from being within the pro-
visions of section 351 or 361. Under pro-
posed §1.357-2(b), this general rule would
not preclude any liability of a transferor
that is assumed by a transferee corpo-
ration from being taken into account for
purposes of computing the amount of gain
or loss realized to the transferor under sec-
tion 1001 resulting from the exchange.
2. Amount of Liability Assumed
Proposed §1.357-2(c) would provide
that, if the transferor issues a debt that
converts, pursuant to its terms, into a debt
of the transferee corporation (traveling
note), the transferee corporation is treated
as assuming that traveling note at the time
at which the debtor on that debt converts
from the transferor to the transferee cor-
poration under the terms of the note. Pro-
posed §1.357-2(d) also would provide
general rules for determining the amount
of recourse and nonrecourse liabilities
assumed by a transferee corporation for
purposes of §§1.357-2, 1.357-3, 1.357-4,
1.358-3, 1.358-5, 1.358-7, 1.361-3(c)(2),
and 1.368-2(d).
The Treasury Department and the IRS
are considering additional rules regarding
the amount of a liability a transferee cor-
poration is treated as assuming in connec-
tion with a transfer of property and certain
tax consequences that result from such an
assumption. The Treasury Department and
the IRS request comments regarding these
issues and rules. See REG-100818-01,
Liabilities Assumed in Certain Transac-
tions, 68 Fed. Reg. 23931 (May 6, 2003).
a. Recourse liabilities
Proposed §1.357-2(d)(1)(i) would pro-
vide that a recourse liability (or portion
thereof) of a transferor is treated as having
been assumed by the transferee corpora-
tion if, as determined based on all facts and
circumstances, the transferee corporation
has agreed to, and is expected to, satisfy
the liability (or portion thereof), whether
or not the transferor has been relieved of
the liability (or portion thereof).
b. Nonrecourse liabilities
Proposed §1.357-2(d)(1)(ii)(A) gen-
erally would provide that a nonrecourse
liability of a transferor is treated as hav-
ing been assumed by the transferee corpo-
ration to which any asset subject to that
liability is transferred. However, proposed
§1.357-2(d)(1)(ii)(B) would provide that
the amount of any nonrecourse liability of
a transferor treated as assumed is reduced
by the lesser of (i) the amount of that lia-
bility that an owner of other assets not
transferred to the transferee corporation
and also subject to that liability has agreed
with the transferee corporation to, and is
expected to, satisfy, or (ii) the fair market
value of such other assets (determined
without regard to section 7701(g) of the
Code).
3. Legal or Practical Dominion or
Control over Payment of Assumed
Liability
a. General rule
Proposed §1.357-2(e)(1) would apply
if a transferee corporation (or, in the case
of a divisive reorganization, a member of
the CSAG) makes a payment to satisfy
an assumed liability, and if the transferor
(or, in the case of a divisive reorganiza-
tion, a member of the DSAG) has legal
or practical dominion or control over any
part of the payment. If proposed §1.357-
2(e)(1) applies, then (i) that part of the
payment is treated as money or other
property received by the transferor, (ii)
the rules in section 351(b) or 361(b) (as
applicable) apply to determine the Fed-
eral income tax consequences of the
receipt of that money or other property
by the transferor, and (iii) the rules in
proposed §§1.357-2 through 1.357-4 (see
the discussion in part VIII.C and D of this
Explanation of Provisions) do not apply
(that is, the Federal income tax conse-
quences of the payment are not deter-
mined under section 357).
Proposed §1.357-2(e)(2)(i) would pro-
vide that the determination of whether a
payment is within the transferor’s legal
or practical dominion or control generally
is made based on all facts and circum-
stances. However, proposed §1.357-2(e)
(2)(ii) would treat a payment as within a
transferor’s legal or practical dominion
or control if that payment is made to (i)
a segregated account of the transferor (or,
in the case of a divisive reorganization, a
member of the DSAG), or (ii) any person
through which the transferor (or, in the

Bulletin No. 2025–10 1021 March 3, 2025
case of a divisive reorganization, a mem-
ber of the DSAG) can direct the treatment
or disposition of the payment, regardless
of the brevity or transitory nature of the
period in which the payment is in such an
account.
b. Exceptions for indemnification
agreements and other payments
These proposed regulations also would
except from the general facts-and-circum-
stances determination certain payments
that otherwise would result in the trans-
feror having legal or practical dominion or
control over the payment. Under proposed
§1.357-2(e)(2)(iii)(A), payments made
pursuant to an indemnification agree-
ment would not be treated as within the
transferor’s legal or practical dominion or
control (and, thus, would not be treated
as money or other property received by
the transferor) if three requirements are
satisfied. First, the transferee corporation
must be legally prohibited from assuming
the liability. Second, the indemnification
agreement must require the transferor to
first satisfy the obligation that is the sub-
ject of the indemnification before seeking
payment from the transferee corpora-
tion. Third, the transferor must be in the
same net economic position as it would
have been had the transferee corporation
legally assumed the liability.
Under proposed §1.357-2(e)(2)(iii)(B),
a payment not made pursuant to an indem-
nification agreement would not be treated
as within the transferor’s legal or practical
dominion or control if (i) the payment is
dedicated to the satisfaction of a liability
of the transferor that is identified in an
agreement or the plan of reorganization,
(ii) the payment is made to an independent
trustee or escrow agent that is not affili-
ated with the transferor, (iii) the payment
is not made to any account of the trans-
feror (or, in the case of a divisive reorga-
nization, a member of the DSAG) or any
person through which the transferor (or,
in the case of a divisive reorganization,
a member of the DSAG) could direct the
payment, (iv) the transferor and transferee
corporation treat any income, gain, or loss
on the payment proceeds as income, gain,
or loss of the transferee corporation, and
(v) any excess of the payment account
(and any income or gain thereon) over the
amount paid in satisfaction of the liability
reverts to the transferee corporation.
C. Tax avoidance purpose under section
357(b)
1. Principal Purpose Standard
These proposed regulations would
revise and redesignate current §1.357-1(c)
(concerning tax avoidance purpose) as
proposed §1.357-3(a) through (c). Consis-
tent with section 357(b), proposed §1.357-
3(a)(1) would provide that §1.357-2(a)
does not apply to any exchange involving
the assumption of a liability if the princi-
pal purpose of the transferor with respect
to the assumption is either (i) to avoid
Federal income tax on the exchange, or (ii)
not a bona fide business purpose. In accor-
dance with caselaw and the long-standing
view of the Treasury Department and the
IRS, proposed §1.357-3(a)(2) also would
clarify that a principal purpose described
in proposed §1.357-3(a)(1) is presumed
to exist if the transferee corporation
assumes a liability of the transferor that
was not incurred in the ordinary course
of a business of the transferor. See Bryan
v. Comm’r, 281 F.2d 238 (4th Cir. 1960);
Rev. Proc. 96-30, 1996-1 C.B. 696, super-
seded by Rev. Proc. 2024-24 (continuing
to require a similar representation); Rev.
Proc. 83-59, 1983-2 C.B. 575.
Consistent with section 357(b)(1) and
current §1.357-1(c), proposed §1.357-
3(b) would provide that, for purposes of
determining the amount of gain recog-
nized upon an exchange described in pro-
posed §1.357-3(a)(1), the total amount of
liabilities assumed or acquired pursuant
to the exchange (and not merely a par-
ticular liability with respect to which the
tax avoidance or non-business purpose
existed) is treated as money or other prop-
erty received by the transferor upon the
exchange. Consistent with section 357(b)
(2) and current §1.357-1(c), proposed
§1.357-3(c) would provide that, if the
Commissioner determines that the trans-
feror’s principal purpose with respect to
the assumption of a liability was to avoid
Federal income tax on the exchange or
was not a bona fide business purpose, the
burden is on the transferor to prove by a
clear preponderance of the evidence that
the liability assumption should not be
treated as the receipt of money or other
property.
2. Eligible Distributing Corporation
Liabilities
With respect to divisive reorganiza-
tions, the Treasury Department and the
IRS view the allocation of distributing
corporation liabilities as a fundamental
aspect of separating one or more busi-
nesses. These proposed regulations are
intended to facilitate the assumption of
a distributing corporation’s liabilities in
bona-fide divisive reorganizations in a
manner that balances the objectives of
complying with section 357 while provid-
ing certainty to taxpayers and the IRS.
Accordingly, as a threshold matter,
proposed §1.357-3(d)(2) generally would
permit solely eligible distributing corpo-
ration liabilities to be assumed. In other
words, these proposed regulations would
provide that a distributing corporation is
presumed to have hade a principal pur-
pose described in proposed §1.357-3(a)
(1) (and, as a result, is presumed to be
treated as recognizing an amount of gain
determined under proposed §1.357-3(b))
if the controlled corporation assumes a
distributing corporation liability that is
not eligible to be assumed under proposed
§1.357-(d)(3). Liabilities of a distribut-
ing corporation would be eligible to be
assumed under proposed §1.357-3(d)(3)
if (i) the liabilities are described in a plan
of reorganization or original plan of reor-
ganization (if amended), (ii) the liabilities
were incurred in the ordinary course of
business of the distributing corporation,
and (iii) the assumption of the liabilities
is necessary (A) to ensure the transfer to
the controlled corporation of all liabili-
ties 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 prop-
erly satisfy those liabilities.
3. Eligible Distributing Corporation Debt
a. In general
Proposed §1.357-3(d)(4) would pro-
vide additional requirements if the distrib-

March 3, 2025 1022 Bulletin No. 2025–10
uting corporation liabilities to be assumed
are debt. The general rule in proposed
§1.357-3(d)(4)(i) would provide that dis-
tributing corporation debt generally is eli-
gible to be assumed if such debt qualifies
as historical distributing corporation debt
(as defined in proposed §1.357-1(b)(13))
(certain exceptions to the general rule are
provided in proposed §1.357-3(d)(4)(ii)).
b. Exceptions to requirement that
eligible distributing corporation debt be
historical
To facilitate the bona-fide allocation
of distributing corporation debt in divi-
sive reorganizations and to provide cer-
tainty to taxpayers and the IRS, proposed
§1.357-3(d)(4)(ii) would provide several
exceptions to the requirement that the
distributing corporation debt must qual-
ify as historical distributing corporation
debt. First, proposed §1.357-3(d)(4)(ii)
(A) would provide that any trade pay-
ables (as defined in proposed §1.357-1(b)
(19)) of the distributing corporation that
meet the requirements set forth in pro-
posed §1.357-3(d)(3) (that is, the general
requirements for distributing corporation
liabilities eligible to be assumed) are not
required to qualify as historical distribut-
ing corporation debt.
Second, proposed §1.357-3(d)(4)(ii)
(B) would provide that, if a controlled
corporation assumes refinanced distrib-
uting corporation debt (as defined in pro-
posed §1.357-1(b)(17)), that refinanced
distributing corporation debt is treated as
historical distributing corporation debt if
all the following requirements are met: (i)
the distributing corporation has a direct
business purpose for the controlled cor-
poration’s assumption of the refinanced
distributing corporation debt; (ii) the dis-
tributing corporation’s refinancing of its
historical distributing corporation debt is
completed before the controlled corpora-
tion’s assumption of that refinanced dis-
tributing corporation debt; (iii) following
the controlled corporation’s assumption
of the refinanced distributing corporation
debt, the distributing corporation and the
controlled corporation are in the same net
economic position as each corporation
would have been had the controlled cor-
poration assumed the historical distribut-
ing corporation debt; (iv) the distributing
corporation’s refinancing of its historical
distributing corporation debt and the sub-
sequent assumption of that refinanced
debt are included in the plan of reorga-
nization for the divisive reorganization;
(v) there is no untaxed gain or other Fed-
eral income tax benefit to the distributing
corporation or the controlled corporation
resulting from the distributing corpora-
tion’s refinancing of a historical distribut-
ing corporation debt and the assumption
by the controlled corporation of that refi-
nanced distributing corporation debt; (vi)
the business assets transferred by the dis-
tributing corporation to the controlled cor-
poration in the section 361(a) exchange
are associated with the refinanced dis-
tributing corporation debt assumed by
the controlled corporation; and (vii) the
refinancing of historical distributing cor-
poration debt by the distributing corpo-
ration and the subsequent assumption of
that refinanced distributing corporation
debt by the controlled corporation result
in the controlled corporation assuming lia-
bilities in an amount that properly relates
to its business operations and will be prop-
erly satisfied with earnings generated by
those operations. The foregoing require-
ments are derived directly from Rev. Rul.
79-258, which provides long-standing IRS
guidance on the treatment of an assump-
tion of a refinanced historical distributing
corporation debt.
Third, proposed §1.357-3(d)(4)(ii)
(C) would provide that a controlled cor-
poration’s assumption of a traveling note
issued to refinance a historical distributing
corporation debt is treated as an assump-
tion of historical distributing corporation
debt if the requirements with respect to
refinanced distributing corporation debt
described in the foregoing paragraph are
met. Because the issuance of a traveling
note resembles the issuance and assump
-
tion of refinanced debt, the Treasury
Department and IRS are of the view that
traveling notes should be subject to the
same degree of scrutiny as the issuance
and assumption of refinanced debt.
Fourth, proposed §1.357-3(d)(4)(ii)
(D) would provide that a revolving credit
agreement to which the distributing cor-
poration is a debtor qualifies as historical
distributing corporation debt only if the
distributing corporation entered into the
agreement before the earliest applicable
date, the agreement does not expire until
after the date of the exchange described in
proposed §1.361-2(a) or 1.361-3(a), and
that agreement is identified in the plan of
reorganization or original plan of reorga-
nization (if amended).
D. Liabilities in excess of basis under
section 357(c)
Consistent with section 357(c) and cur-
rent §1.357-2(a), proposed §1.357-4(a)
(1) generally would provide that, in an
exchange described in section 351 or in
section 361 (by reason of a divisive reor-
ganization that qualifies under sections
355 and 368(a)(1)(D)), the excess of (i)
the sum of the amount of liabilities of the
transferor assumed by the transferee cor-
poration, over (ii) the total adjusted basis
of the property transferred by the trans-
feror pursuant tothe exchange, is treated
as gain from the sale or exchange of a cap-
ital asset or of property that is not a capital
asset, as applicable. The determination of
whether gain resulting from the transfer
of capital assets is long-term or short-
term capital gain would be made under
proposed §1.357-4(b) by reference to the
transferor’s holding period for the trans-
ferred assets, based on the proportionate
fair market value of the transferor’s long-
term assets to its short-term assets.
Under proposed §1.357-4(a)(2), the
general rule in proposed §1.357-4(a)
(1) would not apply to any exchange (i)
to which proposed §1.357-3(a) applies,
(ii) that is pursuant to a plan of reorgani-
zation for a reorganization described in
section 368(a)(1)(G) in which no former
shareholder of the transferor corporation
receives any consideration for the share-
holder’s stock, or (iii) to which section
351 applies if that exchange also (A) qual-
ifies as part of a reorganization described
in section 368(a)(1)(A), (C), or (D) or
(G) (provided the requirements of section
354(b)(1) of the Code are satisfied), and
(B) is described as a reorganization in a
filing with the IRS under §1.368-3.
In addition, the following liabilities
generally would be excluded under pro-
posed §1.357-4(a)(3)(i) for purposes of
applying the general rule in proposed
§1.357-4(a)(1): (i) a liability the payment
of which would give rise to a deduction;
(ii) a liability the payment of which would

Bulletin No. 2025–10 1023 March 3, 2025
give rise to the creation of, or increase
in, the basis of any property; and (iii) a
liability the payment of which would be
described in section 736(a) of the Code.
However, such liabilities would not be
excluded under proposed §1.357-4(a)(3)
(i) to the extent (i) the incurrence of the
liability resulted in a deduction, (ii) the
incurrence of the liability resulted in the
creation of, or an increase in, the basis of
any property, or (iii) the liability is not
incurred in the ordinary course of business
or associated with any assets transferred.
IX. Solvency and Continued Viability of
Distributing Corporation and Controlled
Corporation
A. Notice 2024-38
Section 2.02(3) of Notice 2024-38
stated the view of the Treasury Depart-
ment and the IRS that qualification under
section 355 is limited to transactions after
which the distributing corporation and
the controlled corporation are capable
of carrying on sustained businesses. In
this regard, section 355 and related Code
provisions were not enacted to provide
nonrecognition treatment for section 355
transactions that burden the distributing
corporation or the controlled corporation
with excessive leverage, thereby jeopar-
dizing their ability to continue as a viable
going concern. See, for example
, S. Rep.
No. 82-781, at 58 (1951) (providing, in
relevant part, that the predecessor statute
to section 355 was drafted “so as to limit
its benefits to reorganizations in which
all of the new corporations as well as the
parent are intended to carry on a business
after the reorganization”).
B. Stakeholder input
Stakeholders have contended that
substantive guidance under section 355,
357, or 361 is not appropriate to address
the foregoing solvency concern and that
additional rules to address this concern
are unnecessary. First, stakeholders have
asserted that section 355 already provides
safeguards to prevent an abusive trans-
action (such as a transaction involving
the allocation of excess liabilities to the
controlled corporation) from qualifying
under sections 355 and 361. Those safe-
guards include the active trade or business
requirement (see section 355(b)), the cor-
porate business purpose requirement (see
§1.355-2(b)), and the device prohibition
(see section 355(a)(1)(B) and §1.355-
2(d)). Second, stakeholders have noted
that, if a taxpayer’s principal purpose
with respect to a liability assumption is to
avoid Federal income tax on the exchange
or is not a bona fide business purpose,
the total amount of liabilities assumed is
treated as money received by the taxpayer
in the exchange (that is, as taxable boot).
See section 357(b)(1). Third, stakehold-
ers have contended that, if the controlled
corporation is not expected to have the
capacity to repay the assumed debt, that
debt would not be respected as debt for
Federal income tax purposes (and would
be recharacterized as non-voting equity).
Finally, stakeholders have contended that
non-tax safeguards, including commer-
cial constraints on capital allocation and
structuring, State law restrictions (such as
voidable transfers or fraudulent transfers),
bankruptcy law, and third-party evalua-
tions (including credit agency ratings),
operate as limitations on the assumption
of excessive liabilities by the controlled
corporation and, thus, obviate the need for
a solvency requirement under section 355.
C. Proposed regulations
The Treasury Department and the IRS
disagree that the foregoing safeguards
obviate the need for additional guid-
ance to address the solvency concern. As
acknowledged by stakeholders, some dis-
tributing corporations facing substantial
contingent liabilities have separated those
liabilities from the corporations’ primary
assets through divisive reorganizations.
In numerous instances, the controlled cor-
poration has been unable to support those
liabilities through operation of the trans-
ferred business and consequently became
financially unviable, notwithstanding the
safeguards mentioned by stakeholders.
Such separations have been successfully
challenged as fraudulent transfers. See, for
example, In re Tronox Inc., 503 B.R. 239
(Bankr. S.D.N.Y. 2013).
The Treasury Department and the IRS
view the aforementioned transactions and
resulting outcomes as inconsistent with
Congress’s intent that section 355 “limit
its benefits to reorganizations in which all
of the new corporations as well as the par-
ent are intended to carry on a business after
the reorganization.” S. Rep. No. 82-781,
at 58 (1951). For example, the Treasury
Department and the IRS are of the view
that so-called “spin-to-bankruptcy” trans-
actions, in certain situations, would fail to
evidence an intent for the continued con-
duct of the business following the divisive
reorganization.
Accordingly, the Treasury Department
and the IRS intend to address these issues
in forthcoming guidance concerning the
active trade or business requirement under
section 355(b). It is the position of the
Treasury Department and the IRS that,
while such guidance is pending, solvency
and financial viability considerations
continue to be relevant for purposes of
the IRS’s private letter ruling program,
as reflected in Rev. Proc. 2024-24. The
Treasury Department and the IRS request
additional comments on this issue, taking
into account the views described in this
part IX.C.
Proposed Applicability Dates
Each provision of the regulations con-
tained in this notice of proposed rulemak-
ing 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 con-
firmed, or a sale approved, by order of a
court) in a title 11 or similar case, only if
the taxpayer was a debtor in a case before
such court; or (5) the date a ruling request
is submitted to the IRS.
Proposed §§1.355-2(e), 1.355-4, and
1.355-10 would be applicable to sec-
tion 355 transactions occurring after
the general applicability date. Proposed
§§1.357-1 through 1.357-4 would be
applicable to assumptions of liabilities
in transactions intended to qualify under
section 351 or section 361 occurring
after the general applicability date. Pro-

March 3, 2025 1024 Bulletin No. 2025–10
posed §§1.361-1 through 1.361-5 would
be applicable to exchanges under section
361 occurring after the general applica-
bility date. Proposed §§1.368-1(c), 1.368-
2(f), 1.368-3(a)(5), and 1.368-4 would be
applicable to transactions occurring after
the general applicability date.
Effect on Other Documents
The following revenue rulings are
proposed to be obsoleted for transac-
tions occurring after the date of publi-
cation of final regulations in the Fed-
eral Register: Rev. Rul. 2007-8, 2007-1
C.B. 469; Rev. Rul. 95-74, 1995-2 C.B.
36; Rev. Rul. 79-258, 1979-2 C.B. 143;
Rev. Rul. 75-469, 1975-2 C.B. 126; Rev.
Rul. 75-321, 1975-2 C.B. 123; Rev. Rul.
57-518, 1957-2 C.B. 253.
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of
Agreement, Review of Treasury Regula-
tions under Executive Order 12866 (June
9, 2023), tax regulatory actions issued by
the IRS are not subject to the requirements
of section 6 of Executive Order 12866, as
amended. Therefore, a regulatory impact
assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501-3520) (PRA) generally
requires that a Federal agency obtain the
approval of the Office of Management
and Budget (OMB) before collecting
information from the public, whether such
collection of information is mandatory,
voluntary, or required to obtain or retain
a benefit. An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
The general recordkeeping require-
ments mentioned within these proposed
regulations are considered general tax
records under §1.6001-1(e). In connec-
tion with a reorganization, these records
should include information regarding the
amount, basis, and fair market value of
all transferred property, and relevant facts
regarding any liabilities assumed or extin-
guished as part of such reorganization. For
PRA purposes, these general tax records
are already approved under OMB control
number 1545-0123.
The reporting requirements set forth
in proposed §§1.355-5(a)(2) and 1.368-
3(a)(5) require parties to a section 355(c)
distribution or a corporate reorganization
to attach a statement to their return that
includes a copy of the plan of distribution
or the plan of reorganization satisfying
the requirements set forth in proposed
§§1.355-4 or 1.368-4, respectively. The
burden for these requirements will be
approved by OMB, in accordance with 5
CFR 1320.10, under OMB control num-
ber 1545-0123 for business entities.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby certi-
fied that these proposed regulations would
not have a significant economic impact
on a substantial number of small entities.
This certification is based on the fact that
the situations to which these proposed
regulations would apply are primarily
section 355 transactions and acquisitive
reorganizations. Such transactions pri-
marily are engaged in by publicly traded
corporations, which tend to be larger
businesses. Specifically, the Research,
Applied Analytics, and Statistics Divi-
sion of the IRS estimates that, based on
the most recent complete data available,
fewer than one percent of small businesses
with gross receipts under $25 million
would be subject to the requirements of
these regulations annually. To the extent
that transactions qualifying under section
351 or 368(a)(1) also are included, the
percentage of small businesses impacted
remains fewer than one percent of small
businesses with gross receipts under $25
million. In addition, the reporting burden
in these proposed regulations is an incre-
mental, additional obligation on small
entities to a currently existing collection
of information. Moreover, the economic
impact of these proposed regulations will
not be significant.
Therefore, these proposed regulations
would not create significant additional
obligations for, or impose any meaningful
economic impact on, a substantial number
of small entities. Accordingly, the Secre-
tary certifies that the proposed regulations
would not have a significant economic
impact on a substantial number of small
entities and a regulatory flexibility analy-
sis under the Regulatory Flexibility Act is
not required.
IV. Section 7805(f)
Pursuant to section 7805(f) of the
Code, the proposed regulations have been
submitted to the Chief Counsel for the
Office of Advocacy of the Small Business
Administration for comment on its impact
on small business.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires that
agencies assess anticipated costs and ben-
efits and take certain other actions before
issuing a final rule that includes any Fed-
eral mandate that may result in expendi-
tures in any one year by a State, local, or
Tribal government, in the aggregate, or by
the private sector, of $100 million in 1995
dollars, updated annually for inflation.
These proposed regulations do not
include any Federal mandate that may
result in expenditures by State, local, or
Tribal governments, or by the private sec-
tor, in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism)
prohibits an agency from publishing any
rule that has federalism implications if
the rule either imposes substantial, direct
compliance costs on State and local gov-
ernments, and is not required by statute,
or preempts State law, unless the agency
meets the consultation and funding
requirements of section 6 of the Execu-
tive order. This proposed rule does not
have federalism implications and does
not impose substantial direct compliance
costs on State and local governments or
preempt State law within the meaning of
the Executive order.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration

Bulletin No. 2025–10 1025 March 3, 2025
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 comment-
ers are strongly encouraged to submit
comments electronically. The Treasury
Department and the IRS will publish for
public availability any comment submit-
ted 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 com-
ments. Requests for a public hearing also
are encouraged to be made electronically.
If a public hearing is scheduled, notice of
the date and time for the public hearing
will be published in the Federal Register.
Statement of Availability of IRS
Documents
Guidance cited in this preamble is pub-
lished in the Internal Revenue Bulletin
and is available from the Superintendent
of Documents, U.S. Government Publish-
ing Office, Washington, DC 20402, or by
visiting the IRS website at https://www.
irs.gov.
Drafting Information
The principal author of these proposed
regulations is Justin R. Du Mouchel of the
Office of Associate Chief Counsel (Cor-
porate). However, other personnel from
the Treasury Department and the IRS par-
ticipated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Proposed Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS propose to amend 26 CFR
part 1 as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries in
numerical order for §§1.355-2(e), 1.355-
4, 1.355-5, 1.355-10, 1.361-1 through
1.361-5, and 1.368-1 through 1.368-4, and
removing the entry for §1.355-2T(g) and
(i) to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.355-2(e) also issued under 26
U.S.C. 337(d).
* * * * *
Section 1.355-4 also issued under 26
U.S.C. 337(d).
Section 1.355-5 also issued under 26
U.S.C. 337(d).
* * * * *
Section 1.355-10 also issued under 26
U.S.C. 337(d).
* * * * *
Section 1.361-1 also issued under 26
U.S.C. 337(d).
Section 1.361-2 also issued under 26
U.S.C. 337(d).
Section 1.361-3 also issued under 26
U.S.C. 337(d) and 361(b)(3).
Section 1.361-4 also issued under 26
U.S.C. 337(d) and 361(b)(3).
Section 1.361-5 also issued under 26
U.S.C. 337(d) and 361(b)(3).
* * * * *
Section 1.368-1 also issued under 26
U.S.C. 337(d).
Section 1.368-2 also issued under 26
U.S.C. 337(d).
Section 1.368-3 also issued under 26
U.S.C. 337(d).
Section 1.368-4 also issued under 26
U.S.C. 337(d).
* * * * *
Par. 2. Section 1.355-1 is revised and
republished to read as follows:
§1.355-1 Distribution of stock and
securities of a controlled corporation.
(a) Application of section 355—(1)
Overview—(i) In general. Section 355
of the Code provides for the separation,
without recognition of gain or loss to (or
the inclusion in income of) the sharehold-
ers and security holders, of one or more
existing businesses formerly operated,
directly or indirectly, by a single distrib-
uting corporation. Section 355 applies
only to the separation of existing busi-
nesses that have been in active operation
for at least five years (or to the division
of a business that has been in active oper-
ation 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 corpo-
ration. A separation is achieved through
the distribution by the distributing corpo-
ration 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 distri-
butions. Paragraphs (c) and (d) of this sec-
tion provide rules regarding stock rights
and nonqualified preferred stock, respec-
tively. Paragraph (e) of this section pro-
vides applicability dates for certain sec-
tions of the section 355 regulations.
(2) Definitions. Except as otherwise
provided in the section 355 regulations,
the following definitions apply for pur-
poses of the section 355 regulations:
(i) Code. The term Code means the
Internal Revenue Code of 1986, as
amended.
(ii) Commissioner. The term Commis-
sioner means the Commissioner of Inter-
nal Revenue.
(iii) Control distribution. The term
control distribution means a distribution
of controlled corporation stock, or of con-
trolled corporation stock and securities,
that results in the distribution by the dis-
tributing corporation of an amount of con-
trolled corporation stock constituting con-
trol (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 con-
trolled corporation described in section
355(a)(1)(A).

March 3, 2025 1026 Bulletin No. 2025–10
(vi) Distributing corporation. The term
distributing corporation means the dis-
tributing corporation described in section
355(a)(1)(A).
(vii) Distribution. Unless the context
indicates otherwise, the term distribution
means—
(A) With regard to a section 355(c)
distribution, a single distribution or series
of distributions of controlled corporation
stock and securities (if any) carried out
pursuant to a plan of distribution to qual-
ify the distribution or series of distribu-
tions under section 355; or
(B) With regard to a divisive reorga-
nization, 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 distri-
butions 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 reor-
ganization 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 pur-
suant 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 corpora-
tion 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 pro-
vided in §1.355-4.
(xiv) Plan of reorganization. The term
plan of reorganization has the meaning
provided in §1.368-4.
(xv) SEC. The term SEC means the U.S.
Securities and Exchange Commission.
(xvi) Section 355 regulations. The term
section 355 regulations means this section
and §§1.355-2 through 1.355-10.
(xvii) Section 355 transaction. The
term section 355 transaction means either
a section 355(c) distribution or a divisive
reorganization.
(xviii) Section 355(c) distribution. The
term section 355(c) distribution means a
distribution that qualifies under section
355(a) (or so much of section 356 of the
Code as relates to section 355) and section
355(c).
(b) Non pro rata distributions—(1) In
general. Section 355 provides for nonrec-
ognition of gain or loss with respect to a
distribution whether or not—
(i) The distribution is pro rata with
respect to all shareholders of the distribut-
ing 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 con-
trolled corporation may consist of com-
mon stock or preferred stock. (See, how-
ever, section 306 of the Code and the
regulations under section 306.)
(3) Section 355 not applicable to mere
exchanges of stock or securities. Section
355 does not apply if the substance of a
transaction is merely an exchange between
shareholders or security holders of stock
or securities in one corporation for stock
or securities in another corporation. For
example, if two individuals, A and B, each
own directly 50 percent of the stock of
corporation X and 50 percent of the stock
of corporation Y, section 355 would not
apply to a transaction in which A and B
transfer all of their stock of X and Y to a
new corporation Z for all of the stock of Z,
and Z then distributes the stock of X to A
and the stock of Y to B.
(c) Stock rights. Except as provided
in §1.356-6, for purposes of section
355, the term securities includes rights
issued by the distributing corporation
or the controlled corporation to acquire
the stock of that corporation. For pur-
poses 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 con-
nection with a transaction described in
section 355. See, for example, sections
83 and 421 through 424 of the Code and
the regulations under sections 83 and
421 through 424.
(d) Nonqualified preferred stock. See
§1.356-7(a) and (b) for the treatment of
nonqualified preferred stock (as defined
in section 351(g)(2) of the Code) received
in certain exchanges for (or in certain dis-
tributions with respect to) nonqualified
preferred stock or preferred stock. See
§1.356-7(c) for the treatment of the receipt
of preferred stock in certain exchanges for
(or in certain distributions with respect to)
common or preferred stock described in
section 351(g)(2)(C)(i)(II).
(e) Applicability dates—(1) Section
1.355-1—(i) In general. This section
applies to section 355 transactions for
which the earliest of the following dates
occurs after [DATE OF PUBLICATION
OF FINAL REGULATIONS IN THE
FEDERAL REGISTER] (general appli-
cability date):
(A) The date of the first public
announcement (as defined in §1.355-7(h)
(10)) of the section 355 transaction.
(B) The date of entry by the distribut-
ing corporation into a written agreement
to engage in the section 355 transaction.
(C) The date of approval of the section
355 transaction by the board of directors
of the distributing corporation.
(D) The date of a court order (or a plan
confirmed, or a sale approved, by order
of a court) in a title 11 or similar case
(as defined in section 368(a)(3)(A)), but
only if the taxpayer was a debtor in a case
before such court.
(E) The date a ruling request for the
section 355 transaction is submitted to the
IRS.
(ii) Transactions occurring on or
before general applicability date. For
section 355 transactions occurring on or
before the general applicability date, see
26 CFR 1.355-1 and 1.355-4 (revised as
of April 1, 2024).
(2) Sections 1.355-2 and 1.355-3—(i)
In general. Except as otherwise provided
in this paragraph (e)(2), §§1.355-2 and
1.355-3 apply to section 355 transactions
occurring after February 6, 1989. For
section 355 transactions occurring on or
before that date, see 26 CFR 1.355-2 and
1.355-3 (revised as of April 1, 1988).

Bulletin No. 2025–10 1027 March 3, 2025
(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 PUBLI-
CATION OF FINAL REGULATIONS IN
THE FEDERAL REGISTER].
(iii) Section 1.355-2(g). Sections
1.355-2(g) applies to section 355 trans-
actions occurring after October 20, 2011.
For rules regarding section 355 transac-
tions occurring on or before October 20,
2011, see §1.355-2T(i), as contained in 26
CFR part 1, revised as of April 1, 2011.
(3) Section 1.355-4. Section 1.355-4
applies to section 355 transactions for
which the earliest of the dates listed in
paragraphs (e)(1)(i)(A) through (E) of this
section occurs after [DATE OF PUBLI-
CATION 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 PUBLI-
CATION OF FINAL REGULATIONS IN
THE FEDERAL REGISTER].
Par. 3. Section 1.355-2 is amended by:
1. Revising paragraph (e); and
2. Removing paragraph (i).
The revision reads as follows:
§1.355-2 Limitations.
* * * * *
(e) Stock and securities distributed—
(1) Overview. To qualify under section
355, a distributing corporation, as part
of the distribution (within the meaning
of section 355(a)(1)(D)), must distribute
stock, or stock and securities, of the con-
trolled corporation.
(2) Requirements. A distribution does
not qualify under section 355 unless,
pursuant to a plan of distribution (as
described in §1.355-4) or a plan of reorga-
nization (within the meaning of §1.368-4),
the distributing corporation satisfies the
requirements set forth in either paragraph
(e)(2)(i) or (ii) of this section in addition
to satisfying the requirements set forth in
paragraph (e)(2)(iii) of this section.
(i) The distributing corporation dis-
tributes 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 dis-
tributes stock of the controlled corpora-
tion as part of a control distribution during
two taxable years of the distributing cor-
poration, but only if all distributions up to
and including the control distribution are
made pursuant to a binding commitment
that is described in, as appropriate—
(A) The plan of distribution; or
(B) The plan of reorganization.
(iii) Any stock of the controlled cor-
poration not distributed as part of the first
distribution satisfies all requirements for
a qualifying retention (as described in
§1.355-10(c)).
* * * * *
Par. 4. Section 1.355-4 is revised to
read as follows:
§1.355-4 Plan of distribution.
(a) Plan of distribution—(1) Scope and
purpose. This section sets forth require-
ments and procedures for the determina-
tion 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 sec-
tion 355 of the Code and the section 355
regulations, the term
plan of distribution
means—
(i) A plan of distribution of the distrib-
uting corporation that—
(A) Satisfies all requirements set forth
in paragraph (c) of this section; and
(B) Is filed with the IRS pursuant to
§1.355-5(a)(2);
(ii) A plan of distribution of the dis-
tributing corporation that results from the
Commissioner correcting a plan of distri-
bution of a distributing corporation; or
(iii) A plan of distribution of the dis-
tributing corporation that results from the
Commissioner identifying a plan of dis-
tribution for a distributing corporation (in
the event of a failure to file a plan of dis-
tribution with the IRS pursuant to §1.355-
5(a)(2)).
(3) Failure to satisfy requirements. The
failure of a distributing corporation to
comply with any particular requirement or
procedure set forth in this section (includ-
ing the failure to file a plan of distribution
with the IRS pursuant to §1.355-5(a)(2))
does not, on its own, prevent a transaction
or series of transactions from being con-
sidered part of the plan of distribution.
(b) Determination of plan of distribu-
tion—(1) Status generally based on plan
of distribution filed by distributing corpo-
ration. Except as provided in paragraph
(b)(2) of this section, a distributing corpo-
ration establishes the plan of distribution
for a transaction or series of transactions
solely by—
(i) Satisfying all requirements set forth
in paragraph (c) of this section; and
(ii) Filing the plan of distribution with
the IRS pursuant to §1.355-5(a)(2).
(2) Correction or identification of plan
of distribution due to distributing corpo-
ration’s failure to file a complete plan of
distribution—(i) In general. If a distrib-
uting corporation files a plan of distribu-
tion with the IRS that fails to satisfy any
requirement set forth in paragraph (c) of
this section, or if the distributing corpo-
ration fails to file any plan of distribution
with the IRS, the Commissioner may cor-
rect or identify a plan of distribution in
accordance with paragraph (b)(2)(ii) of
this section.
(ii) Status of distributions as part of a
plan of distribution. The Commissioner
may determine that a distribution or series
of distributions should be included in,
or excluded from, a plan of distribution
described in paragraph (b)(2)(i) of this
section based on—
(A) All facts and circumstances regard-
ing the distribution or series of distribu-
tions; 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 distri-
bution. 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 para-
graphs (c)(1) through (3) of this section.
For purposes of this paragraph (c) and
paragraph (d) of this section, the term offi-
cial records includes a contract or other
agreement to which the distributing cor-
poration is a party, a resolution or other
document authorized by the distributing

March 3, 2025 1028 Bulletin No. 2025–10
corporation’s board of directors, or other
document filed with the SEC or other Fed-
eral regulatory agency.
(1) Documentation requirement. The
plan of distribution is provided in a single,
comprehensive document that—
(i) Identifies the distributing corpora-
tion 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 appli-
cable, is finalized and adopted by the dis-
tributing corporation, as established by—
(i) The acts of the distributing corpora-
tion’s duly authorized officers and direc-
tors; and
(ii) The distributing corporation’s offi-
cial records.
(3) Completion of plan of distribu-
tion—(i) Expeditious prosecution of plan
of distribution—(A) General rule. In
accordance with paragraph (c)(3)(ii) of
this section, taking into account all facts
and circumstances (including the one or
more corporate business purposes for each
distribution), the distributing corporation
completes the plan of distribution as expe-
ditiously 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 dis-
tribution—(A) General rule. All distri-
butions included in a plan of distribu-
tion 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 para-
graph (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 dis-
tribution.
(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 sat-
isfied.
(1) Definite intent requirement—(i)
General rule. Prior to the first step of the
plan of distribution or of an original plan
of distribution that becomes the amended
plan of distribution (within the meaning
of paragraph (e) of this section), the dis-
tributing corporation evidences a definite
intent to carry out the distribution through
a written commitment in one or more offi-
cial 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 dis-
tribution, the distributing corporation does
not establish a definite intent under para-
graph (d)(1)(i) of this section unless all
distributions up to and including the con-
trol distribution are effectuated pursuant
to a binding commitment of the distribut-
ing corporation. See §1.355-2(e)(2)(ii).
(iii) Relevancy of contemplated possi-
bilities—(A) Contemplation irrelevant to
distributing corporation’s determination.
The contemplation by the distributing
corporation that it may carry out a distri-
bution 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 Com-
missioner’s determination. The distribut-
ing corporation’s contemplation of a dis-
tribution may be relevant for purposes of
the correction or identification of a plan of
distribution by the Commissioner pursu-
ant to paragraph (b)(2) of this section.
(2) Proximate relationship require-
ment—(i) General rule. Taking into
account paragraphs (d)(2)(ii) and (iii) of
this section, a distribution is part of the
plan of distribution to which the provi-
sions 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 distri-
butions carried out to satisfy the require-
ments of section 355, as evidenced by a
written commitment in one or more offi-
cial records of the distributing corpora-
tion.
(ii) Existence of independent signif-
icance not determinative. The indepen-
dent 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 pre-
clude the satisfaction of the requirements
under paragraph (d)(2)(i) of this section.
(iii) Temporal proximity. A distribution
that takes place in close temporal proxim-
ity to one or more other distributions is
not properly included in a plan of distribu-
tion under paragraph (d)(2)(i) of this sec-
tion unless Federal income tax principles
(including the step transaction doctrine)
would apply to determine that the distri-
bution was in substance part of the plan of
distribution.
(3) Corporate business purpose con-
sistency requirement. A distribution, on its
own or as part of a series of distributions,
is consistent with, and directly related to,
one or more corporate business purposes
for the one or more other distributions (for
example, the distribution directly furthers
one or more corporate business purposes
for the one or more other distributions).
(e) Amended plan of distribution—(1)
Conditions. If the distributing corporation
amends a plan of distribution described in
paragraph (a)(2)(i) of this section (original
plan of distribution) after the first step of
the original plan of distribution (amended
plan of distribution), those amendments
will not cause the distributing corporation
to fail to satisfy the requirements set forth
in paragraph (c) of this section only if—
(i) Those amendments are in direct
response to an identifiable, unexpected,
and material change in market or business
conditions that occurs after the date on
which the original plan of distribution is
adopted by the distributing corporation in
the manner described in paragraph (c)(2)
of this section;

Bulletin No. 2025–10 1029 March 3, 2025
(ii) Those amendments are necessary
to achieve the one or more corporate busi-
ness purposes for the distribution; and
(iii) The amended plan of distribution
satisfies all requirements set forth in para-
graph (c) of this section.
(2) Consequences of plan of distri-
bution amended due to changed circum-
stances—(i) Qualifying amended plan of
distribution. If the requirements set forth
in paragraph (e)(1) of this section are
satisfied, the provisions set forth in sec-
tion 355 will apply to distributions iden-
tified 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 dis-
tribution fails to satisfy all requirements
set forth in paragraph (e)(1) of this sec-
tion, the Commissioner may correct the
amended plan of distribution or may iden-
tify an amended plan of distribution.
(f) Examples. The following examples
illustrate the application of the rules of this
section. For purposes of these examples,
unless otherwise provided: a distributing
corporation (Distributing) owns all the
stock of an existing controlled corporation
(Controlled); Distributing properly files a
plan of distribution with the IRS pursuant
to §1.355-5 that satisfies all requirements
set forth in paragraph (c) of this section,
including providing the corporate busi-
ness purpose for each distribution and the
intended Federal income tax treatment
of those distributions (that is, a section
355(c) distribution, as defined in §1.355-
1(a)(2)(xviii)) and completing the plan of
distribution as expeditiously as practica-
ble; Distributing satisfies all requirements
for qualification under section 355; and
with regard to any retained controlled cor-
poration stock (as defined in §1.355-10(b)
(7)), the requirements set forth in §1.355-
10(c) are satisfied.
(1) Example 1: Status of distributions as part of
the plan of distribution—(i) Facts. Official records
of Distributing provide that Distributing will distrib-
ute, 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 remain-
ing 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 Distribut-
ing’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 Distrib-
uting will distribute another appreciated asset (Asset
2) to its shareholders during Distributing’s 2026 tax-
able year (Asset 2 distribution). As reflected in offi-
cial records of Distributing, the control and final dis-
tributions, 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 dis-
tribution for the separation. First, as reflected in offi-
cial 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 para-
graph (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 corpo
-
rate business purpose for the distributions. See para-
graph (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 distribu-
tion is not properly included in the plan of distribu-
tion for the separation because not all requirements
set forth in paragraph (d) of this section are satisfied.
Specifically, as evidenced by official records of Dis-
tributing, Distributing treats the Asset 2 distribution
as a contemplated possibility, thereby failing to evi-
dence a definite intent to carry out the transaction.
See paragraph (d)(1)(iii)(A) of this section. Accord-
ingly, Distributing recognizes gain on its distribution
of Asset 2 under section 311(b) (as opposed to sec-
tion 355(c)(2)).
(2) Example 2: Identifiable, unexpected change
in market or business conditions—(i) Facts. The
facts are the same as in paragraph (f)(1)(i) of this
section (Example 1), except for the following. Fol-
lowing the date of adoption of Distributing’s plan
of distribution for the separation, and before the
intended date of the final distribution, market condi-
tions 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 suf-
ficiently to permit the final distribution, and Distrib-
uting accordingly makes the final distribution during
that taxable year.
(ii) Analysis. The final distribution is properly
included in the plan of distribution for the separa-
tion. 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 identifi-
able, 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, Dis-
tributing’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 para-
graph (e)(1) of this section are satisfied and there-
fore 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 distri-
bution (and not on the original plan of distribution).
See paragraph (e)(2)(i) of this section.
Par. 5. Section 1.355-5 is revised to
read as follows:
§1.355-5 Information reporting and
record retention requirements.
(a) Reporting of transaction informa-
tion—(1) [Reserved]
(2) Plan of distribution. With regard to
a section 355(c) distribution, the distrib-
uting corporation must include, with its
return for the taxable year of the first dis-
tribution, a copy of its plan of distribution
for the section 355(c) distribution satisfy-
ing the requirements of §1.355-4.
(3) Plan of reorganization. With regard
to a divisive reorganization, see §1.368-
3(a).
(b) [Reserved]
(c) [Reserved]
(d) Applicability date—(1) [Reserved]
(2) Paragraphs (a)(2) and (3). Para-
graphs (a)(2) and (3) of this section apply
to section 355 transactions for which the
earliest of the following dates occurs after

March 3, 2025 1030 Bulletin No. 2025–10
[date of publication of final regulations in
the Federal Register]:
(i) The date of the first public announce-
ment (as defined in §1.355-7(h)(10)) of
the section 355 transaction.
(ii) The date of entry by the distribut-
ing 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:
§1.355-10 Qualifying retentions
of controlled corporation stock or
securities.
(a) Overview. For a distribution to qual-
ify 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 defini-
tions apply for purposes of this section:
(1) CSAG—(i) In general. Except as
provided in paragraph (b)(1)(ii) of this
section, the term CSAG means the sepa-
rate affiliated group (as defined in section
355(b)(3)(B) of the Code) of which the
controlled corporation is the common par-
ent.
(ii) Controlled corporation not com-
mon 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 corpora-
tion related person means a person that is
related to a distributing corporation within
the meaning of section 267(b) or 707(b)
(1) of the Code, determined immediately
before the control distribution date.
(3) DSAG—(i) In general. The term
DSAG means the separate affiliated group
(as defined in section 355(b)(3)(B)) of
which the distributing corporation is the
common parent.
(ii) Distributing corporation not com-
mon parent. If the distributing corporation
is not the common parent of a separate
affiliated group, the term DSAG means the
distributing corporation.
(4) Key employee. The term key
employee means, with regard to a business
of the DSAG or CSAG, an employee—
(i) Who possesses specialized and
unique expertise with regard to that busi-
ness 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 signifi-
cantly detrimental to that business; and
(iii) Who would be difficult to replace
due to the attributes described in para-
graph (b)(4)(i) of this section.
(5) Option. The term option means
a call option, a warrant, a convertible
obligation, a conversion feature of con-
vertible stock, a put option, a redemption
agreement (including the right to cause
the redemption of stock), any other instru-
ment that provides for the right or possi-
bility 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 sec-
tion.
(7) Retained controlled corporation
stock (or securities). The term retained
controlled corporation stock (or securi-
ties) 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 securi-
ties 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 con-
trolled corporation stock (or securities) by
a distributing corporation after the first
distribution date.
(c) General rule—(1) Presumption of
tax avoidance. A retention is treated as
pursuant to a plan having as one of its
principal purposes the avoidance of Fed-
eral income tax unless the retention is a
qualifying retention.
(2) Qualifying retention—(i) In gen-
eral. A qualifying retention is a retention
that—
(A) Satisfies all requirements set forth
in paragraphs (c)(2)(ii) and (iii) of this
section; or
(B) Satisfies the requirements set forth
in paragraph (c)(2)(iii) of this section and
meets the safe harbor set forth in para-
graph (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 (includ-
ing 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 para-
graphs (c)(2)(ii)(A) through (E) of this
section are satisfied.
(A) The distribution resulted in a gen-
uine 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 busi-
ness purpose for the retention as of the
date on which the plan of distribution or
the plan of reorganization (as applicable)
is adopted in accordance with §1.355-4(c)
(2) or 1.368-4(d)(2), respectively.
(D) There is a sufficient corporate busi-
ness purpose for the retention at all times
during the period of retention.
(E) The disposition of retained con-
trolled corporation stock (or securities)
would not result in less Federal income
tax to the distributing corporation (deter-
mined 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

Bulletin No. 2025–10 1031 March 3, 2025
votes cast by the controlled corporation’s
other shareholders (other than distributing
corporation related persons).
(3) Safe harbor for rebutting tax avoid-
ance presumption—(i) General rule. A dis-
tributing corporation is considered to have
met the requirements of the facts-and-cir-
cumstances test set forth in paragraph (c)
(2)(ii) of this section if the distributing
corporation satisfies all requirements
described in paragraphs (c)(3)(ii) through
(vii) of this section and either—
(A) With regard to a section 355(c)
distribution, includes in its plan of dis-
tribution a description of each agreement
and transaction that establishes the satis-
faction of the requirements described in
paragraphs (c)(3)(ii) through (vii) of this
section; or
(B) With regard to a divisive reorga-
nization, includes in its plan of reorga-
nization a description of each agreement
and transaction that establishes the satis-
faction 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 reten-
tion—
(A) As of the date on which the plan of
distribution or the plan of reorganization
(as applicable) is adopted in accordance
with §1.355-4(c)(2) or 1.368-4(d)(2),
respectively; and
(B) At all times during the period of
retention.
(iii) Controlled corporation stock is
widely held. Stock of the controlled cor-
poration (including a successor to the con-
trolled corporation (within the meaning
of §1.355-8(c)(2))) is widely held during
the period of retention after the first dis-
tribution date. For example, stock of the
controlled corporation is considered to be
widely held if it is traded on an established
securities market (within the meaning of
§1.7704-1(b)).
(iv) Overlapping officers, directors,
or key employees. No officers, directors,
or key employees of a member of the
DSAG serve as an officer, a director, or a
key employee of a member of the CSAG
during the period of retention, unless—
(A) The officer, director, or key
employee of a member of the DSAG
serves as an officer, a director, or a key
employee of a member of the CSAG
solely to accommodate the CSAG’s busi-
ness needs;
(B) The overlapping directors do not
constitute a majority of the CSAG mem-
ber’s board; and
(C) The duration of the overlap for offi-
cers, directors, and key employees is for
an identified, limited period of time, not
in excess of two years after the first distri-
bution date.
(v) Continuing arrangements. Any
continuing arrangement between the dis-
tributing corporation and the controlled
corporation during the period of reten-
tion—
(A) Is negotiated on, and reflects,
arm’s-length terms; or
(B) If the arrangement is not described
in paragraph (c)(3)(v)(A) of this section,
is—
(1) Terminated within two years after
the first distribution date; or
(2) Renegotiated within two years after
the first distribution date to reflect arm’s-
length terms.
(vi) Disposition of retained controlled
corporation stock (or securities). The plan
of distribution or plan of reorganization,
as appropriate, reflects a definite intent
in the official records of the distributing
corporation that the distributing corpo-
ration will dispose of all retained con-
trolled 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 Fed-
eral 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 corpora-
tion (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 con-
trolled corporation (Controlled) with a
single class of outstanding stock that is
directly owned by Distributing; and the
DSAG operates a banking business and a
title insurance business, with Controlled
operating the banking business, and the
remaining DSAG members (including
Distributing) operating the title insurance
business.
(1) Example 1: Not a qualifying retention—(i)
Facts. Distributing distributes 80 percent of Con-
trolled’s stock to Distributing’s shareholders in a
single distribution on a pro rata basis during Dis-
tributing’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 owner-
ship interest in Controlled, thereby reducing Distrib-
uting’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 reten-
tion 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 sec-
tion because directors of Distributing will serve as
directors of Controlled for a period that is not lim-
ited 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 Con-
trolled 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 distri-
bution does not result in a genuine separation, Dis-
tributing retains practical control over Controlled,
and there is not a sufficient corporate business pur-
pose for the retention. See paragraphs (c)(2)(ii)(A)
through (D) of this section. Accordingly, Distribut-
ing’s retention is not a qualifying retention. Conse-

March 3, 2025 1032 Bulletin No. 2025–10
quently, the first distribution (and any subsequent
distribution of Controlled stock) does not qualify
under section 355. See paragraphs (a) and (c)(1) of
this section and §1.355-2(e)(2)(iii).
(2) Example 2: Safe harbor—(i) Facts. Distrib-
uting distributes 95 percent of Controlled’s stock
to Distributing’s shareholders in a single distri-
bution on a pro rata basis during Distributing’s
2025 taxable year (first distribution) and retains 5
percent of Controlled stock (retention). The corpo-
rate business purpose for the retention, as of the
date on which the plan of distribution is adopted
in accordance with §1.355-4(c)(2) and throughout
the period of retention, is to enable Distributing to
have assets of sufficient value (which otherwise
would not be available absent the retention) to
serve as collateral for needed short-term financing
for Distributing’s remaining business enterprise.
The stock of Controlled is traded on an established
securities market (within the meaning of §1.7704-
1(b)) throughout the period of retention. The plan
of distribution reflects a definite intent in the offi-
cial 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 require-
ments for the safe harbor set forth in paragraph (c)
(3) of this section. However, to have a qualifying
retention, Distributing also must meet the require-
ment set forth in paragraph (c)(2)(iii) of this section.
See paragraph (c)(2)(i)(B) of this section.
(3) Example 3: Overlapping directors—(i)
Facts. The facts are the same as in paragraph (d)(2)
(i) of this section (Example 2), except that directors
of Distributing that are recognized as experts in the
banking industry will serve as two of the six direc-
tors 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 sec-
tion. See paragraph (c)(3)(iv)(C) of this section.
(4) Example 4: Safe harbor is not met but
facts-and-circumstances test is met—(i) Facts.
The facts are the same as in paragraph (d)(2)(i) of
this section (Example 2), except that Distributing
must retain the Controlled stock (to meet collateral
requirements) for at least six years after the first dis-
tribution 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 para-
graph (c)(3) of this section because the plan of distri-
bution 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 con-
trol 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 accor-
dance with §1.355-4(c)(2), there is a sufficient
corporate business purpose for the retention at all
times during the period of retention, and the dis-
position of the retained Controlled stock will not
result in less Federal income tax to Distributing
than if Distributing had distributed the Controlled
stock in the first distribution. Accordingly, provided
Distributing also meets the requirement set forth in
paragraph (c)(2)(iii) of this section, the retention is
a qualifying retention under paragraph (c)(2)(i)(A)
of this section.
(5) Example 5: Not a qualifying retention—(i)
Facts. The facts are the same as in paragraph (d)(2)
(i) of this section (Example 2), except that Distribut-
ing 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 require-
ments 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-circum-
stances 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 reten-
tion. See paragraph (c)(2)(i) of this section. Conse-
quently, the distribution does not qualify under sec-
tion 355. See paragraphs (a) and (c)(1) of this section
and §1.355-2(e)(2)(iii).
Par. 7. Section 1.357-0 is added to read
as follows:
§1.357-0 Table of contents.
This section lists the major captions
that appear in §§1.357-1 through 1.357-5.
§1.357-1 Assumption of liability.
(a) Overview.
(b) Definitions.
(1) Code.
(2) Commissioner.
(3) Contingent liability.
(4) Controlled corporation.
(5) CSAG.
(i) In general.
(ii) Controlled corporation not a com-
mon 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 com-
mon 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 corpora
-
tion debt.
(18) Section 357 regulations.
(19) Trade payable.

Bulletin No. 2025–10 1033 March 3, 2025
(20) Transferee corporation.
(21) Transferor.
(22) Traveling note.
§1.357-2 Application of section 357(a).
(a) In general.
(b) Amount realized.
(c) Treatment of traveling notes.
(d) Determination of amount of liabil-
ity 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.
§1.357-3 Application of section 357(b).
(a) Principal purpose standard.
(1) General rule.
(2) Ordinary course of business
requirement.
(b) Amount of gain recognized.
(c) Burden of proof.
(d) Eligible distributing corporation
liabilities.
(1) Scope.
(2) In general.
(3) Eligible assumptions of Distribut-
ing 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 reorga-
nization.
(6) Example 6: Assumption to avoid
Federal income tax in a section 351
exchange.
§1.357-4 Application of section 357(c).
(a) Liabilities in excess of adjusted
basis.
(1) General rule.
(2) Exceptions.
(3) Certain liabilities excluded.
(i) General rule.
(ii) Exceptions.
(b) Determination of character of gain
of multiple capital assets.
(c) Examples.
(1) Example 1: Determination of char-
acter of gain.
(2) Example 2: Capital and non-capital
assets.
(3) Example 3: Liabilities in excess of
adjusted basis.
§1.357-5 Applicability date.
(a) Applicability date.
Par. 8. Section 1.357-1 is revised to
read as follows:
§1.357-1 Assumption of liability.
(a) Overview. The section 357 regula-
tions apply to the assumption by a trans-
feree corporation of a liability of a trans-
feror 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 reorganiza-
tion).
(b) Definitions. The following defini-
tions 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 Commis-
sioner means the Commissioner of Inter-
nal Revenue.
(3) Contingent liability. The term con-
tingent liability means a liability (other
than a debt) that includes one or more
contingent payments.
(4) Controlled corporation. The term
controlled corporation means the con-
trolled corporation described in section
355(a)(1)(A) of the Code.
(5) CSAG—(i) In general. Except as
provided in paragraph (b)(5)(ii) of this
section, the term CSAG means the sepa-
rate affiliated group (as defined in section
355(b)(3)(B)) of which a controlled cor-
poration is the common parent.
(ii) Controlled corporation not a com-
mon 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 lia-
bility pursuant to an instrument or a
contractual arrangement that constitutes
debt under general principles of Federal
income tax law. See §1.1275-1(d).
(7) Distributing corporation. The term
distributing corporation means the dis-
tributing corporation described in section
355(a)(1)(A).
(8) Distributing corporation debt—(i)
In general. The term distributing corpora-
tion debt means debt for which the distrib-
uting 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 trans-
action 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 reor-
ganization described in sections 355 and
368(a)(1)(D) or (G) of the Code.
(11) DSAG—(i) In general. Except as
provided in paragraph (b)(11)(ii) of this
section, the term DSAG means the sepa-
rate 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 cor-
poration is not the common parent of a

March 3, 2025 1034 Bulletin No. 2025–10
separate affiliated group, the term DSAG
means the distributing corporation.
(12) Earliest applicable date—(i) In
general. The term earliest applicable date
means the date that is the earliest of—
(A) The date of the first public
announcement (as defined in §1.355-7(h)
(10)) of the divisive reorganization or a
similar transaction;
(B) The date of entry by the distribut-
ing corporation into a written agreement
to engage in the divisive reorganization or
a similar transaction; and
(C) The date of approval of the divisive
reorganization or a similar transaction by
the board of directors of the distributing
corporation.
(ii) Similar transaction. For purposes
of paragraph (b)(12)(i) of this section, the
term similar transaction means a similar
acquisition within the meaning of §1.355-
7(h)(12) and (13).
(13) Historical distributing corpora-
tion debt. The term historical distributing
corporation debt means a debt of the dis-
tributing corporation that was in existence
as of the earliest applicable date, has an
original term that ends after the date of
the exchange described in §1.361-2(a) or
1.361-3(a), and is identified in the plan of
reorganization or original plan of reorga-
nization (if amended).
(14) IRS. The term IRS means the Inter-
nal Revenue Service.
(15) Liability—(i) In general. The
term liability means a debt, a contingent
liability, or any other fixed or contingent
obligation, without regard to whether the
obligation otherwise has been taken into
account for Federal income tax purposes.
(ii) Certain obligations incurred in the
ordinary course of business—(A) In gen-
eral. Except as provided in paragraph (b)
(15)(ii)(B) of this section, an obligation
incurred in the ordinary course of busi-
ness 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 lia-
bility, reserve, or similar item.
(16) Plan of reorganization. The term
plan of reorganization has the meaning
provided in §1.368-4.
(17) Refinanced distributing corpora-
tion debt. The term refinanced distributing
corporation debt means debt of a distrib-
uting corporation—
(i) That is incurred on or after the earli-
est applicable date; and
(ii) The proceeds of which are used to
satisfy a historical distributing corporation
debt.
(18) Section 357 regulations. The term
section 357 regulations means this section
and §§1.357-2 through 1.357-5.
(19) Trade payable. The term trade
payable means debt arising in the ordinary
course of a business from sales, leases,
licenses, or the rendition of services pro-
vided to or for the distributing corporation.
(20) Transferee corporation. The term
transferee corporation means a corpora-
tion to which property is transferred pur-
suant 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 corpo-
ration.
Par. 9. Section 1.357-2 is revised to
read as follows:
§1.357-2 Application of section 357(a).
(a) In general. Except as provided in
§§1.357-3 and 1.357-4, and subject to the
requirements set forth in paragraph (e) of
this section, the assumption by a trans-
feree corporation of a liability of a trans-
feror 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 sec-
tion 351 or 361 of the Code, if—
(1) The transferor receives property
that would be permitted to be received
under section 351 or 361 without the
recognition of gain to the transferor if
that property were the sole consideration
received by the transferor; and
(2) As part of the consideration, the
transferee corporation assumes a liability
of the transferor.
(b) Amount realized. Neither section
357(a) of the Code nor this section pre-
cludes 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 real-
ized 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 assum-
ing 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 trans-
feree corporation under the terms of the
note.
(d) Determination of amount of liabil-
ity assumed—(1) In general. For purposes
of this section and §§1.357-3, 1.357-4,
1.358-3, 1.358-5, 1.358-7, 1.361-3(c)(2),
and 1.368-2(d), the rules of this paragraph
(d) apply in determining the amount of
liabilities assumed by a transferee corpo-
ration.
(i) Recourse liability. A recourse lia-
bility (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 gen-
eral. A nonrecourse liability of a trans-
feror 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 nonre-
course liability treated as assumed. The
amount of any nonrecourse liability of
a transferor treated as assumed under
paragraph (d)(1)(ii)(A) of this section is
reduced by the lesser of—
(1) The amount of that liability that an
owner of other assets not transferred to the
transferee corporation and also subject to
that liability has agreed with the transferee
corporation to, and is expected to, satisfy; or
(2) The fair market value of the assets
described in paragraph (d)(1)(ii)(B)(1) of
this section (determined without regard to
section 7701(g) of the Code).

Bulletin No. 2025–10 1035 March 3, 2025
(2) [Reserved]
(e) Dominion or control over payment
of assumed liability—(1) General rule. If
the transferee corporation (or, in the case
of a divisive reorganization, a member of
the CSAG) makes a payment to satisfy an
assumed liability that results in the trans-
feror (or, in the case of a divisive reorga-
nization, a member of the DSAG) having
legal or practical dominion or control over
any part of the payment—
(i) That part of the payment is treated
as money or other property received by
the transferor;
(ii) The rules in section 351(b) or
361(b) (as applicable) apply to determine
the Federal income tax consequences of
the receipt by the transferor of the money
or other property; and
(iii) The rules in this section and
§§1.357-3 and 1.357-4 do not apply (that
is, the Federal income tax consequences
of the payment are not determined under
section 357).
(2) Dominion or control—(i) In gen-
eral. Except as provided in paragraph (e)
(2)(ii) or (iii) of this section, the determi-
nation of whether a payment is within a
transferor’s legal or practical dominion or
control is made based on all facts and cir-
cumstances.
(ii) Segregated account; related per-
son. 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 trans-
feror (or, in the case of a divisive reorga-
nization, 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 sec-
tion (as appropriate) are satisfied.
(A) Indemnification agreements. For
payments made pursuant to an indemnifi-
cation agreement:
(1) The transferee corporation is legally
prohibited from assuming the liability (for
example, because the transferor is pro-
hibited 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 indem-
nification 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 inde-
pendent 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 liabili-
ties 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 reorgani-
zation entered into between the transferor
and the transferee corporation before the
date of the exchange.
(1) Example 1: Application of general rule—(i)
Facts. In an exchange that qualifies under section
351, Individual A transfers to a transferee corpora-
tion property with an adjusted basis of $10,000x in
exchange for stock of the corporation with a fair mar-
ket value of $8,000x, money amounting to $3,000x,
and the assumption by the corporation of a liability
of Individual A amounting to $4,000x.
(ii) Analysis. Individual A’s realized gain is
$5,000x, computed as follows:
Table 1 to paragraph (f)(1)(ii)
Stock received, fair market value$8,000x
Money received3,000x
Liability assumed by transferee corporation4,000x
Total consideration received15,000x
Less: Adjusted basis of property transferred10,000x
Gain realized5,000x
The gain recognized to Individual A is limited to
the $3,000x of money received, because the assump-
tion of the $4,000x liability does not constitute
money or other property. See paragraph (a) of this
section and section 351(b).
(2) Example 2: Dominion or control—(i) Facts.
A distributing corporation (Distributing) transfers
one of its businesses to a newly formed controlled
corporation (Controlled) in exchange for Controlled
stock (contribution). Distributing distributes all the
Controlled stock to its shareholders (distribution;
together with the contribution, the separation). As
part of the contribution, Controlled agrees to assume
a contingent liability of Distributing. The separation
satisfies all requirements to qualify as a divisive reor-

March 3, 2025 1036 Bulletin No. 2025–10
ganization. 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 con-
trol—(i) Facts. The facts are the same as in para-
graph (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 agree-
ment 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. Pur-
suant to the terms of the indemnity agreement,
Controlled transfers to Distributing $200x, which
Distributing retains. The $200x payment from Con-
trolled 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 hav-
ing 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 Dis-
tributing in the contribution. See paragraph (a) of
this section.
Par. 10. Sections 1.357-3 through
1.357-5 are added to read as follows:
§1.357-3 Application of section 357(b).
(a) Principal purpose standard—(1)
General rule. Section 1.357-2(a) does
not apply to any exchange involving the
assumption by a transferee corporation of
a liability of a transferor if the principal
purpose of the transferor with respect to
that assumption is either—
(i) To avoid Federal income tax on the
exchange; or
(ii) Not a bona fide business purpose.
(2) Ordinary course of business
requirement. With regard to an assump-
tion by a transferee corporation of a lia-
bility 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 pur-
poses 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 prop-
erty received by the transferor under sec-
tion 351(b) or 361(b) (as applicable) of the
Code upon the exchange.
(c) Burden of proof. If the Commis-
sioner 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 pre-
ponderance of the evidence that the liabil
-
ity assumption should not be treated as the
receipt of money or other property. There-
fore, the transferor must prove by such a
clear preponderance of all the evidence
that the absence of a purpose to avoid Fed-
eral income tax on the exchange, or the
presence of a bona fide business purpose,
is unmistakable.
(d) Eligible distributing corporation
liabilities—(1) Scope. The rules of this
paragraph (d) apply solely to divisive
reorganizations.
(2) In general. A distributing corpo-
ration 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 liabil-
ity that is not eligible to be assumed under
paragraph (d)(3) of this section.
(3) Eligible assumptions of Distribut-
ing corporation liabilities. Distributing
corporation liabilities are eligible to be
assumed under §1.357-2(a) in a divisive
reorganization if—
(i) The distributing corporation liabili-
ties to be assumed are described in a plan
of reorganization or original plan of reor-
ganization (if amended);
(ii) The distributing corporation liabil-
ities were incurred in the ordinary course
of business of the distributing corporation;
and
(iii) The assumption of such distribut-
ing corporation liabilities is necessary—
(A) To ensure the transfer to the con-
trolled corporation of all liabilities prop-
erly associated with the business assets
transferred to that corporation; and
(B) To result in the controlled corpora-
tion assuming liabilities in an amount that
properly relates to its business operations,
the earnings of which will be used to prop-
erly satisfy those liabilities.
(4) Distributing corporation debt—(i)
In general. Except as provided in para-
graph (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 cor-
poration debt.
(ii) Exceptions. The following excep-
tions apply to the general rule in para-
graph (d)(4)(i) of this section:
(A) Qualifying trade payables. For
purposes of paragraph (d)(4)(i) of this sec-
tion, solely trade payables of the distribut-
ing 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 distrib-
uting corporation debt. For purposes of
paragraph (d)(4)(i) of this section, refi-
nanced distributing corporation debt is
treated as historical distributing corpora-
tion 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 pur-
poses of this paragraph (d)(4)(ii)(B)(1),
the modification of the capital structure
of the distributing corporation or the con-
trolled corporation is not a direct business
purpose unless that modification directly
accomplishes a corporate business pur-
pose of the distributing corporation.
(2) The distributing corporation’s refi-
nancing of its historical distributing cor-
poration debt is completed before the con-
trolled corporation’s assumption of that
refinanced distributing corporation debt.

Bulletin No. 2025–10 1037 March 3, 2025
(3) Following the controlled corpora-
tion’s assumption of the refinanced dis-
tributing 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 histor-
ical distributing corporation debt.
(4) The distributing corporation’s refi-
nancing of its historical distributing corpo-
ration debt and the subsequent assumption
of that refinanced distributing corporation
debt are included in the plan of reorgani-
zation 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 corpora-
tion’s refinancing of a historical distribut-
ing corporation debt and the assumption
by the controlled corporation of that refi-
nanced 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 corpora-
tion debt assumed by the controlled cor-
poration.
(7) The refinancing of a historical
distributing corporation debt by the dis-
tributing corporation and the subsequent
assumption of that refinanced distributing
corporation debt by the controlled corpo-
ration result in the controlled corporation
assuming liabilities in an amount that
properly relates to its business operations
and will be properly satisfied with earn-
ings generated by those operations.
(C) Qualifying assumption of a trav-
eling note. For purposes of paragraph (d)
(4)(i) of this section, a controlled corpo-
ration’s assumption of a traveling note
(within the meaning of §1.357-2(c))
issued to refinance a historical distributing
corporation debt will be treated as histori-
cal distributing corporation debt only if all
requirements set forth in paragraph (d)(4)
(ii)(B) of this section are satisfied.
(D) Revolving credit agreements. For
purposes of paragraph (d)(4)(i) of this
section, a revolving credit agreement to
which the distributing corporation is a
debtor qualifies as historical distributing
corporation debt only if—
(1) The distributing corporation
entered into the agreement before the ear-
liest applicable date;
(2) That agreement does not expire until
after the date of the exchange described in
§1.361-2(a) or 1.361-3(a); and
(3) That agreement is identified in the
plan of reorganization or original plan of
reorganization (if amended).
(e) Examples. The following examples
illustrate the application of the rules of
this section. For purposes of these exam-
ples: any liability assumption is provided
for in an agreement or a plan of reorgani-
zation entered into between the transferor
and transferee corporation before the date
of the exchange; and the amount of liabili-
ties assumed by the transferee corporation
does not exceed the adjusted basis of the
assets transferred to the transferee corpo-
ration in the exchange.
(1) Example 1: Application of general rule—(i)
Facts. In an exchange that qualifies under section
351, Individual A transfers to a transferee corpo-
ration 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. Individ-
ual A’s principal purpose for causing the transferee
corporation to assume the $4,000x liability is to
avoid Federal income tax on the exchange.
(ii) Analysis. Individual A’s realized gain is
$5,000x, computed as follows:
Table 1 to paragraph (e)(1)(ii)
Stock received, fair market value$8,000x
Money received3,000x
Liability assumed by transferee corporation4,000x
Total consideration received15,000x
Less: Adjusted basis of property transferred10,000x
Gain realized5,000x
Because Individual A’s principal purpose for the
assumption of the $4,000x liability is to avoid Fed-
eral 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 corpo-
ration debt—(i) Facts—(A) In general. A distrib-
uting 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 Distribut-
ing (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 Distribut-
ing intended Controlled to assume in the contribution
is a $4,000x portion of a $25,000x historical Distrib-
uting 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 Distribut-
ing refinances that portion of its historical debt, Dis-
tributing will be unable to have Controlled assume
an amount of existing historical debt that properly
relates to, and to have that debt properly be satis-
fied 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 refi-
nanced debt assumption), and the bank relieves Dis-
tributing of its primary liability for repayment of the
New Loan.
(ii) Analysis. The Controlled refinanced debt
assumption satisfies all requirements set forth in
paragraph (d)(4)(ii)(B) of this section and, therefore,
is treated under paragraph (d)(3) of this section as an
eligible assumption by Controlled to which §1.357-
2(a) applies. Distributing has a direct business pur-
pose for Controlled’s assumption of the New Loan.
See paragraph (d)(4)(ii)(B)(1) of this section. Dis-
tributing’s refinancing of its historical debt is com-
pleted before Controlled’s assumption of the New
Loan. See paragraph (d)(4)(ii)(B)(2) of this section.
Following the Controlled refinanced debt assump-
tion, Distributing and Controlled are in the same
net economic position as they would have been had
Controlled assumed an equivalent portion of Distrib-
uting’s historical debt. See paragraph (d)(4)(ii)(B)(3)
of this section. Distributing’s refinancing of histori-
cal debt and the Controlled refinanced debt assump-
tion occur pursuant to the plan of reorganization for
the separation. See paragraph (d)(4)(ii)(B)(4) of this

March 3, 2025 1038 Bulletin No. 2025–10
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 Con-
trolled 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 prop-
erly will be satisfied with earnings generated by, its
business operations. See paragraph (d)(4)(ii)(B)(7)
of this section.
(3) Example 3: Traveling note—(i) Facts. The
facts are the same as in paragraph (e)(2)(i) of this sec-
tion (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 travel-
ing note. See §1.357-1(b)(22). Therefore, Controlled
is treated as assuming the New Loan at the time Con-
trolled becomes the debtor on the New Loan (that is,
upon the contribution). See §1.357-2(c). The analysis
is the same as in paragraph (e)(2)(ii) of this section
(Example 2).
(4) Example 4: Trade payables—(i) Facts—(A) In
general. Pursuant to a plan of reorganization, a distrib-
uting 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 con-
tribution, the separation). The separation satisfies all
requirements to qualify as a divisive reorganization.
(B) Liabilities assumed. The $20,000x of liabil-
ities assumed by Controlled arose in the ordinary
course of Business B’s operations from the rendi-
tion 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 con-
stitute debt that arose in the ordinary course of Busi-
ness B’s operations from the rendition of services
to or for Distributing. See §1.357-1(b)(19). Accord-
ingly, 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 sec-
tion for Controlled’s assumption of the $20,000x
of liabilities, and, consequently, those liabilities are
not treated as money received by Distributing in the
contribution. See paragraphs (a) and (d)(2) of this
section.
(5) Example 5: Assumption to avoid Federal
income tax in a divisive reorganization—(i) Facts.
A distributing corporation (Distributing) transfers
one of its businesses (Business A) to a newly formed
controlled corporation (Controlled) in exchange for
Controlled stock and Controlled’s assumption of his-
torical Distributing debt (contribution). The histori-
cal 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 (distribu-
tion; 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 Con-
trolled of all liabilities properly associated with Busi-
ness 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 Dis-
tributing in the exchange. See paragraphs (a) and (b)
of this section and §1.357-2(a). However, Distributing
would recognize no gain on the exchange if, pursuant
to the plan of reorganization, Distributing distributes
to its shareholders an amount of money equivalent to
the amount it is treated as having received in the con-
tribution or transfers an equivalent amount of money
to its creditors in satisfaction of Distributing debt in a
distribution or transfer meeting the requirements set
forth in §1.361-3(b)(2).
(6) Example 6: Assumption to avoid Federal
income tax in a section 351 exchange—(i) Facts. In
a transaction that qualifies as a section 351 exchange,
Corporation A contributes one of its two businesses
to newly formed Corporation B in exchange for all
of B’s stock and B’s assumption of liabilities of A.
One of the liabilities assumed by B was not incurred
in the ordinary course of A’s business.
(ii) Analysis. Because the liability assumed by B
was not incurred in the ordinary course of business,
the liability is presumed to have been assumed for
a principal purpose described in paragraph (a)(1)
of this section. See paragraph (a)(2) of this section.
Accordingly, B’s assumption of liabilities is pre-
sumed 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 para-
graph (b) of this section.
§1.357-4 Application of section 357(c).
(a) Liabilities in excess of adjusted
basis—(1) General rule. Except as pro-
vided 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 recog-
nizing gain from the sale or exchange of
a capital asset or of property that is not a
capital asset, as applicable, in an amount
equal to the excess of—
(i) The sum of the amount of liabilities
of the transferor assumed by the transferee
corporation; over
(ii) The total adjusted basis of the prop-
erty transferred by the transferor pursuant
to the exchange.
(2) Exceptions. Paragraph (a)(1) of this
section does not apply to any exchange—
(i) To which §1.357-3(a) applies;
(ii) That is pursuant to a plan of reorga-
nization 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 con-
sideration for the shareholder’s stock; or
(iii) To which section 351 applies if the
exchange—
(A) Also qualifies as part of a reorga-
nization described in section 368(a)(1)
(A), (C), (D) (provided the requirements
of section 354(b)(1) of the Code are satis-
fied), or (G) (provided the requirements of
section 354(b)(1) are satisfied); and
(B) Is described as a reorganization
pursuant to a filing with the IRS under
§1.368-3.
(3) Certain liabilities excluded—(i)
General rule. Except as provided in para-
graph (a)(3)(ii) of this section, the follow-
ing liabilities are excluded for purposes of
applying paragraph (a)(1) of this section:
(A) A liability the payment of which
would give rise to a deduction.
(B) A liability the payment of which
would give rise to the creation of, or
increase in, the basis of any property.
(C) A liability the payment of which
would be described in section 736(a) of
the Code.
(ii) Exceptions. Paragraph (a)(3)(i) of
this section does not apply to any liability
to the extent that—
(A) The incurrence of the liability
resulted in a deduction;
(B) The incurrence of the liability
resulted in the creation of, or an increase
in, the basis of any property; or

Bulletin No. 2025–10 1039 March 3, 2025
(C) The liability is not—
(1) Incurred in the ordinary course of
business; or
(2) Associated with any assets trans-
ferred.
(b) Determination of character of gain
of multiple capital assets. The determi-
nation of whether gain resulting from the
transfer of capital assets is long-term or
short-term capital gain is made by refer-
ence to the transferor’s holding period for
the transferred assets, based on the pro-
portionate fair market value of the trans-
feror’s long-term assets to its short-term
assets.
(c) Examples. The following exam-
ples 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 lia-
bility 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 transfer-
or’s principal purpose with respect to the
assumption of liabilities is not to avoid
Federal income tax on the exchange; and
there is a bona fide business purpose for
the assumption of liabilities.
(1) Example 1: Determination of character
of gain—(i) Facts. In an exchange that qualifies
under section 351, Individual A transfers to a
transferee corporation property with an adjusted
basis of $1,000x in exchange for stock of the
transferee corporation with a fair market value
of $8,000x and the assumption by the transferee
corporation of Individual A debt amounting to
$4,000x. All assets transferred by Individual A
to the transferee corporation are capital assets.
By reference to Individual A’s holding period at
the time of the exchange, one half of the assets
transferred (with a fair market value of $4,000x
and an adjusted basis of $500x) have a long-term
holding period, and the other half of the assets
transferred (with a fair market value of $4,000x
and an adjusted basis of $500x) have a short-term
holding period.
(ii) Analysis. The excess of the amount of
liabilities assumed over the adjusted basis of the
assets transferred ($4,000x - $1,000x = $3,000x)
is treated as gain from the sale or exchange of a
capital asset. See paragraph (a)(1) of this section.
Half of Individual A’s capital gain resulting from
the deemed sale or exchange of a capital asset
(that is, $1,500x) is long-term capital gain, and the
other half is short-term capital gain. See paragraph
(b) of this section.
(2) Example 2: Capital and non-capital assets—
(i) Facts. The facts are the same as in paragraph (c)
(1)(i) of this section (Example 1), except that the
long-term assets transferred are capital assets, and
the short-term assets are other than capital assets.
(ii) Analysis. Half of the gain recognized by Indi-
vidual A is treated as capital gain, and the other half
of the gain recognized by Individual A is treated as
gain from the sale or exchange of assets other than
capital assets. See paragraph (a)(1) of this section.
(3) Example 3: Liabilities in excess of adjusted
basis—(i) Facts. Pursuant to a plan of reorganization,
a distributing corporation (Distributing) transfers
one of its businesses (Business A) to a newly formed
controlled corporation (Controlled) in exchange for
Controlled stock and Controlled’s assumption of a
historical Distributing debt (contribution), and Dis-
tributing distributes all the Controlled stock to its
shareholders (distribution; together with the contri-
bution, 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 non-
recourse 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 Dis-
tributing 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 rec-
ognizes gain of $5,000x ($10,000x - $5,000x) on the
exchange. See paragraph (a)(1) of this section. The
character of that gain depends on the character of the
assets transferred in the exchange. See paragraph (b)
of this section.
§1.357-5 Applicability date.
(a) Applicability date. The rules of
§§1.357-1 through 1.357-4 apply to trans-
actions intended to qualify under section
351 or 361 of the Code for which the ear-
liest of the following dates occurs after
[DATE OF PUBLICATION OF FINAL
REGULATIONS IN THE FEDERAL
REGISTER]:
(1) The date of the first public
announcement (as defined in §1.355-7(h)
(10)) of the transaction.
(2) The date of entry by the taxpayer
into a written agreement to engage in the
transaction.
(3) The date of approval of the transac-
tion by the board of directors of the tax-
payer.
(4) The date of a court order (or a plan
confirmed, or a sale approved, by order
of a court) in a title 11 or similar case
(as defined in section 368(a)(3)(A) of
the Code), but only if the taxpayer was a
debtor in a case before such court.
(5) The date a ruling request for the
transaction is submitted to the IRS.
Par. 11. Section 1.361-0 is added to
read as follows:
§1.361-0 Table of contents.
This section lists the major captions
that appear in §§1.361-1 through 1.361-6.
§1.361-1 Nonrecognition of gain or loss
to corporations under section 361.
(a) Overview.
(1) In general.
(2) Scope.
(b) Definitions.
(1) Acquiring corporation.
(2) Acquisitive reorganization.
(3) Amount.
(4) Appreciated nonqualified property.
(i) In general.
(ii) Inclusions.
(5) Assume; assumption.
(6) Code.
(7) Contingent liability.
(8) Control distribution.
(9) Control distribution date.
(10) Controlled corporation.
(11) Controlled corporation contingent
liability.
(12) Controlled corporation debt.
(13) Controlled corporation related
person.
(14) Covered convertible debt.
(15) CSAG.
(i) In general.
(ii) Controlled corporation not a com-
mon parent.
(16) Debt.
(17) Direct issuance transaction.
(18) Distributing corporation.
(19) Distributing corporation contin-
gent 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 com-
mon parent.

March 3, 2025 1040 Bulletin No. 2025–10
(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 trans-
action.
(46) Refinanced historical distributing
corporation debt.
(47) Related person.
(48) Revolving credit agreement.
(49) Section 361 consideration.
(i) In general.
(ii) Inclusions.
(iii) Exclusion.
(50) Section 361 regulations.
(51) Target corporation.
(i) In general.
(ii) Inclusions.
(52) Trade payable.
(53) True-up payment.
(54) Unrelated ultimate creditor.
§1.361-2 Exchanges solely for stock or
securities under section 361(a).
(a) General rule.
(b) Exchanges not solely for stock or
securities.
(c) Example.
§1.361-3 Exchanges not solely for stock
or securities under section 361(b).
(a) Scope.
(1) In general.
(2) Exception.
(b) Money or other property distributed
in acquisitive reorganizations.
(1) Distributions to shareholders.
(2) Transfers to creditors.
(c) Money or other property distributed
in divisive reorganizations.
(1) Distributions to shareholders.
(2) Transfers to creditors.
(i) In general.
(ii) Application of adjusted basis limita-
tion 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 dis-
tributed.
(e) No recognition of loss.
(f) Examples.
(1) Example 1: Acquisitive reorganiza-
tion.
(2) Example 2: Divisive reorganization
with money or other property distributed
pursuant to plan of reorganization.
(3) Example 3: Ordinary course distri-
bution.
(4) Example 4: Special stock repur-
chase program.
(5) Example 5: Existing stock repur-
chase program.
(6) Example 6: Divisive reorganization
with money or other property not distrib-
uted within the 12-month period.
(7) Example 7: Post-distribution pay-
ments from a distributing corporation to a
controlled corporation.
(8) Example 8: Post-distribution pay-
ment from a controlled corporation to a
distributing corporation.
§1.361-4 Distributions of property
under section 361(c).
(a) Distributions of qualified property.
(1) Distributions to shareholders.
(2) Treatment of certain transfers to
creditors.
(i) Acquisitive reorganizations.
(ii) Divisive reorganizations.
(b) Distributions of appreciated non-
qualified 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 quali-
fied property.
(2) Example 2: Distribution timing
requirement.
(3) Example 3: Distribution of non-
qualified property.
§1.361-5 Transfers to creditors of
distributing corporation in divisive
reorganizations under section 361(b)(3)
and (c)(3).
(a) General rule.
(b) Qualifying creditor.
(1) General status as a creditor with
regard to distributing corporation debt.
(2) Related-creditor prohibition.
(i) General rule.
(ii) Exception for certain distributing
corporation related persons.
(iii) Determination of related-person
status.
(c) Eligible distributing corporation
debt.
(1) Overview.
(2) Qualification as eligible distribut-
ing corporation debt.
(i) Historical distributing corporation
debt.
(ii) Refinancing exception for histori-
cal distributing corporation debt.
(iii) Revolving credit agreements.
(iv) Qualifying trade payables.
(v) Direct issuance debt.
(3) Determination of amount of distrib-
uting 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 corpora-
tion debt at the close of each quarter.
(iii) Distributing corporation debt held
by distributing corporation related person.

Bulletin No. 2025–10 1041 March 3, 2025
(e) Qualifying debt elimination trans-
actions.
(1) Overview.
(2) Qualifying original creditor
exchanges.
(3) Qualifying intermediated
exchanges.
(i) Prohibition on intermediary bene-
fits.
(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 transac-
tions.
(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 histori-
cal distributing corporation debt.
(3) Example 3: Eight-quarterly-aver-
age test.
(4) Example 4: Amount of distributing
corporation debt under revolving credit
agreement.
(5) Example 5: Effect of offsetting
debts on amount of distributing corpora-
tion debt.
(6) Example 6: Qualifying original
creditor exchange.
(7) Example 7: Not a qualifying direct
issuance transaction.
(8) Example 8: Qualifying intermedi-
ated exchange.
§1.361-6 Applicability date.
(a) Applicability date.
Par. 12. Section 1.361-1 is revised to
read as follows:
§1.361-1 Nonrecognition of gain or loss
to corporations under section 361.
(a) Overview—(1) In general. The sec-
tion 361 regulations apply—
(i) To exchanges of property by a target
corporation pursuant to a plan of reorga-
nization for property from an acquiring
corporation that is a party to the reorga-
nization; and
(ii) To distributions by the target corpo-
ration to its shareholders of property pur-
suant to a plan of reorganization (includ-
ing 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 pro-
vides 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 con-
sideration to creditors of a distributing cor-
poration in a divisive reorganization. Sec-
tion 1.361-6 provides the applicability date.
(b) Definitions. The following defini-
tions apply for purposes of the section 361
regulations:
(1) Acquiring corporation. The term
acquiring corporation means a corpora-
tion (including a controlled corporation)
that receives property transferred by a tar-
get corporation in an exchange to which
section 361(a) applies.
(2) Acquisitive reorganization. The
term acquisitive reorganization means a
transaction that qualifies as a reorganiza-
tion under—
(i) Section 368(a)(1)(A) of the Code
(including by reason of section 368(a)(2)
(D) or section 368(a)(2)(E));
(ii) Section 368(a)(1)(C);
(iii) Section 368(a)(1)(D) (provided the
requirements of section 354(b)(1) of the
Code are satisfied);
(iv) Section 368(a)(1)(F); or
(v) Section 368(a)(1)(G) (provided the
requirements of section 354(b)(1) are sat-
isfied).
(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 will-
ing assignee to assume the liability in an
arm’s-length transaction.
(ii) With respect to debt, except as pro-
vided in paragraph (b)(3)(iii) of this sec-
tion, the adjusted issue price (as defined in
§1.1275-1(b)) of the debt.
(iii) With respect to covered convert-
ible debt, the fair market value of the
covered convertible debt as of the earliest
applicable date.
(4) Appreciated nonqualified prop-
erty—(i) In general. The term appreciated
nonqualified property means property
distributed by a target corporation under
§1.361-4(b) that—
(A) Is property other than qualified
property; and
(B) At the time of the distribution of
that property under section 361(c), has a
fair market value that exceeds the adjusted
basis of that property in the hands of the
target corporation.
(ii) Inclusions. The term appreciated
nonqualified property includes all con-
trolled corporation stock or securities—
(A) Treated as other property under
section 355(a)(3)(B) of the Code;
(B) Distributed in a disqualified distri-
bution, as defined in section 355(d)(2); or
(C) Distributed by a distributing corpo-
ration pursuant to an acquisition described
in section 355(e)(2).
(5) Assume; assumption. With respect
to a liability, the terms assume, assump-
tion, and similar terms have the meaning
of “assumed” as set forth in §1.357-2(d).
(6) Code. The term Code means
the Internal Revenue Code of 1986, as
amended.
(7) Contingent liability. The term con-
tingent liability means a liability (other
than a debt) that includes one or more
contingent payments.
(8) Control distribution. The term con-
trol distribution means a distribution of
controlled corporation stock, or of con-
trolled corporation stock and securities,
that results in the distribution by the dis-
tributing corporation of an amount of con-
trolled corporation stock constituting con-
trol (within the meaning of section 368(c)
of the Code).

March 3, 2025 1042 Bulletin No. 2025–10
(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 con-
trolled 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 corpora-
tion 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 corpo-
ration related person means a related
person with respect to a controlled cor-
poration.
(14) Covered convertible debt. The
term covered convertible debt means debt
with a conversion option described in
§1.1275-4(a)(4) that is reasonably certain
to be exercised as of the earliest applica-
ble date based on all facts and circum-
stances—
(i) Taking into account §1.1504-4(g)
(to the extent relevant); but
(ii) Not taking into account the safe
harbors described in §1.1504-4(g)(3).
(15) Debt. The term debt means a
liability pursuant to an instrument or a
contractual arrangement that constitutes
debt under general principles of Federal
income tax law. See §1.1275-1(d).
(16) Direct issuance debt. The term
direct issuance debt means the newly
incurred debt a distributing corporation
incurs with a creditor as part of a direct
issuance transaction and the proceeds of
which are used to repay historical distrib-
uting 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 transac-
tions), in which—
(i) The distributing corporation incurs
distributing corporation debt with a credi-
tor after the earliest applicable date;
(ii) The distributing corporation uses
the proceeds of the newly incurred dis-
tributing 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 corpo-
ration.
(18) Distributing corporation. The
term distributing corporation means the
distributing corporation described in sec-
tion 355(a)(1)(A).
(19) Distributing corporation contin-
gent liability. The term distributing cor-
poration contingent liability means a con-
tingent liability for which the distributing
corporation is the obligor.
(20) Distributing corporation debt—(i)
In general. The term distributing corpora-
tion debt means debt for which the distrib-
uting 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 trans-
action 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 distribu-
tion means a single distribution, or one
of a series of distributions, of controlled
corporation stock, or of controlled corpo-
ration stock and securities—
(i) Intended to qualify as a divisive
reorganization; and
(ii) Made by the distributing corpora-
tion pursuant to the plan of reorganization.
(24) Distribution date. If all distri-
butions comprising an intended divisive
reorganization take place on one date—
(i) The term distribution date means
that date; and
(ii) Each of the terms first distribution
date, control distribution date, and final
distribution date refers to the distribution
date.
(25) Distribution period. The term dis-
tribution period means the period of time
that—
(i) Begins at the time of the first distri-
bution; and
(ii) Ends at the time of the final distri-
bution.
(26) Divisive reorganization. The term
divisive reorganization means a series of
transactions carried out pursuant to a plan
of reorganization that qualify as a reorga-
nization under sections 355 and 368(a)(1)
(D) or (G).
(27) Earliest applicable date—(i) In
general. The term earliest applicable date
means the date that is the earliest of—
(A) The date of the first public
announcement (as defined in §1.355-7(h)
(10)) of the divisive reorganization or a
similar transaction;
(B) The date of entry by the distribut-
ing corporation into a written agreement
to engage in the divisive reorganization or
a similar transaction; and
(C) The date of approval of the divisive
reorganization or a similar transaction by
the board of directors of the distributing
corporation.
(ii) Similar transaction. For purposes
of paragraph (b)(27)(i) of this section, the
term similar transaction means a similar
acquisition within the meaning of §1.355-
7(h)(12) and (13).
(28) Eligible distributing corporation
debt. The term eligible distributing corpo-
ration debt means distributing corporation
debt described in §1.361-5(c).
(29) Final distribution. The term final
distribution means, with respect to a series
of distributions, the last distribution that is
made by the distributing corporation pur-
suant 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 corpora-
tion 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 corpora-
tion debt. The term historical distributing
corporation debt means distributing cor-
poration debt described in §1.361-5(c)(2).
(34) Intermediary—(i) In general. The
term intermediary means an investment
bank or other person that—

Bulletin No. 2025–10 1043 March 3, 2025
(A) Is not a distributing corporation
related person or a controlled corpora-
tion 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 ser-
vices to the distributing corporation or the
controlled corporation, directly or indi-
rectly, to facilitate the divisive reorgani-
zation.
(ii) Inclusion. The term intermediary
includes a related person of the interme-
diary.
(35) Intermediated exchange. The term
intermediated exchange means a transac-
tion, or a series of transactions (or similar
transaction or series of transactions), in
which an intermediary—
(i) Acquires historical distributing cor-
poration debt on a secondary market from
the holders of that debt; and
(ii) Exchanges that historical distribut-
ing corporation debt for controlled corpo-
ration stock or securities held by the dis-
tributing corporation.
(36) Liability—(i) In general. The
term liability means a debt, a contingent
liability, or any other fixed or contingent
obligation, without regard to whether the
obligation otherwise has been taken into
account for Federal income tax purposes.
(ii) Certain obligations incurred in the
ordinary course of business—(A) In gen-
eral. Except as provided in paragraph (b)
(36)(ii)(B) of this section, an obligation
incurred in the ordinary course of busi-
ness 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 lia-
bility, reserve, or similar item.
(37) Non-qualifying creditor. The term
non-qualifying creditor has the meaning
provided in §1.361-5(b)(2)(i).
(38) Obligor. With regard to a liability,
the term obligor means the person that
has agreed and is expected (as determined
based on all facts and circumstances) to
satisfy the liability, taking into account—
(i) All relevant provisions of the Code
(including the principles of section 357(d)
(liability treated as assumed));
(ii) Treasury regulations (26 CFR
chapter I); and
(iii) General principles of Federal
income tax law, including the substance-
over-form doctrine.
(39) Other property. The term other
property means section 361 consider-
ation other than money, acquiring cor-
poration stock or securities, and stock of
a corporation controlling the acquiring
corporation (within the meaning of sec-
tion 368(c)).
(40) Party to a reorganization. The
term party to a reorganization has the
meaning provided in §1.368-2(f).
(41) Plan of reorganization. The term
plan of reorganization has the meaning
provided in §1.368-4.
(42) Post-distribution payment. The
term post-distribution payment means a
transfer of money or other property by the
controlled corporation to the distributing
corporation or by the distributing corpora-
tion to the controlled corporation—
(i) Pursuant to the plan of reorganiza-
tion; and
(ii) Subsequent to the control distribu-
tion date.
(43) Qualified property. The term qual-
ified property means any stock in (or right
to acquire stock in), or obligation of—
(i) The target corporation;
(ii) The acquiring corporation, if that
stock (or right) or obligation is received
by the target corporation in an exchange
described in §1.361-2 or §1.361-3; or
(iii) A corporation controlling the
acquiring corporation (within the meaning
of section 368(c)), if—
(A) The controlling corporation is a
party to the reorganization; and
(B) That stock (or right) or obligation
is received by the target corporation in
an exchange described in in §1.361-2 or
§1.361-3.
(44) Qualifying creditor. The term
qualifying creditor means a creditor
described in §1.361-5(b).
(45) Qualifying debt elimination trans-
action. The term qualifying debt elimi-
nation transaction means a transaction
described in §1.361-5(e).
(46) Refinanced historical distributing
corporation debt. The term refinanced
historical distributing corporation debt
has the meaning provided in §1.361-5(c)
(2)(ii).
(47) Related person. The term related
person means a person related within
the meaning of section 267(b) or section
707(b)(1) of the Code.
(48) Revolving credit agreement. The
term revolving credit agreement means a
loan structure that—
(i) Permits the borrower to make multi-
ple 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 bor-
rower to pledge any of its assets as security
for the loan (that is, it may be a secured or
unsecured loan structure).
(49) Section 361 consideration—(i) In
general. The term section 361 consider-
ation means, with regard to an exchange
to which §1.361-2 or §1.361-3 applies, the
consideration received by a target corpo-
ration from an acquiring corporation in
exchange for property transferred by the
target corporation to the acquiring corpo-
ration pursuant to the plan of reorganiza-
tion.
(ii) Inclusions. The term section 361
consideration includes—
(A) Acquiring corporation stock or
stock of a corporation controlling the
acquiring corporation (within the meaning
of section 368(c));
(B) Acquiring corporation securities;
(C) Acquiring corporation non-security
debt;
(D) Money transferred by the acquiring
corporation; and
(E) Other property (other than acquir-
ing corporation non-security debt) trans-
ferred by the acquiring corporation.
(iii) Exclusion. The term section 361
consideration does not include an assump-
tion of a liability described in §1.357-2(a).
(50)
Section 361 regulations. The term
section 361 regulations means this section
and §§1.361-2 through 1.361-6.
(51) Target corporation—(i) In gen-
eral. The term target corporation means
the corporation that is treated under sec-
tion 361(a) or (b) as exchanging its prop-
erty pursuant to a plan of reorganization
for section 361 consideration.
(ii) Inclusions. The term target corpo-
ration includes solely—
(A) A corporation that is acquired in an
acquisitive reorganization; and

March 3, 2025 1044 Bulletin No. 2025–10
(B) A distributing corporation in a divi-
sive 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 pro-
vided 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 securi-
ties, or controlled corporation non-security
debt, for distributing corporation debt pur-
suant to a plan of reorganization of a divi-
sive reorganization, a payment—
(i) Under an agreement entered into
between the distributing corporation
(including any distributing corpora-
tion related person) and an intermediary
(including any related person with regard
to the intermediary); and
(ii) Made pursuant to that agreement
by—
(A) The distributing corporation to the
intermediary as the result of a decrease in
value of any controlled corporation stock
or securities or controlled corporation
non-security debt (as applicable) between
an initial valuation date and a subsequent
valuation date; or
(B) The intermediary to the distributing
corporation as the result of an increase in
value of any controlled corporation stock
or securities or controlled corporation
non-security debt (as applicable) between
an initial valuation date and a subsequent
valuation date.
(54) Unrelated ultimate creditor. The
term unrelated ultimate creditor means a
creditor that is not—
(i) A distributing corporation related
person; or
(ii) A related person with regard to a
distributing corporation related person.
Par. 13. Sections 1.361-2 through
1.361-6 are added to read as follows:
§1.361-2 Exchanges solely for stock or
securities under section 361(a).
(a) General rule. A target corporation
that is a party to a reorganization does not
recognize any gain or loss on a transfer of
property by that corporation to an acquir-
ing corporation if—
(1) The acquiring corporation or a cor-
poration controlling the acquiring corpo-
ration is a party to the reorganization;
(2) The target corporation receives
solely stock or securities of—
(i) The acquiring corporation in
exchange for the transferred property; or
(ii) The corporation controlling the
acquiring corporation in exchange for the
transferred property; and
(3) The exchange occurs pursuant to
the plan of reorganization.
(b) Exchanges not solely for stock or
securities. With regard to an exchange to
which paragraph (a) of this section would
apply but for the fact that the target cor-
poration receives money or other prop-
erty in addition to stock and securities of
an acquiring corporation or a corporation
controlling the acquiring corporation, see
§1.361-3.
(c) Example—(1) Facts. Pursuant to a plan of
reorganization for a transaction that qualifies as a
reorganization described in section 368(a)(1)(C), a
target corporation (Target) transfers all its property
to an acquiring corporation (Acquiring) solely in
exchange for Acquiring stock, which Target distrib-
utes to its shareholders in complete liquidation of
Target. Target properly files a plan of reorganization
with the IRS pursuant to §1.368-3(a)(5) that satis-
fies all requirements set forth in §1.368-4, includ-
ing 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 Tar-
get’s property, and the exchange occurs pursuant to
the plan of reorganization. See paragraph (a) of this
section.
§1.361-3 Exchanges not solely for stock
or securities under section 361(b).
(a) Scope—(1) In general. If §1.361-
2(a) would apply to an exchange between
a target corporation and an acquiring cor-
poration but for the fact that the target cor-
poration receives money or other property,
in addition to stock and securities of the
acquiring corporation or stock of the cor-
poration controlling the acquiring corpo-
ration, the exchange is governed by para-
graphs (b) through (e) this section.
(2) Exception. If the exchange is pursu-
ant to a reorganization that qualifies under
section 368(a)(1)(F) of the Code, the
exchange is not governed by paragraphs
(b) through (e) of this section. See §1.368-
2(m)(3)(iii).
(b) Money or other property distributed
in acquisitive reorganizations—(1) Dis-
tributions to shareholders. In an acquisi-
tive reorganization, the target corporation
recognizes no gain from an exchange
described in paragraph (a)(1) of this sec-
tion 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 acquis-
itive reorganization, if a target corporation
receives money or other property in an
exchange described in paragraph (a)(1)
of this section, the target corporation is
treated as distributing the money or other
property to its shareholders for purposes
of paragraph (b)(1) of this section if the
target corporation transfers that money or
other property to a creditor—
(i) Pursuant to the plan of reorganiza-
tion; and
(ii) In satisfaction of debt of the target
corporation.
(c) Money or other property distributed
in divisive reorganizations—(1) Distribu-
tions to shareholders. In a divisive reor-
ganization, the distributing corporation
recognizes no gain from an exchange
described in paragraph (a)(1) of this sec-
tion if, pursuant to the plan of reorganiza-
tion, the distributing corporation—
(i) Deposits the money received in the
exchange in a segregated account; and
(ii) Distributes the money or other
property received in the exchange to its
shareholders no later than the end of the
12-month period beginning on the date of
the exchange.
(2) Transfers to creditors—(i) In gen-
eral. Subject to the adjusted basis limita-
tion 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 dis-
tributing corporation is treated as distrib-
uting 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 corpo-
ration—
(A) Deposits the money received in the
exchange in a segregated account; and
(B) Transfers that money or other prop-
erty to a creditor—
(1) In satisfaction of distributing cor-
poration debt in a transfer meeting the
requirements set forth in §1.361-5; and

Bulletin No. 2025–10 1045 March 3, 2025
(2) Within the period described in para-
graph (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 liabil-
ities assumed by the controlled corpora-
tion.
(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 sec-
tion) apply to any post-distribution pay-
ment received by a distributing corpora-
tion only if all the following requirements
are satisfied:
(i) Treatment as section 361 consid-
eration. The post-distribution payment
constitutes section 361 consideration for
Federal income tax purposes. For pur-
poses of this paragraph (c)(3), a post-dis-
tribution payment constitutes section 361
consideration for Federal income tax
purposes (and not, for example, a pay-
ment for goods or services separate from
and, therefore, not pursuant to the plan of
reorganization for the divisive reorgani-
zation) only if all the following require-
ments are satisfied:
(A) Characterization as section 361
consideration. The post-distribution pay-
ment properly is characterized for Federal
income tax purposes as consideration that
the distributing corporation receives in the
exchange described in §1.361-3(a).
(B) Value not reasonably ascertainable.
As of the date of the exchange described
in §1.361-3(a), the fair market value of the
distributing corporation’s right to receive
the post-distribution payment is not rea-
sonably ascertainable.
(C) Proper accounting. In accordance
with the plan of reorganization, the dis-
tributing 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 reorgani-
zation.
(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, pur-
suant to the plan of reorganization—
(A) Distributes that post-distribution
payment to the distributing corporation’s
shareholders; or
(B) Transfers that post-distribution
payment to the distributing corporation’s
creditors in satisfaction of distributing
corporation debt in a transfer meeting the
requirements set forth in §1.361-5.
(4) Post-distribution payments received
by a controlled corporation. For purposes
of the adjusted basis limitation set forth
in paragraph (c)(2)(ii) of this section, any
post-distribution payment received by the
controlled corporation from the distribut-
ing corporation will increase the aggregate
adjusted basis of the assets transferred by
the distributing corporation to the con-
trolled corporation only if all the follow-
ing requirements are satisfied:
(i) Characterization as contribution
in the reorganization exchange. The
post-distribution payment properly is
characterized for Federal income tax pur-
poses as consideration that the controlled
corporation receives in the exchange
described in §1.361-3(a).
(ii) Value not reasonably ascertainable.
As of the date of the exchange described
in §1.361-3(a), the fair market value of the
controlled corporation’s right to receive
the post-distribution payment is not rea-
sonably ascertainable.
(iii) Proper accounting. In accordance
with the plan of reorganization, the con-
trolled corporation properly accounts for
the post-distribution payment as part of
the contribution when the controlled cor-
poration receives that payment.
(d) Money or other property not dis-
tributed. If a target corporation does not
satisfy the requirements set forth in para-
graph (b) or (c) of this section with respect
to an exchange described in paragraph (a)
(1) of this section, the target corporation
recognizes gain (if any) from the exchange
in an amount that does not exceed the sum
of—
(1) The amount of money received but
not distributed; and
(2) The fair market value of other prop-
erty received but not distributed.
(e) No recognition of loss. A target cor-
poration 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 exam-
ples: Distributing is a distributing cor-
poration, and Controlled is a controlled
corporation, in a divisive reorganization;
Target is a target corporation, and Acquir-
ing is an acquiring corporation, in an
acquisitive reorganization; all taxpayers
are calendar-year taxpayers; and for each
transaction, a plan of reorganization has
been properly filed with the IRS pursuant
to §1.368-3(a)(5) that satisfies all require-
ments set forth in §1.368-4, including
identifying all parties to the reorganiza-
tion, identifying all transactions included
in the plan of reorganization, and describ-
ing the intended Federal income tax treat-
ment of the transaction.
(1) Example 1: Acquisitive reorganization—
(i) Facts. Pursuant to a plan of reorganization for
a transaction that qualifies as a reorganization
described in section 368(a)(1)(C), Target transfers all
its property to Acquiring in exchange for Acquiring
stock and money (exchange), and Target distributes
the Acquiring stock and money to Target’s share-
holders in complete liquidation of Target.
(ii) Analysis. Target recognizes no gain on the
exchange because Target distributes the money
received in the exchange to its shareholders pursuant
to the plan of reorganization. See paragraph (b)(1)
of this section.
(2) Example 2: Divisive reorganization with
money or other property distributed pursuant to plan
of reorganization—(i) Facts—(A) In general. On
June 1, 2025, pursuant to a plan of reorganization
for a transaction that qualifies as a divisive reor-
ganization, Distributing transfers one of its busi-
nesses (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 sharehold-
ers (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 agree-
ment filed by Distributing with the U.S. Securities

March 3, 2025 1046 Bulletin No. 2025–10
and Exchange Commission (SEC), a resolution by
Distributing’s board of directors, and other official
records of Distributing collectively evidence a defi-
nite 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 distrib-
uted to Distributing’s shareholders pursuant to Dis-
tributing’s dividend payment policy (as reflected in
documents filed by Distributing with the SEC).
(ii) Analysis. The special dividend satisfies all
requirements set forth in §1.368-4(e). Accordingly,
the special dividend is properly included in the plan
of reorganization for the divisive reorganization.
Distributing recognizes no gain on the contribution
because, pursuant to the plan of reorganization, Dis-
tributing deposits the money received in the con-
tribution in a segregated account, and it distributes
the money received in the contribution to its share-
holders no later than the end of the 12-month period
beginning on the date of the contribution. See para-
graph (c)(1) of this section.
(3) Example 3: Ordinary course distribution—
(i) Facts. The facts are the same as in paragraph (f)
(2)(i) of this section (Example 2), except that Dis-
tributing 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 share-
holders through an ordinary course dividend pur-
suant to Distributing’s dividend payment policy (as
reflected in documents filed by Distributing with the
SEC). Distributing distributes the cash in an ordinary
course dividend on November 1, 2025.
(ii) Analysis. The ordinary course dividend is not
properly included in the plan of reorganization for
the divisive reorganization because the dividend does
not satisfy the requirements set forth in §1.368-4(e)
(2)(i)(B) (that is, the dividend would have occurred
regardless of the divisive reorganization). Because
the $10,000x of cash received from Controlled is not
distributed to Distributing’s shareholders pursuant to
the plan of reorganization, Distributing recognizes
gain (but not loss) on the exchange in an amount that
does not exceed the amount of money received (that
is, $10,000x). See paragraphs (c)(1), (d), and (e) of
this section. The Federal income tax consequences
of the ordinary course dividend are determined under
section 301 of the Code.
(4) Example 4: Special stock repurchase pro-
gram—(i) Facts. The facts are the same as in para-
graph (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 repur-
chase 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 para-
graph (f)(2)(ii) of this section (Example 2).
(5) Example 5: Existing stock repurchase pro-
gram—(i) Facts. The facts are the same as in para-
graph (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 pro-
gram approved by Distributing’s board of directors.
(ii) Analysis. The analysis is the same as in para-
graph (f)(3)(ii) of this section (Example 3). Accord-
ingly, the Federal income tax consequences of the
ordinary course stock repurchase are determined
under section 301 or 302 of the Code.
(6) Example 6: Divisive reorganization with
money or other property not distributed within the
12-month period—(i) Facts. The facts are the same
as in paragraph (f)(2)(i)(A) of this section (Example
2), except that Distributing distributes the $10,000x
of cash received from Controlled to Distributing’s
shareholders on July 1, 2026, and, therefore, after
the end of the 12-month period beginning on June
1, 2025.
(ii) Analysis. Distributing recognizes gain (but
not loss) on the exchange in an amount that does
not exceed the amount of money received (that is,
$10,000x). See paragraphs (c)(1), (d), and (e) of this
section.
(7) Example 7: Post-distribution payments
from a distributing corporation to a controlled cor-
poration—(i) Facts. The facts are the same as in
paragraph (f)(2)(i)(A) of this section (Example 2),
except that Distributing and Controlled enter into a
capital contribution agreement, which is identified
and properly included in the plan of reorganization,
under which Distributing will make one or more
transfers of working capital to Controlled after the
contribution to fund Business B’s post-distribution
operations. Distributing’s obligation to make any
such transfer, and the amount of any such transfer
(if required to be made), is subject to certain con-
ditions 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 con-
tribution. 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 §1.361-1(b)
(42). Based on all facts and circumstances, includ-
ing because the capital contribution agreement is
identified and properly included in the plan of reor-
ganization, 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 contri-
bution). See paragraph (c)(4)(i) of this section. In
addition, Controlled’s right to receive the post-dis-
tribution 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 con-
tribution 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 corpo-
ration—(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 trans-
fer meeting the requirements set forth in paragraph
(c)(3) of this section and §1.361-5. Distributing
and Controlled also enter into an indemnification
agreement whereby Controlled agrees to satisfy a
contingent liability (Liability) that is associated with
Business B but that Controlled cannot assume under
State law. Under the indemnification agreement,
Distributing may demand payment from Controlled
once the amount of the Liability becomes fixed and
determinable, without regard to whether Distributing
has satisfied the Liability. The fair market value of
Distributing’s right to receive any such payment, and
the amount of any such payment (if required to be
made), is not reasonably ascertainable at the time of
the contribution. On November 1, 2026, the Liabil-
ity becomes fixed and determinable in the amount
of $300x.
(B) Payment under indemnification agreement.
After November 1, 2026, Distributing seeks pay-
ment 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 consider-
ation and deposits the $300x in a segregated account
pursuant to the plan of reorganization. Not later than
90 days after the date on which Distributing receives
the $300x from Controlled, pursuant to the plan of
reorganization, Distributing transfers the $300x to
a qualifying creditor in satisfaction of Distributing
debt in a manner that satisfies all requirements set
forth in §1.361-5.
(ii) Analysis—(A) Post-distribution payment;
section 361 consideration; treatment as distribu-
tion to shareholders. The $300x that Distributing
receives from Controlled is a post-distribution pay-
ment because that transfer occurs pursuant to the
plan of reorganization and after the control distribu-
tion date. See §1.361-1(b)(42). Based on all facts and
circumstances, including because the indemnifica-
tion agreement is identified and properly included in
the plan of reorganization, the $300x payment prop-
erly is characterized for Federal income tax purposes
as consideration that Distributing receives in an
exchange described in paragraph (a)(1) of this sec-
tion (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 contri-
bution when Distributing receives that payment. See
paragraphs (c)(3)(i)(B) and (C) of this section. Para-
graph (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, Distrib-
uting deposits the payment in a segregated account
and transfers the $300x to a qualifying creditor in
satisfaction of Distributing debt in a transfer meeting
the requirements set forth in §1.361-5 not later than
90 days after the date on which Distributing receives

Bulletin No. 2025–10 1047 March 3, 2025
the payment. See paragraph (c)(2) of this section.
Accordingly, and subject to the adjusted basis lim-
itation set forth in paragraph (c)(2)(ii) of this sec-
tion, 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 con-
tribution ($10,200x) exceeds the sum of the aggre-
gate 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 Dis-
tributing’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 dis-
tributed). See paragraph (d) of this section.
§1.361-4 Distributions of property
under section 361(c).
(a) Distributions of qualified prop-
erty—(1) Distributions to shareholders.
A target corporation recognizes no gain
or loss on a distribution of qualified prop-
erty received in an exchange described in
§1.361-2(a) or §1.361-3(a) to the target
corporation’s shareholders pursuant to a
plan of reorganization.
(2) Treatment of certain transfers to
creditors—(i) Acquisitive reorganizations.
In an acquisitive reorganization, if a tar-
get corporation receives qualified prop-
erty in an exchange described in §1.361-
2(a) or §1.361-3(a), the target corporation
is treated as distributing the qualified
property to its shareholders for purposes
of paragraph (a)(1) of this section if the
target corporation transfers that qualified
property to a creditor—
(A) Pursuant to the plan of reorganiza-
tion; and
(B) In satisfaction of target corporation
debt.
(ii) Divisive reorganizations. In a divi-
sive reorganization, if a distributing cor-
poration receives qualified property in
an exchange described in §1.361-2(a) or
§1.361-3(a), the distributing corporation
is treated as distributing the qualified
property to its shareholders for purposes
of paragraph (a)(1) of this section if the
distributing corporation transfers that
qualified property to a creditor—
(A) Pursuant to a plan of reorganiza-
tion; and
(B) In satisfaction of distributing cor-
poration debt in a transfer meeting the
requirements set forth in §1.361-5.
(b) Distributions of appreciated non-
qualified property—(1) Deemed sale
treatment. If a target corporation distrib-
utes appreciated nonqualified property
received in an exchange described in
§1.361-3(a) to its shareholders pursuant
to a plan of reorganization, the target cor-
poration 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 non-
qualified property subject to a liability to
its shareholders pursuant to a plan of reor
-
ganization, or if a shareholder assumes a
liability of the target corporation pursuant
to the plan of reorganization, the fair mar-
ket value of that appreciated nonqualified
property for purposes of paragraph (b)(1)
of this section is treated as not less than
the amount of that liability.
(c) No recognition of loss. If a target
corporation distributes property received
in an exchange described in described in
§1.361-2(a) or §1.361-3(a) to its share-
holders pursuant to a plan of reorganiza-
tion, the target corporation does not rec-
ognize loss.
(d) Coordination with other provi-
sions; 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 corpo-
ration 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 prop-
erty—(i) Facts. On June 1, 2025, a calendar-year
distributing corporation (Distributing) transfers one
of its businesses to a newly formed controlled cor-
poration (Controlled) in exchange for Controlled
stock (contribution). On June 2, 2025, Distributing
distributes 80 percent of the Controlled stock to Dis-
tributing’s shareholders on a pro rata basis (control
distribution). As reflected in the separation and dis-
tribution agreement between Distributing and Con-
trolled 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 Con-
trolled stock) in 2026 pursuant to, and in comple-
tion of, the plan of reorganization (final distribution;
together with the contribution and the control distri-
bution, the separation). The retention of the retained
Controlled stock is a qualifying retention within the
meaning of §1.355-10(c). Distributing properly files
a plan of reorganization with the IRS pursuant to
§1.368-3(a)(5) satisfying all requirements set forth
in §1.368-4, including identifying Distributing and
Controlled as parties to the reorganization, determin-
ing 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 separa-
tion qualifies as a divisive reorganization.
(ii) Analysis. The Controlled stock Distributing
receives in the contribution is qualified property. See
§1.361-1(b)(43). The contribution is an exchange
described in §1.361-2(a), because Controlled is a
party to the reorganization, Distributing receives
solely Controlled stock in the contribution, and the
contribution and each distribution of Controlled
stock occurs pursuant to the plan of reorganization.
Consequently, Distributing recognizes no gain or
loss on the control distribution or the final distribu-
tion. See paragraph (a)(1) of this section.
(2) Example 2: Distribution timing require-
ment—(i) Facts. The facts are the same as in para-
graph (e)(1)(i) of this section (Example 1), except
that the plan of reorganization evidences a definite
intent to distribute the retained Controlled stock
three years after the date of the first step of the plan
of reorganization.
(ii) Analysis. The 24-month presumption for the
expeditious prosecution of the plan of reorganization
requirement is not satisfied. See §1.368-4(d)(3)(i)
(B). However, if Distributing demonstrates, based
on all facts and circumstances, that Distributing has
transferred the retained Controlled stock to its share-
holders as expeditiously as practicable in completion
of the plan of reorganization, Distributing recognizes
no gain or loss on the control distribution or final dis-
tribution. See
§1.368-4(d)(3)(i)(A) and paragraph (a)
(1) of this section.
(3) Example 3: Distribution of nonqualified
property—(i) Facts. Pursuant to a plan of reorgani-
zation for a transaction that qualifies as a reorgani-
zation under section 368(a)(1)(C), a target corpora-
tion (Target) transfers all its property other than an
appreciated asset (Asset) to an acquiring corpora-
tion (Acquiring) solely in exchange for Acquiring
voting stock, which Target distributes, along with
Asset, to its shareholders in complete liquidation of
Target. Asset has a fair market value of $100x and
an adjusted basis of $50x and is subject to a $130x
nonrecourse liability. Target properly files a plan of
reorganization with the IRS pursuant to §1.368-3(a)
(5) satisfying all requirements set forth in §1.368-4,

March 3, 2025 1048 Bulletin No. 2025–10
including identifying Target and Acquiring as parties
to the reorganization, determining that the distri-
bution of Asset is properly included in the plan of
reorganization, and describing the intended Federal
income tax treatment of the reorganization.
(ii) Analysis—(A) In general. The Acquiring
stock Target receives in the exchange is qualified
property. See §1.361-1(b)(43). The exchange of Tar-
get assets for Acquiring stock is described in §1.361-
2(a), because the exchange occurs pursuant to a plan
of reorganization, Target and Acquiring are parties
to the reorganization, and Target receives solely
Acquiring stock in the exchange. Accordingly, Tar-
get recognizes no gain on the distribution of Acquir-
ing stock to Target shareholders. See paragraph (a)
(1) of this section.
(B) Asset distribution. Asset is appreci-
ated nonqualified property. See §1.361-1(b)(4).
Accordingly, Target recognizes gain on the distri-
bution of Asset to its shareholders pursuant to the
plan of reorganization as if Target had sold Asset
to its shareholders at Asset’s fair market value. See
paragraph (b)(1) of this section. Because Target
distributed Asset to its shareholders subject to the
$130 nonrecourse liability, the fair market value
of Asset is treated as not less than the amount of
that liability. See paragraph (b)(2) of this section.
Accordingly, the amount of gain Target recognizes
on the distribution is $80x ($130x fair market
value - $50x adjusted basis).
§1.361-5 Transfers to creditors of
distributing corporation in divisive
reorganizations under section 361(b)(3)
and (c)(3).
(a) General rule. The transfer of sec-
tion 361 consideration by a distributing
corporation to a creditor of the distribut-
ing corporation under §1.361-3(c)(2) or
1.361-4(a)(2)(ii) (as appropriate) in a divi-
sive reorganization is not treated as a dis-
tribution by the distributing corporation
to its shareholders pursuant to the plan of
reorganization unless the transfer is—
(1) To a qualifying creditor of the dis-
tributing corporation, as determined under
paragraph (b) of this section;
(2) In satisfaction of eligible distribut-
ing corporation debt, as determined under
paragraph (c) of this section;
(3) In an amount not greater than the
maximum amount of distributing corpora-
tion debt, as determined under paragraph
(d) of this section; and
(4) Part of a qualifying debt elimina-
tion transaction, as determined under
paragraph (e) of this section.
(b) Qualifying creditor—(1) General
status as a creditor with regard to distrib-
uting corporation debt. Each creditor to
which the distributing corporation trans-
fers section 361 consideration must be a
creditor (qualifying creditor) that—
(i) Holds historical distributing corpo-
ration debt, qualifying trade payables, or
direct issuance debt; and
(ii) Satisfies the requirements set forth
in paragraph (b)(2) of this section.
(2) Related-creditor prohibition—(i)
General rule. Except as provided in para-
graph (b)(2)(ii) of this section, the follow-
ing persons are not qualifying creditors of
the distributing corporation (non-qualify-
ing 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 distribut-
ing corporation related persons. A dis-
tributing corporation related person or a
related person with respect to a distrib-
uting corporation related person (each as
determined in accordance with paragraph
(b)(2)(iii) of this section) is a qualifying
creditor of the distributing corporation
only if the following requirements are
satisfied:
(A) Transfer to unrelated ultimate
creditor—(1) Money or other property.
No later than the end of the 12-month
period beginning on the date the distrib-
uting corporation receives the money or
other property, the section 361 consider-
ation composed of money or other prop-
erty is transferred to an unrelated ultimate
creditor pursuant to the plan of reorga-
nization to satisfy debt owed by the dis-
tributing 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 prop-
erty is transferred pursuant to the plan of
reorganization to an unrelated ultimate
creditor to satisfy debt owed by the dis-
tributing corporation related person or the
related person with regard to a distribut-
ing corporation related person, respec-
tively, to the unrelated ultimate creditor.
For rules regarding the expeditious com-
pletion of the plan of reorganization, see
§1.368-4(d)(3).
(3) Intermediate transfers. For pur-
poses of paragraph (b)(2)(ii)(A)(1) and
(2) of this section, one or more intermedi-
ate transfers of section 361 consideration
between or among distributing corpora-
tion related persons or related persons
with regard to distributing corporation
related persons to satisfy debts (includ-
ing the initial distributing corporation
debt) are permissible if those intermediate
transfers culminate in a transfer of section
361 consideration to an unrelated ultimate
creditor.
(B) Debt in existence as of earliest
applicable date —(1) In general. Except
as provided in paragraph (b)(2)(ii)(B)(2)
of this section, all debt for which section
361 consideration is exchanged pursuant
to the transfers described in paragraph (b)
(2)(ii)(A) of this section is in existence as
of the earliest applicable date.
(2) Distributing corporation debt
directly held by internal creditor. Distrib-
uting corporation debt held directly by a
distributing corporation related person or
a related person with regard to a distrib-
uting 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 trans-
fer), 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 cor-
poration related person, is determined as
of the date on which that person receives
section 361 consideration in a transfer or
series or transfers described in paragraph
(b)(2)(ii)(A) of this section.
(c) Eligible distributing corporation
debt—(1) Overview. Distributing corpo-
ration debt is not eligible to be satisfied
with section 361 consideration under

Bulletin No. 2025–10 1049 March 3, 2025
paragraph (a) of this section unless that
debt qualifies under paragraph (c)(2) of
this section.
(2) Qualification as eligible distrib-
uting corporation debt—(i) Historical
distributing corporation debt. Historical
distributing corporation debt is eligible to
be satisfied with section 361 consideration
under paragraph (c)(1) of this section.
Except as provided in paragraph (c)(2)(ii)
or (iii) of this section, for a distributing
corporation debt to qualify as historical
distributing corporation debt—
(A) The distributing corporation must
have incurred the distributing corporation
debt before the earliest applicable date;
(B) That debt must have an origi-
nal term that ends after the date of the
exchange described in §1.361-2(a) or
1.361-3(a); and
(C) That debt must be identified in the
plan of reorganization or original plan of
reorganization (if amended).
(ii) Refinancing exception for histor-
ical distributing corporation debt. Dis-
tributing corporation debt incurred by the
distributing corporation after the earliest
applicable date is treated as historical dis-
tributing corporation debt only if—
(A) The distributing corporation debt
is—
(1) A refinancing of historical distribut-
ing corporation debt (refinanced historical
distributing corporation debt); or
(2) A refinancing of refinanced histor-
ical 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 distribut-
ing 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 refi-
nanced 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 reorganiza-
tion 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 qual-
ifies as historical distributing corporation
debt only if—
(A) The distributing corporation
entered into the agreement before the ear-
liest applicable date;
(B) That agreement does not expire
until after the date of the exchange
described in §1.361-2(a) or 1.361-3(a);
and
(C) That agreement is identified in the
plan of reorganization or original plan of
reorganization (if amended).
(iv) Qualifying trade payables. Trade
payables of the distributing corporation
that meet the following requirements are
eligible to be satisfied with section 361
consideration under paragraph (c)(1) of
this section:
(A) The trade payables are described in
a plan of reorganization or original plan of
reorganization (if amended).
(B) The trade payables were incurred
in the ordinary course of business of the
distributing corporation.
(C) The satisfaction such trade pay-
ables is necessary—
(1) To ensure the allocation to the con-
trolled corporation of all liabilities prop-
erly associated with the business assets
transferred to that corporation; and
(
2) To result in the controlled corpo-
ration 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 issu-
ance debt incurred as part of a direct issu-
ance transaction satisfying the require-
ments 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 dis-
tributing corporation debt—(i) Purpose.
The rules in this paragraph (c)(3) apply to
determine the aggregate amount of distrib-
uting corporation debt. For rules to deter-
mine 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 para-
graphs (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 his-
torical distributing corporation debt other
than historical distributing corporation
debt that is eliminated as part of a qual-
ifying direct issuance transaction under
paragraph (e)(4) of this section.
(B) Refinanced distributing corpora-
tion debt. If the distributing corporation
relies on the exception set forth in para-
graph (c)(2)(ii) of this section (that is,
the refinancing exception for historical
distributing corporation debt) with regard
to any distributing corporation debt, the
amount of that distributing corporation
debt equals the lesser of—
(1) The original principal amount of
the refinanced distributing corporation
debt; and
(2) The principal amount of the origi-
nal historical distributing corporation debt
(that is, the distributing corporation debt
to which the refinanced distributing cor-
poration debt is traced) as of the earliest
applicable date.
(C) Revolving credit agreements. With
regard to a revolving credit agreement
that satisfies the requirements set forth in
paragraph (c)(2)(iii) of this section, the
amount of that revolving credit agreement
equals the lesser of—
(1) The balance under that agreement
as of the earliest applicable date (and
not the maximum amount that could be
incurred by the distributing corporation
under that agreement); and

March 3, 2025 1050 Bulletin No. 2025–10
(2) The lowest balance under that
agreement beginning on the earliest appli-
cable date and ending on the control dis-
tribution 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 sec-
tion, the amount of those payables equals
the aggregate amount of those payables
on the date of the exchange described in
§1.361-2(a) or 1.361-3(a).
(E) Direct issuance debt. With regard
to direct issuance debt that satisfies the
requirements set forth in paragraph (c)(2)
(v) of this section, the amount of that debt
equals the aggregate principal amount
of that debt on the date of the exchange
described in §1.361-2(a) or 1.361-3(a).
(iii) Offsetting debts taken into account.
The aggregate amount of distributing cor-
poration debt determined under paragraph
(c)(3)(ii) of this section must be reduced
by the aggregate principal amount (or the
balance, in the case of a revolving credit
agreement) of any debt for which—
(A) The distributing corporation is a
creditor; and
(B) The debtor of that debt is a credi-
tor with respect to distributing corporation
debt described in paragraph (c)(3)(ii) of
this section.
(d) Maximum amount of distributing
corporation debt—(1) General calcula-
tion. The maximum amount of distribut-
ing corporation debt that can be satisfied
with section 361 consideration under para-
graph (a) of this section equals the amount
obtained by subtracting the aggregate
amount of distributing corporation debt
that the controlled corporation assumes
pursuant to the plan of reorganization
from the lesser of—
(i) The aggregate amount of distribut-
ing corporation debt (as determined under
paragraph (c)(3) of this section); and
(ii) The aggregate amount of distribut-
ing corporation debt determined under the
eight-quarterly-average test (as set forth in
paragraph (d)(2) of this section).
(2) Eight-quarterly-average test—(i)
Determination. In accordance with para-
graphs (d)(2)(ii) and (iii) of this section,
the aggregate amount of distributing
corporation debt under the eight-quarter-
ly-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 per-
sons other than distributing corporation
related persons.
(ii) Calculation of distributing corpo-
ration debt at the close of each quarter.
The methodology for determining the
maximum amount of distributing corpo-
ration debt under paragraph (c)(3) of this
section must be used to determine the
amount of distributing corporation debt at
the close of each quarter for purposes of
paragraph (d)(2)(i) of this section.
(iii) Distributing corporation debt held
by distributing corporation related person.
If the distributing corporation relies on the
exception set forth in paragraph (b)(2)(ii)
of this section (that is, the related-creditor
exception), the amount determined under
paragraph (d)(2)(i) of this section includes
an amount equal to the least of—
(A) The amount of distributing corpo-
ration debt directly held by distributing
corporation related persons or related
persons with respect to distributing cor-
poration 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 trans-
actions—(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 distribut-
ing corporation debt with section 361 con-
sideration 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 bene-
fits—(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 consider-
ation holds the distributing corporation
debt for the benefit of—
(1) The distributing corporation;
(2) The controlled corporation;
(3) A distributing corporation related
person; or
(4) A controlled corporation related
person.
(B) Exception. The prohibition
described in paragraph (e)(3)(i)(A) of
this section does not apply to the collat-
eral 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 intermedi-
ary does not acquire historical distributing
corporation debt satisfied with section 361
consideration from the distributing corpo-
ration, 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 distribut-
ing corporation and the intermediary is
effectuated based on terms and condi-
tions arrived at by the parties bargaining
at arm’s length.
(iv) Prohibition on profit-sharing or
limitation. None of the distributing corpo-
ration, the controlled corporation, or any
distributing corporation related person or
controlled corporation related person—
(A) Participates in any profit gained by
the intermediary upon an exchange of sec-
tion 361 consideration; or
(B) Limits by agreement or other
arrangement any profit described in para-
graph (e)(3)(iv)(A) of this section.
(v) Independence requirement—(A)
General rule. The intermediary acts for
its own account with regard to all compo-
nents of the intermediated exchange.
(B) Risk of loss. The intermediary bears
the risk of loss with respect to—
(1) The historical distributing corpora-
tion debt; and

Bulletin No. 2025–10 1051 March 3, 2025
(2) Any subsequent sale or other dispo-
sition of section 361 consideration trans-
ferred to the intermediary to satisfy the
historical distributing corporation debt.
(C) Prohibition regarding variable
pricing and similar agreements. The
requirement set forth in paragraph (e)(3)
(v)(B) of this section is not satisfied if the
intermediary enters into a variable pricing
agreement or similar arrangement with the
distributing corporation (or a controlled
corporation, distributing corporation
related person, or controlled corporation
related person) with regard to any section
361 consideration, including—
(1) True-up payments;
(2) Forward exchange agreements; and
(3) Any similar agreement or arrange-
ment.
(vi) Minimum temporal requirement.
The intermediary holds the historical dis-
tributing corporation debt for a period of
not less than 30 days ending on the control
distribution date.
(4) Qualifying direct issuance trans-
actions—(i) Overview—(A) In general.
To qualify as a qualifying debt elimina-
tion transaction, a direct issuance trans-
action must be determined to comprise
a transfer by the distributing corporation
of section 361 consideration to the credi-
tor 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 sec-
tion 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 gen-
eral 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 non-
recognition 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-qualifica-
tion as an exchange under section 361 as
set forth in paragraph (e)(4)(ii)(B) of this
section, unless the transaction satisfies the
safe harbor under paragraph (e)(4)(iii) of
this section. The strength of the evidence
provided by those factors is determined
based on an analysis of all relevant facts
and circumstances.
(B) Factors—(1) Exchange part of
prearranged, integrated plan—(i) Sub-
stantial evidence of non-qualification. An
exchange of section 361 consideration by
the distributing corporation with the cred-
itor pursuant to an arrangement that com-
prises part of a prearranged, integrated
plan is substantial evidence of non-qual-
ification.
(ii) Evidence of qualification. An
exchange of section 361 consideration by
the distributing corporation with the cred
-
itor that is not pursuant to an arrangement
that comprises part of a prearranged, inte-
grated plan is evidence of qualification.
(2) Specified agency and substance-
over-form requirements—(i) Evidence of
non-qualification. The failure to satisfy
one or more requirements set forth in
paragraphs (e)(4)(iii)(C) through (F) of
this section is evidence of non-qualifica-
tion.
(ii) Substantial evidence of non-quali-
fication. 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-qualifica-
tion.
(iii) Substantial evidence of qualifica-
tion. The satisfaction of all requirements
set forth in paragraphs (e)(4)(iii)(C)
through (F) of this section is substantial
evidence of qualification.
(3) Temporal proximity—(i) Evidence
of non-qualification. The fact that the
creditor holds the refinanced historical
distributing corporation debt for a period
of less than 30 days ending on the control
distribution date is evidence of non-qual-
ification.
(ii) Evidence of qualification. The fact
that the creditor holds the refinanced his-
torical 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 pro-
ceeds of refinanced distributing corpo-
ration debt—(i) Substantial evidence of
non-qualification. The distributing cor-
poration’s legal or practical dominion
or control over any proceeds of the refi-
nanced historical distributing corporation
debt (as determined in accordance with
§1.357-2(e)(2)) is substantial evidence of
non-qualification.
(ii) Substantial evidence of qualifica-
tion. The distributing corporation’s lack
of legal or practical dominion or control
over any proceeds of the refinanced his-
torical distributing corporation debt (as
determined in accordance with §1.357-
2(e)(2)) is substantial evidence of qual-
ification.
(5) Purpose of avoiding requirements
or limitations of section 361. The distrib-
uting corporation’s issuance of the refi-
nanced historical distributing corporation
debt with a principal purpose of avoiding
any of the requirements or limitations of
section 361 is evidence of non-qualifica-
tion.
(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 accor-
dance with §1.357-2(e)(2).
(B) The creditor holds the refinanced
historical distributing corporation debt for
a period of not less than 30 days ending on
the control distribution date.
(C) Each exchange of section 361 con-
sideration for refinanced historical dis-
tributing corporation debt between the
distributing corporation and the creditor
is effectuated based on terms and condi-
tions arrived at by the parties bargaining
at arm’s length.
(D) None of the distributing corpora-
tion, the controlled corporation, or any
distributing corporation related person or
controlled corporation related person—

March 3, 2025 1052 Bulletin No. 2025–10
(1) Participates in any profit gained by
the creditor upon an exchange of section
361 consideration; or
(2) Limits by agreement or other
arrangement any profit of the creditor
described in paragraph (e)(4)(iii)(D)(1) of
this section.
(E) The creditor acts for its own
account with regard to all components of
the direct issuance transaction.
(F) The creditor bears the risk of loss
with respect to—
(1) The refinanced historical distribut-
ing corporation debt; and
(2) Any subsequent sale or other dispo-
sition of section 361 consideration trans-
ferred to the creditor to satisfy the refi-
nanced historical distributing corporation
debt.
(iv) Prohibition regarding variable
pricing and similar agreements. The
requirement set forth in paragraph (e)(4)
(iii)(F) of this section is not satisfied if
the creditor enters into a variable pricing
agreement or similar arrangement with the
distributing corporation (or a controlled
corporation, distributing corporation
related person, or controlled corporation
related person) with regard to any section
361 consideration, including—
(A) True-up payments;
(B) Forward exchange agreements; and
(C) Any similar agreement or arrange-
ment.
(f) Transitorily eliminated eligible dis-
tributing corporation debt—(1) Overview.
The amount of section 361 consideration
treated as transferred by a distributing
corporation to a creditor of the distribut-
ing corporation in a qualifying debt elim-
ination transaction (and, therefore, treated
as distributed to shareholders pursuant
to the plan of reorganization under sec-
tion 361(b)(3) or (c)(3), as appropriate) is
reduced by the amount of eligible distrib-
uting corporation debt that is transitorily
eliminated pursuant to paragraph (f)(2)(i)
of this section.
(2) Transitory elimination—(i) Gen-
eral 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 corpo-
ration 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 earli-
est applicable date, directly or indirectly,
with borrowing that the distributing cor-
poration or any distributing corporation
related person (determined immediately
after the earliest applicable date) expects
or is committed to, directly or indirectly,
before that date.
(ii) Borrowings not in the ordinary
course. For purposes of paragraph (f)(2)(i)
of this section, a borrowing is not treated
as expected if the borrowing results
from—
(A) An event unrelated to the divisive
reorganization and not in the ordinary
course of business of the distributing cor-
poration; and
(B) Changed circumstances that were
not expected prior to the control distri-
bution date (therefore, the borrowing is
unrelated to, and demonstrably indepen-
dent of, the divisive reorganization or any
transaction related to the divisive reorga-
nization).
(iii) Borrowings in the ordinary course.
A borrowing described in paragraph (f)(2)
(i) of this section is not treated as transi-
torily eliminating eligible distributing cor-
poration debt if the borrowing—
(A) Is incurred in the ordinary course
of business of the distributing corporation
or distributing corporation related person
(as appropriate); and
(B) Would have been incurred by the
distributing corporation or distributing
corporation related person (as appropri-
ate) without regard to the divisive reorga-
nization or any transaction related to the
divisive reorganization (that is, the bor-
rowing 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 exam-
ples, the following facts apply: A distrib-
uting 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 hold-
ers of Distributing debt (together with
the contribution and the distribution, the
separation); Distributing properly files a
plan of reorganization for the separation
with the IRS pursuant to §1.368-3(a)(5)
that satisfies all requirements set forth
in §1.368-4; the separation qualifies as
a divisive reorganization under sections
355 and 368(a)(1)(D); and the aggregate
amount of adjusted basis of the assets
transferred in the contribution exceeds the
sum of the aggregate amount of liabilities
assumed by Controlled plus the amount of
money and the fair market value of any
other property received by Distributing.
Unless otherwise provided, no Distribut-
ing debt was transitorily eliminated within
the meaning of paragraph (f) of this sec-
tion.
(1) Example 1: Transfer of money or other prop-
erty to related creditor—(i) Facts. The section 361
consideration received by Distributing in the con-
tribution consists of Controlled stock and $100x of
cash. Distributing has an outstanding debt of $100x
owed to a wholly owned subsidiary that is a Dis-
tributing related person (Subsidiary, and such debt,
Internal Debt). Subsidiary has an outstanding debt of
$100x owed to an unrelated ultimate creditor (Exter-
nal 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 seg-
regated account. Subsequently, Distributing, pursu-
ant 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 Distrib-
uting receives the $100x of cash from Controlled.
Each transaction, creditor (Subsidiary and unrelated
ultimate creditor), and debt (Internal Debt and Exter-
nal Debt) is identified and described in the plan of
reorganization with regard to the separation.
(ii) Analysis. Distributing’s transfer of the $100x
of cash to Subsidiary satisfies all requirements under
this section and §1.361-3(c)(2)(i) to be treated as a
distribution to Distributing’s shareholders pursuant
to the plan of reorganization for purposes of §1.361-
3(c)(1). See paragraph (a) of this section. First, each
of Distributing and Subsidiary deposits the $100x
of cash they received into a segregated account. See
§1.361-3(c)(2)(i)(A). Second, Distributing’s transfer
of the $100x of cash to Subsidiary is a transfer to
a qualifying creditor because, pursuant to the plan
of reorganization, Subsidiary transfers the $100x
of cash to an unrelated ultimate creditor by no later
than the end of the 12-month period beginning on
the date Distributing receives the $100x of cash

Bulletin No. 2025–10 1053 March 3, 2025
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 para-
graphs (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 cred-
itor, is identified and described in the plan of reorga-
nization (see paragraph (b)(2)(ii)(C) of this section).
Second, the amount of historical distributing corpo-
ration debt satisfied by Distributing (that is, $100x)
does not exceed the maximum amount of distribut-
ing 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 dis-
tributing corporation debt—(i) Facts. The section
361 consideration received by Distributing in the
contribution consists of Controlled stock and $100x
of cash. Distributing has an outstanding $100x debt
owed to an unrelated creditor that is a qualifying
creditor (Distributing debt). The Distributing debt
was incurred before the earliest applicable date and
has an original term that ends after the date of the
contribution. This debt was identified in the plan of
reorganization. Before the date of the contribution,
but after the earliest applicable date, Distributing
refinances the Distributing debt with a bank that is
a qualifying creditor (refinanced Distributing debt).
The incurrence of the refinanced Distributing debt is
not part of a plan to incur additional debt 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 Dis-
tributing 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 refi-
nancing 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 refinanc-
ing 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 separa-
tion. See paragraph (c)(2)(ii)(D) of this section and
proposed §1.368-4(d)(1)(iv). Accordingly, the refi-
nanced Distributing debt is eligible to be satisfied
with section 361 consideration under paragraph (a)
of this section. See paragraph (c)(1) of this section.
(3) Example 3: Eight-quarterly-average test—
(i) Facts. The section 361 consideration received
by Distributing in the contribution consists of Con-
trolled stock and $100x of cash. As of the earliest
applicable date (July 10, 2025), Distributing has out-
standing 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 there-
fore eligible Distributing debt, because Distribut-
ing incurred each of the debts before the earliest
applicable date and each of the debts has an origi-
nal 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 consider-
ation 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 prin-
cipal 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 Distrib-
uting debt determined under the eight-quarterly-av-
erage test is equal to $110x (that is, the eight quar-
terly average of $880x—the $180x of Distributing
debt outstanding at the close of the first fiscal quarter
ending immediately before the earliest applicable
date and the $100x of Distributing debt outstand-
ing 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 consid-
eration 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 con-
tribution). See paragraph (d)(1) of this section.
(4) Example 4: Amount of distributing corpo-
ration debt under revolving credit agreement—(i)
Facts. Distributing is the debtor under a revolving
credit agreement entered into before the earliest
applicable date with an unrelated creditor that is a
qualifying creditor. The revolving credit agreement
does not expire until after the date of the contribu-
tion, 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 outstand-
ing balance under the agreement is $50x. After that
date, but prior to the control distribution date, Dis-
tributing’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 contribu-
tion, 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 Dis-
tributing 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 low-
est balance under the agreement beginning on the
earliest applicable date and ending on the control
distribution date ($40x). See paragraph (c)(3)(ii)(C)
of this section.
(5) Example 5: Effect of offsetting debts on
amount of historical distributing corporation debt—
(i) Facts. As of the earliest applicable date, Distribut-
ing has an outstanding $100x debt owed to an unre-
lated creditor (Creditor) that is a qualifying creditor
(Distributing debt). The Distributing debt is histori-
cal 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 para-
graphs (c)(1) and (2) of this section. As of the earli-
est 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 Distrib-
uting debt must be reduced by the aggregate princi-
pal amount of any debt for which Distributing is a
creditor and the debtor is the Creditor with respect
to that Distributing debt. See paragraph (c)(3)(iii) of
this section (requiring offsetting debts to be taken
into account). Accordingly, the aggregate amount of
eligible Distributing debt is $50x (that is, the $100x
of Distributing debt reduced by the $50x of Creditor
debt).
(6) Example 6: Qualifying original creditor
exchange—(i) Facts. The section 361 consideration
received by Distributing in the contribution consists
of Controlled stock and $100x of Controlled securi-
ties. As of the earliest applicable date, Distributing
has an outstanding $100x debt owed to an unrelated
creditor (Creditor) that is a qualifying creditor (Dis-
tributing 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 maxi-
mum 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, Dis-
tributing transfers the $100x of Controlled securities
received from Controlled directly to Creditor in sat-
isfaction of the Distributing debt. This transfer does
not qualify as a qualifying intermediated exchange
under paragraph (e)(3) of this section or as a quali-
fying direct issuance transaction under paragraph (e)
(4) of this section.

March 3, 2025 1054 Bulletin No. 2025–10
(ii) Analysis. The Distributing debt qualifies as
historical distributing corporation debt because Dis-
tributing incurred the debt before the earliest appli-
cable 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 deter-
mined under paragraph (d) of this section (that is,
$100x). Distributing’s transfer of the $100x of Con-
trolled securities directly to Creditor in satisfaction
of Distributing debt is a qualifying original creditor-
exchange, and therefore is a qualifying debt elimina-
tion transaction. See paragraph (e)(2) of this section.
Accordingly, the transfer of $100x of Controlled
securities to Creditor in satisfaction of Distributing
debt is treated as a distribution by Distributing to its
shareholders pursuant to the plan of reorganization.
See paragraph (a) of this section.
(7) Example 7: Not a qualifying direct issuance
transaction—(i) Facts. The facts are the same as in
paragraph (g)(6)(i) of this section (Example 6), except
for the following. In anticipation of the divisive reor-
ganization, Distributing intends to issue new debt to
Creditor and use the proceeds to satisfy historical Dis-
tributing 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. Dis-
tributing 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 contri-
bution, 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 elim-
ination transaction. Distributing incurred the refi-
nanced 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 qual-
ify for the safe harbor for qualifying direct issuance
transactions under paragraph (e)(4)(iii) of this sec-
tion because Distributing had dominion and control
over the direct issuance proceeds. See paragraph (e)
(4)(iii)(A) of this section. In addition, the domin-
ion 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 para-
graph (e)(4)(ii)(B)(1) of this section. Accordingly,
the exchange with Creditor is not a qualifying orig-
inal 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 reorgani-
zation under §1.361-4(a)(2)(ii). See paragraph (a) of
this section.
(8) Example 8: Qualifying intermediated
exchange—(i) Facts—(A) Historical Distributing
debt. The section 361 consideration received by Dis-
tributing 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 inter-
mediary will acquire the $100x of Distributing debt
directly from the creditor (and not from Distribut-
ing, Controlled, or any Distributing related person or
Controlled related person). The intermediary will not
hold that debt for the benefit of Distributing, Con-
trolled, or any Distributing related person or Con-
trolled 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 arrange-
ment 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 Dis-
tributing related person or Controlled related person
with regard to the Controlled securities. The interme-
diary 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 satis-
fies all requirements set forth in paragraph (e)(3) of
this section to qualify as a qualifying debt elimina-
tion transaction. See paragraphs (b) through (d) and
(e)(3) of this section.
§1.361-6 Applicability date.
(a) Applicability date. The rules of
§§1.361-1 through 1.361-5 apply to trans-
actions intended to qualify under section
361 of the Code for which the earliest of
the following dates occurs after [DATE
OF PUBLICATION OF FINAL REGU-
LATIONS IN THE FEDERAL REGIS-
TER]:
(1) The date of the first public
announcement (as defined in §1.355-7(h)
(10)) of the transaction.
(2) The date of entry by the taxpayer
into a written agreement to engage in the
transaction.
(3) The date of approval of the transac-
tion by the board of directors of the tax-
payer.
(4) The date of a court order (or a plan
confirmed, or a sale approved, by order
of a court) in a title 11 or similar case
(as defined in section 368(a)(3)(A) of
the Code), but only if the taxpayer was a
debtor in a case before such court.
(5) The date a ruling request for the
transaction is submitted to the IRS.
Par. 14. Section 1.368-1 is amended by
revising paragraph (c) to read as follows:
§1.368-1 Purpose and scope of
exception of reorganization exchanges.
* * * * *
(c) Scope of exception for reorganiza-
tion exchanges—(1) Overview. The reor-
ganization provisions of part III of sub-
chapter 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 defini-
tional provisions is to limit the scope of
transactions, and therefore the parties to
such transactions (and other relevant per-
sons, such as shareholders of a party to a
reorganization), to which certain opera-
tive 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 treat-
ment 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 rel-
evant persons, such as shareholders of a

Bulletin No. 2025–10 1055 March 3, 2025
party to a reorganization), that qualify for
nonrecognition treatment (in whole or in
part) under part III.
(2) Definitional and operative provi-
sions. The definitional and operative pro-
visions 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 reor-
ganizations, 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 transac-
tions that qualify as reorganizations—(A)
Section 354. Section 354 generally pro-
vides 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 corpo-
ration pursuant to the plan of reorganiza-
tion.
(B) Section 355. Section 355 generally
provides that, if all requirements are sat-
isfied, 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 con-
trolled corporation stock or securities with
respect to, or in exchange for, their distrib-
uting corporation stock.
(C) Section 356. Section 356 of the
Code generally provides that, if a share-
holder 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 share-
holder recognizes gain or income (as
determined pursuant to the gain calcula-
tion and characterization rules under sec-
tion 356).
(D) Section 357. Section 357 of the
Code generally provides that an assump-
tion by an acquiring corporation of a lia-
bility of a target corporation is not treated
as money received by the target corpora-
tion (and, therefore, the target corporation
recognizes no gain or loss as a result of the
liability assumption).
(E) Section 361(a) and (b) – Transfers
of stock or securities. Section 361(a) and
(b) of the Code generally provide that a
target corporation recognizes no gain or
loss if that corporation is a party to a reor-
ganization and exchanges property, pursu-
ant to the plan of reorganization, solely for
stock or securities in an acquiring corpo-
ration that is a party to the reorganization.
(F) Section 361(c) – Distributions of
qualified property by target corporation.
Section 361(c) generally provides that a
target corporation recognizes no gain or
loss on the distribution to its sharehold-
ers or transfer to its creditors of qualified
property (as defined in section 361(c)(2)
(B)) pursuant to the plan of reorganiza-
tion.
(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 announce-
ment (as defined in §1.355-7(h)(10)) of
the transaction.
(ii) The date of entry by the taxpayer
into a written agreement to engage in the
transaction.
(iii) The date of approval of the trans-
action by the board of directors of the tax-
payer.
(iv) The date of a court order (or a
plan confirmed, or a sale approved, by
order of a court) in a title 11 or similar
case (as defined in section 368(a)(3)(A) of
the Code), but only if the taxpayer was a
debtor in a case before such court.
(v) The date a ruling request for the
transaction is submitted to the IRS.
* * * * *
Par. 15. Section 1.368-2 is amended by
revising paragraphs (f) and (g) to read as
follows:
§1.368-2 Definitions of terms and
operative rules.
* * * * *
(f) Party to a reorganization—(1)
Overview. The provisions described in
§1.368-1(c)(2)(i) and (ii) apply solely to a
transaction that is carried out by, between,
or among one or more parties to a reorga-
nization.
(2) Scope of party to a reorganization.
For purposes of determining the scope of
the transaction or series of transactions to
which the provisions described in §1.368-
1(c)(2)(i) and (ii) apply, the term party to
a reorganization is limited solely to a cor-
poration that—
(i) Is described in paragraph (f)(3) of
this section; and
(ii) Is determined to be a party to a
reorganization pursuant to paragraph (f)
(4) of this section.
(3) Definition—(i) In general. The
term party to a reorganization includes—
(A) A corporation resulting from a
transaction that qualifies as a reorganiza-
tion;
(B) Both corporations, in a transaction
that qualifies as a reorganization in which
one corporation acquires stock or proper-
ties of another corporation; and
(C) A corporation controlling an
acquiring corporation in a transaction that
qualifies as a triangular reorganization
(as defined in §1.358-6(b)(2)) if stock of
the controlling corporation is used in the
acquisition of stock or properties.
(ii) Certain transfers of assets or stock
in reorganizations—(A) In general. If a
transaction otherwise qualifies as a reor-
ganization, a corporation remains a party
to the reorganization even though stock
or assets acquired by the acquiring cor-
poration pursuant to the plan of reorga-
nization 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 con-
tinuity of business enterprise requirement
is satisfied. See §1.368-1(d).
(B) Triangular reorganizations. If a
transaction otherwise qualifies as a reorga-
nization under section 368(a)(1)(B) or as
a reverse triangular merger (as defined in
§1.358-6(b)(2)(iii)), the target corporation
(in the case of a transaction that otherwise
qualifies as a reorganization under section
368(a)(1)(B)) or the surviving corporation
(in the case of a transaction that otherwise
qualifies as a reverse triangular merger)
remains a party to the reorganization even
though its stock or assets acquired pursu-
ant to the plan of reorganization are trans-

March 3, 2025 1056 Bulletin No. 2025–10
ferred in a transaction described in para-
graph (k) of this section. If a transaction
otherwise qualifies as a forward triangular
merger (as defined in §1.358-6(b)(2)(i)), a
triangular B reorganization (as defined in
§1.358-6(b)(2)(iv)), a triangular C reorga-
nization (as defined in §1.358-6(b)(2)(ii)),
or a reorganization under section 368(a)
(1)(G) by reason of section 368(a)(2)(D),
the acquiring corporation remains a party
to the reorganization even though its stock
is transferred in a transaction described in
paragraph (k) of this section.
(4) Determination of party to the reor-
ganization—(i) Status generally based on
plan of reorganization. Subject to para-
graph (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 reorgani-
zation (as defined in §1.368-4) that is filed
with the IRS pursuant to §1.368-3(a)(5).
(ii) Status determined by Commissioner
based on Federal income tax principles.
Notwithstanding the inclusion or omission
of a corporation as a party to a reorganiza-
tion in a plan of reorganization filed by the
taxpayer with the IRS pursuant to §1.368-
3(a)(5), the status of a corporation as a
party to the reorganization may be deter-
mined by the Commissioner based on the
correction of that plan of reorganization
in accordance with §1.368-4(c)(2), taking
into account—
(A) All facts and circumstances regard-
ing the transaction or series of transac-
tions; and
(B) All relevant provisions of the Code
and general principles of Federal income
tax law, including the step transaction
doctrine.
(5) Examples. The following examples
illustrate the application of the rules of
this paragraph (f).
(i) Example 1: Statutory merger—(A) Facts.
Pursuant to State law, Corporation A merges into
Corporation B in a transaction qualifying as a
reorganization under section 368(a)(1)(A). A plan
of reorganization is filed with the IRS pursuant to
§1.368-3(a)(5) that identifies A and B as parties to
the reorganization.
(B) Analysis. A and B are both described in para-
graph (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 reor-
ganization. See paragraph (f)(4)(i) of this section.
Accordingly, each of A and B is a party to a reorga-
nization for purposes of determining the scope of the
transactions to which the definitional and operative
provisions described in §1.368-1(c)(2)(i) and (ii)
apply. See paragraph (f)(2) of this section.
(ii) Example 2: B reorganization—(A) Facts.
Corporation C owns all the stock of Corporation
D. D acquires all the stock of Corporation E solely
in exchange for voting stock of D in a transaction
qualifying as a reorganization under section 368(a)
(1)(B). A plan of reorganization is filed with the IRS
pursuant to §1.368-3(a)(5) that identifies D and E as
parties to the reorganization.
(B) Analysis. With respect to D and E, the anal-
ysis is the same as in paragraph (f)(5)(i)(B) of this
section (Example 1). C is not described in paragraph
(f)(3) of this section. Accordingly, C is not a party to
the reorganization.
(iii) Example 3: Triangular C reorganization—
(A) Facts. The facts are the same as in paragraph (f)
(5)(ii)(A) of this section (Example 2), except that D
acquires all the assets of E solely in exchange for
voting stock of C, and E distributes the stock of C
received in the exchange to E’s shareholders, in a
transaction that qualifies as a reorganization under
section 368(a)(1)(C). A plan of reorganization is filed
with the IRS pursuant to §1.368-3(a)(5) that identi-
fies C, D, and E as parties to the reorganization.
(B) Analysis. With respect to D and E, the anal
-
ysis is the same as in paragraph (f)(5)(i)(B) of this
section (Example 1). C is described in paragraph (f)
(3)(i)(C) of this section and is identified as a party
to the reorganization in the plan of reorganization.
Accordingly, C also is a party to a reorganization for
purposes of determining the scope of the transactions
to which the definitional and operative provisions
described in §1.368-1(c)(2)(i) and (ii) apply. See
paragraph (f)(2) of this section.
(iv) Example 4: Transfer of assets acquired in a
reorganization—(A) Facts. The facts are the same as
in paragraph (f)(5)(iii)(A) of this section (Example
3), except that, after the reorganization, D transfers
all the assets of E received in the exchange to a part-
nership in which D owns a significant interest. The
partnership continues E’s historic business.
(B) Analysis. The continuity of business enter-
prise requirement continues to be satisfied after
D’s transfer of the E assets to the partnership. See
§1.368-1(d)(4)(iii). Consequently, none of C, D, or E
ceases to be a party to the reorganization. See para-
graph (f)(3)(ii)(B) of this section.
(v) Example 5: Transfer of stock acquired in a tri-
angular 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 Corpora-
tion G in exchange for all the stock of G.
(B) Analysis. The analysis is the same as in para-
graph (f)(5)(iii)(B) of this section. Additionally, the
continuity of business enterprise requirement contin-
ues to be satisfied after C’s transfer of the D stock to
G. See §1.368-1(d)(4)(iii). Accordingly, D does not
cease to be a party to the reorganization by reason of
the transfer. See paragraph (f)(3)(ii) of this section.
(vi) Example 6: Divisive reorganization—(A)
Facts. Pursuant to a plan of reorganization for a
transaction that qualifies as a reorganization under
sections 368(a)(1)(D) and 355, Corporation F trans-
fers one of its businesses to newly formed Corpora-
tion G in exchange for all the stock of G and then
distributes all the G stock to F’s shareholders. The
plan of reorganization, which is filed with the IRS
pursuant to §1.368-3(a)(5), identifies F and G as par-
ties to the reorganization.
(B) Analysis. The analysis is the same as in para-
graph (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 fol-
lowing dates occurs after [date of publi-
cation of final regulations in the Federal
Register]:
(i) The date of the first public announce-
ment (as defined in §1.355-7(h)(10)) of
the transaction.
(ii) The date of entry by the taxpayer
into a written agreement to engage in the
transaction.
(iii) The date of approval of the trans-
action by the board of directors of the tax-
payer.
(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 fol-
lows:
§1.368-3 Records to be kept and
information to be filed with returns.
(a) * * *
(3) * * *
(iv) Property not described in para-
graph (a)(3)(i), (ii), or (iii) of this section;
(4) The date and control number of any
private letter ruling(s) issued by the Inter-
nal Revenue Service in connection with
this reorganization; and
(5) A copy of the plan of reorganiza-
tion satisfying the requirements set forth
in §1.368-4(d).

Bulletin No. 2025–10 1057 March 3, 2025
* * * * *
(e) Applicability date—(1) In general.
This section applies to any taxable year
beginning on or after May 30, 2006. How-
ever, taxpayers may apply this section to
any original Federal income tax return
(including any amended return filed on
or before the due date (including exten-
sions) of such original return) timely filed
on or after May 30, 2006. For taxable
years beginning before May 30, 2006, see
§1.368-3 as contained in 26 CFR part 1 in
effect on April 1, 2006.
(2) Paragraphs (a)(3) and (b)(3).
Paragraphs (a)(3) and (b)(3) of this sec-
tion apply with respect to reorganizations
occurring on or after March 28, 2016, and
also with respect to reorganizations occur-
ring before such date as a result of an entity
classification election under §301.7701-3
of this chapter filed on or after March 28,
2016, unless such reorganization is pur-
suant 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 fol-
lowing dates occurs after [date of publi-
cation of final regulations in the Federal
Register]:
(i) The date of the first public announce-
ment (as defined in §1.355-7(h)(10)) of
the transaction.
(ii) The date of entry by the taxpayer
into a written agreement to engage in the
transaction.
(iii) The date of approval of the trans-
action by the board of directors of the tax-
payer.
(iv) The date of a court order (or a
plan confirmed, or a sale approved, by
order of a court) in a title 11 or similar
case (as defined in section 368(a)(3)(A) of
the Code), but only if the taxpayer was a
debtor in a case before such court.
(v) The date a ruling request for the
transaction is submitted to the IRS.
Par. 17. Section 1.368-4 is added to
read as follows:
§1.368-4 Plan of reorganization.
(a) Plan of reorganization—(1) Scope
and purpose. This section sets forth
requirements and procedures for the
determination of a plan of reorganiza-
tion, including the scope of transactions
properly included within that plan. The
plan of reorganization serves to iden-
tify solely those transactions to which
the definitional and operative provisions
described in §1.368-1(c)(2)(i) and (ii)
apply. The plan of reorganization also
serves to distinguish those qualifying
transactions described in §1.368-1(c)(2)
(i) and (ii) from transactions to which
the general recognition provisions of the
Code (such as section 1001 of the Code)
apply. The plan of reorganization is not to
be construed as broadening the definition
of a reorganization as set forth in section
368(a) of the Code.
(2) Plan of reorganization to which
definitional and operative provisions
apply. The provisions described in
§1.368-1(c)(2)(i) and (ii) apply solely to a
transaction that is identified in, and carried
out pursuant to—
(i) A plan of reorganization of a tax-
payer 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 tax-
payer that is corrected by the Commis-
sioner under paragraph (b)(2)(i) of this
section; or
(iii) A plan of reorganization that is
identified by the Commissioner under
paragraph (b)(2)(ii) of this section.
(3) Failure to satisfy requirements. The
failure of a taxpayer to comply with any
particular requirement or procedure set
forth in this section (including the failure
to file a plan of reorganization with the
IRS pursuant to §1.368-3(a)(5)) does not,
on its own, prevent a transaction or series
of transactions from being considered part
of the plan of reorganization, qualifying as
a reorganization under a definitional pro-
vision, or qualifying for nonrecognition
treatment (in whole or in part) under an
operative provision.
(b) Definition. The term plan of reorga-
nization means—
(1) A plan of reorganization of a tax-
payer that—
(i) Satisfies all requirements set forth in
paragraph (d) of this section; and
(ii) Is filed with the IRS pursuant to
§1.368-3(a)(5); or
(2) A plan of reorganization that results
from—
(i) The Commissioner correcting a plan
of reorganization of a taxpayer; or
(ii) The Commissioner identifying
a plan of reorganization for a taxpayer
(in the event of a failure to file a plan of
reorganization with the IRS pursuant to
§1.355-5(a)(2)).
(c) Determination of plan of reorga-
nization—(1) Status generally based on
plan of reorganization filed by taxpayer.
Except as provided in paragraph (c)(2)
of this section, a taxpayer establishes the
plan of reorganization for a transaction or
series of transactions solely by—
(i) Satisfying all requirements set forth
in paragraph (d) of this section; and
(ii) Filing the plan of reorganization
with the IRS pursuant to §1.368-3(a)(5).
(2) Correction or identification of plan
of reorganization due to taxpayer’s failure
to file a complete plan of reorganization—
(i) In general. If a taxpayer files a plan of
reorganization with the IRS that fails to
satisfy any requirement set forth in para-
graph (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 accor-
dance with paragraph (c)(2)(ii) of this sec-
tion.
(ii) Status of transactions as part of
a plan of reorganization. The Commis-
sioner may determine that a transaction or
series of transactions should be included
in, or excluded from, a plan of reorgani-
zation described in paragraph (c)(2)(i) of
this section based on—
(A) All facts and circumstances regard-
ing the transaction or series of transac-
tions; 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 reorga-
nization. To qualify as a plan of reorga-
nization 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 agree-
ment 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. Securi-

March 3, 2025 1058 Bulletin No. 2025–10
ties and Exchange Commission (SEC) or
other Federal regulatory agency.
(1) Documentation requirement. The
plan of reorganization is provided in a sin-
gle, comprehensive document that—
(i) Identifies all parties to the reorgani-
zation (as determined pursuant to §1.368-
2(f));
(ii) Identifies all transactions properly
included in the plan of reorganization (as
determined pursuant to paragraph (e) of
this section);
(iii) Identifies all liabilities (including
debt) to be assumed by the acquiring cor-
poration and the obligees (or creditors) of
those liabilities;
(iv) Identifies all debt of the target cor-
poration that will be satisfied with section
361 consideration (as defined in §1.361-
1(b)(49)) (including all debt intended to
qualify for the refinancing exception for
historical distributing corporation debt
under §1.361-5(c)) and the creditors of
that debt;
(v) Describes the intended Federal
income tax treatment of the transactions
described in paragraph (d)(1)(ii) of this
section;
(vi) Describes the business purpose for
each transaction described in paragraph
(d)(1)(ii) of this section; and
(vii) Establishes that the readjustments
involved in transactions described in para-
graph (d)(1)(ii) of this section are under-
taken 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 reorganiza-
tion, 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 reorganiza-
tion (within the meaning of paragraph (f)
of this section), as applicable, is finalized
and adopted by the party to the reorgani-
zation, as established by—
(i) The acts of the party’s respective
duly authorized officers and directors; and
(ii) The official records of the party to
the reorganization.
(3) Completion of plan of reorganiza-
tion—(i) Expeditious prosecution of plan
of reorganization—(A) General rule. In
accordance with paragraph (d)(3)(iii) of
this section, taking into account all facts
and circumstances (including the one or
more business purposes for the reorgani-
zation), 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 reorganiza-
tion complete the plan of reorganization
within the 24-month period beginning on
the date of the first step of the plan of reor-
ganization.
(ii) Completion of entire plan of reor-
ganization—(A) General rule. All trans-
actions included in a plan of reorganiza-
tion must be carried out in the manner
described in the plan of reorganization.
(B) Failure to complete entire plan
of reorganization. Except as provided
in paragraph (f) of this section, if the
requirement of paragraph (d)(3)(ii)(A) of
this section is not satisfied, the provisions
described in §1.368-1(c)(2)(i) and (ii) do
not apply to the transaction (or series of
transactions) unless the Commissioner
determines the existence of a plan of reor-
ganization.
(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 sat-
isfied.
(1) Definite intent requirement—(i)
General rule. Prior to the first step of
the plan of reorganization or an original
plan of reorganization that becomes the
amended plan of reorganization (within
the meaning of paragraph (f) of this sec-
tion), one or more parties to the reorgani-
zation evidences a definite intent to carry
out the transaction through a written com-
mitment in one or more official records
of the party that substantiate the plan of
reorganization.
(ii) Section 355 transactions. With
regard to a control distribution (as defined
in §1.355-1(a)(2)(iii)) that occurs in the
next taxable year after the first distribu-
tion, the distributing corporation does not
establish a definite intent under paragraph
(e)(1)(i) of this section unless all distri-
butions up to and including the control
distribution are effectuated pursuant to a
binding commitment of the distributing
corporation. See §1.355-2(e)(2)(ii).
(iii) Relevancy of contemplated possi-
bilities—(A) Contemplation irrelevant to
taxpayer’s determination. The contempla-
tion 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 Com-
missioner’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 para-
graph (c)(2) of this section.
(2) Proximate relationship require-
ment—(i) General rules. Taking into
account paragraphs (e)(2)(ii) and (iii) of
this section:
(A) Necessary or integral test for appli-
cation of definitional provision. A transac-
tion is part of the plan of reorganization
for a reorganization to which the provi-
sions described in §1.368-1(c)(2)(i) apply
only if, on its own or as part of a series of
transactions, the transaction is necessary
to satisfy one or more requirements of a
definitional provision described in §1.368-
1(c)(2)(i), or is an integral part of a series
of transactions carried out to satisfy the
requirements of the definitional provision
intended to apply to the reorganization,
as evidenced by a written commitment in
one or more official records of the party to
the reorganization.
(B) But for, or integral to, test for
application of operative provision. A
transaction is part of the plan of reorgani-
zation to which the provisions described
in §1.368-1(c)(2)(ii) apply only if, on its
own or as part of a series of transactions,
the transaction would not occur but for the
reorganization that is covered by the plan
of reorganization, or is an integral part of
a series of transactions carried out to sat-
isfy the requirements of the definitional
provision intended to apply to the reorga-
nization, as evidenced by a written com-
mitment in one or more official records of
the party to the reorganization.
(ii) Existence of independent signifi-
cance not determinative. The independent

Bulletin No. 2025–10 1059 March 3, 2025
significance of a transaction (for example,
the fact that the transaction has a separate
business motive apart from the reorgani-
zation) 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 proxim-
ity to one or more other transactions is not
properly included in a plan of reorganiza-
tion under paragraph (e)(2)(i) of this sec-
tion unless Federal income tax principles
(including the step transaction doctrine)
would apply to determine that the trans-
action 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 con-
sistent with, and directly related to, one
or more business purposes for the reor-
ganization (for example, the transaction
directly furthers one or more business
purposes for the reorganization).
(f) Amended plan of reorganization—
(1) Conditions. If a taxpayer amends a
plan of reorganization described in para-
graph (b)(1) of this section (original plan
of reorganization) after the first step of the
original plan of reorganization (amended
plan of reorganization), those amend-
ments will not cause the taxpayer to fail to
satisfy the requirements set forth in para-
graph (d) of this section only if—
(i) Those amendments are in direct
response to an identifiable, unexpected,
and material change in market or business
conditions that occurs after the date on
which the original plan of reorganization
is adopted by the party to the reorganiza-
tion 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 reorganiza-
tion satisfies all requirements set forth in
paragraph (d) of this section.
(2) Consequences of plan of reorgani-
zation amended due to changed circum-
stances—(i) Qualifying amended plan of
reorganization. If the requirements set
forth in paragraph (f)(1) of this section
are satisfied, the provisions described in
§1.368-1(c)(2)(i) and (ii) will apply to
transactions identified in, and carried out
pursuant to, the amended plan of reorga-
nization. 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 reor-
ganization (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 require-
ments set forth in paragraph (f)(1) of this
section, the Commissioner may correct or
identify the amended plan of reorganiza-
tion.
(g) Examples. The following exam-
ples illustrate the application of the rules
of this section. For purposes of these
examples, unless otherwise stated: terms
defined in §1.361-1(b) and used in these
examples have the meaning given such
terms in §1.361-1(b); all transactions are
completed within the 24-month period
beginning on the date of the first transac-
tion; all transactions qualify for the Fed-
eral income tax treatment intended by the
taxpayers, as described in the facts of each
example; and all corporations are calen-
dar-year taxpayers.
(1) Example 1: Creation of plan of reorganiza-
tion—(i) Facts. A target corporation (Target) trans-
fers all its assets to an acquiring corporation (Acquir-
ing) solely in exchange for stock of Acquiring and
Acquiring’s assumption of Target liabilities. Target
distributes all the Acquiring stock to Target’s share-
holders. 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 pur-
suant to §1.368-3(a)(5).
(ii) Analysis. Target’s failure to file a plan of
reorganization with the IRS pursuant to §1.368-3(a)
(5) does not, on its own, prevent the series of trans-
actions 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 pro-
visions of the Code and general principles of Fed-
eral income tax law, including the step transaction
doctrine. See paragraphs (b)(2)(ii) and (c)(2) of this
section. The definitional and operative provisions
described in §1.368-1(c)(2)(i) and (ii) apply to the
series of transactions identified in, and carried out
pursuant to, the plan of reorganization identified by
the Commissioner. See paragraph (a)(2)(iii) of this
section.
(2) Example 2: Correction of taxpayer’s plan of
reorganization—(i) Facts. An acquiring corporation
(Acquiring) acquires a target corporation (Target)
through the following series of transactions. Acquir-
ing 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 doc-
trine, 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 reorgani-
zation with the IRS pursuant to §1.368-3(a)(5) that
satisfies all requirements set forth in paragraph (d)
of this section, except that the plan of reorganization
does not mention the tender offer.
(ii) Analysis. To determine whether the tender
offer should be included in the plan of reorganiza-
tion for the statutory merger, the Commissioner
may examine all facts and circumstances regarding
the series of transactions and apply all relevant pro-
visions of the Code and general principles of Fed-
eral 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 Com-
missioner may correct Target’s plan of reorganiza-
tion by including the tender offer. See paragraph (c)
(2)(i) of this section. The definitional and operative
provisions described in §1.368-1(c)(2)(i) and (ii)
apply to the transactions identified in, and carried out
pursuant to, the plan of reorganization as corrected
by the Commissioner. See paragraph (a)(2)(ii) of this
section.
(3) Example 3: Scope of plan of reorganization
– distribution to equalize values—(i) Facts. On June
30, 2025, Corporation X and Corporation Y decide to
merge into newly formed Corporation Z. As reflected
in a single, comprehensive document that satisfies
the requirements set forth in paragraph (d)(1) of this
section, the board of directors of each of X and Y
approves the transaction pursuant to paragraph (d)
(2) of this section, with the agreement that X and Y
must be of equal value when merged into Z. Conse-
quently, to equalize the amount of its assets and Y’s
assets, and pursuant to a board resolution, X distrib-
utes $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 consol-
idation, 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 equaliz-
ing distribution satisfies a condition identified by the
boards of directors of X and Y for executing the X/Y

March 3, 2025 1060 Bulletin No. 2025–10
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 para-
graph (e)(3) of this section. Accordingly, the equal-
izing distribution is properly included in the plan of
reorganization for the X/Y consolidation. See para-
graph (e) of this section. Consequently, the Federal
income tax consequences of the equalizing distribu-
tion and the X/Y consolidation are determined under
the definitional and operative provisions described in
§1.368-1(c)(2)(i) and (ii). See paragraph (a)(2)(i) of
this section.
(4) Example 4: Scope of plan of reorganiza-
tion – pre-merger stock acquisition—(i) Facts. Two
potential acquiring corporations (X and Y) engage
in competing tender offers to acquire 100 percent of
the stock of a target corporation (Target). X and Y
carry out the tender offers through their respective
subsidiary corporations. On June 30, 2025, before
acquiring any shares in Target, X subsidiary signs
an agreement with Target (X/Target agreement) pro-
viding that, among other conditions (including regu-
latory 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 remain-
ing 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) (subsidi-
ary merger). As of September 30, 2025, X subsidiary
has been tendered 51 percent of Target’s outstanding
stock. On October 15, 2025, Y subsidiary tenders
to X subsidiary all of Y subsidiary’s Target shares
received in Y subsidiary’s tender offer (30 percent of
Target’s outstanding stock) in exchange for X stock
(Y share exchange). On November 1, 2025, pursuant
to the X/Target agreement, X causes Target to merge
into X subsidiary (that is, the subsidiary merger).
The subsidiary merger satisfies the requirements of
a definitional provision described in §1.368-1(c)(2)
(i) regardless of whether X subsidiary’s tender offer
(including the Y share exchange) is included in the
plan of reorganization for the subsidiary merger.
(ii) Analysis. The X/Target agreement imposes
a legal obligation on X subsidiary to carry out the
subsidiary merger if X subsidiary’s tender offer is
successful. Therefore, this agreement evidences a
definite intent, prior to the first step of the plan of
reorganization, for X subsidiary to carry out both of
those transactions as part of a plan of reorganization.
See paragraph (e)(1) of this section. Satisfaction
of this requirement is not affected by the fact that
the subsidiary merger is subject to significant con-
ditions, including a successful X subsidiary tender
offer, regulatory approval, and X and Target share-
holder approvals. See paragraph (e) of this section.
The X/Target agreement establishes that X subsid-
iary’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 Tar-
get, 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 ten-
der offer and the subsidiary merger are determined
under the definitional and operative provisions
described in §1.368-1(c)(2)(i) and (ii). See paragraph
(a)(2) of this section.
(5) Example 5: Scope of plan of reorganization
– multiple distributions of controlled corporation
stock to constitute a control distribution—(i) Facts.
On June 30, 2025, a distributing corporation (Dis-
tributing) 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 dis-
tributes the remaining 43 percent of Controlled stock
to Distributing’s shareholders (final distribution;
together with the contribution and the first distribu-
tion, 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 contem-
plated possibility that Distributing will distribute the
remaining 43 percent of Controlled stock. Distribut-
ing files a plan of reorganization with the IRS pur-
suant to §1.368-3(a)(5) with its Federal income tax
return for the 2025 taxable year that includes the first
distribution and the final distribution as part of the
plan of reorganization for the separation.
(ii) Analysis. If a taxpayer files a plan of reor-
ganization with the IRS that fails to satisfy any
requirement set forth in paragraph (d) of this section,
the Commissioner may correct the plan of reorgani-
zation. See paragraph (c)(2)(i) of this section. The
Commissioner may correct the plan of reorganiza-
tion to exclude a transaction based on an examina-
tion of all facts and circumstances and consideration
of all relevant provisions of the Code and general
principles of Federal income tax law, including the
step transaction doctrine. See paragraph (c)(2)(ii)
of this section. The final distribution is properly
excluded from the plan of reorganization for the
separation because Distributing fails to satisfy the
definite intent requirement with respect to the final
distribution. See paragraph (e)(1)(i) and (iii) of this
section. Specifically, because the distribution of
control (that is, the final distribution) occurs in the
next taxable year after the first distribution and is not
pursuant to a binding commitment, Distributing does
not establish a definite intent under paragraph (e)
(1)(i) of this section. See paragraph (e)(1)(ii) of this
section. The definitional and operative provisions
described in §1.368-1(c)(2)(i) and (ii) apply solely
to the transactions identified in, and carried out pur-
suant to, the plan of reorganization as corrected by
the Commissioner (that is, the contribution and first
distribution). See paragraph (a)(2) of this section.
Accordingly, the transaction would fail to meet the
definitional requirement under section 368(a)(1)(D)
because the first distribution, by itself, does not meet
the requirement set forth in §1.355-2(e)(2)(i).
(6) Example 6: Scope of plan of reorganization
– qualifying distribution of amount of controlled cor-
poration stock constituting section 368(c) control—
(i) Facts. The facts are the same as in paragraph (g)
(5)(i) of this section (Example 5), except for the fol-
lowing. First, Distributing provides in its separation
and distribution agreement with Controlled that Dis-
tributing will distribute the remaining 43 percent of
Controlled stock during 2026. Second, for its Federal
income tax return for the 2025 taxable year, Distrib-
uting files a plan of reorganization with the IRS pur-
suant to §1.368-3(a)(5) that satisfies all requirements
set forth in paragraph (d) of this section, including
the establishment, by reference to the separation and
distribution agreement, that Distributing will distrib-
ute to its shareholders pursuant to a binding commit-
ment 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 separa-
tion because Distributing satisfies the definite intent
requirement to make the final distribution. See para-
graph (e)(1)(ii) of this section. Accordingly, based on
the correct and properly filed plan of reorganization
pursuant to §1.368-3(a)(5), the Federal income tax
consequences of the contribution and both the first
distribution and the final distribution are determined
under the definitional and operative provisions
described in §1.368-1(c)(2)(i) and (ii). See paragraph
(a)(2)(i) of this section.
(7) Example 7: Scope of plan of reorganization
– contribution and distribution in divisive reorga-
nization—(i) Facts. On June 1, 2025, a distributing
corporation (Distributing) contributes property to a
newly formed controlled corporation (Controlled)
in exchange for Controlled stock and Controlled’s
assumption of Distributing liabilities related to the
contributed business (contribution). On September
1, 2025, Distributing distributes all Controlled stock
to Distributing’s shareholders (distribution; together
with the contribution, the separation). A separation
and distribution agreement between Distributing
and Controlled, filed by Distributing with the SEC,
evidences a definite intent, prior to the first step of
the separation, to carry out each of these transac-
tions 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 liabil-
ities arising solely from that business. Distributing
files a plan of reorganization with the IRS pursuant
to §1.368-3(a)(5) with its Federal income tax return
for the 2025 taxable year.
(ii) Analysis—(A) Contribution. The contribu-
tion is properly included in the plan of reorgani-
zation 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)

Bulletin No. 2025–10 1061 March 3, 2025
of this section. Lastly, the contribution is consistent
with, is directly related to, and therefore directly fur-
thers, the business purpose for the reorganization.
See paragraph (e)(3) of this section. Accordingly,
based on the correct and properly filed plan of reor-
ganization pursuant to §1.368-3(a)(5), the Federal
income tax consequences of the contribution are
determined under a definitional provision described
in §1.368-1(c)(2)(i) (that is, section 368(a)(1)(D)).
See paragraph (a)(2) of this section.
(B) Controlled liability assumption. Controlled’s
liability assumption is properly included in the plan
of reorganization for the separation. See paragraph
(e) of this section. First, as substantiated by the
separation and distribution agreement, Distributing
and Controlled evidence a definite intent, prior to
the first step of the plan of reorganization, for the
liability assumption to occur. See paragraph (e)(1)
(i) of this section. Second, the liability assumption
would not have occurred but for, and is integral to,
the separation, because the assumption ensures that
the respective liabilities of the retained and con-
tributed 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 reorga-
nization by ensuring that the earnings of each busi-
ness are used to pay liabilities arising solely from
that business (in other words, furthering Distribut-
ing’s fit-and-focus corporate business purpose). See
paragraph (e)(3) of this section. Accordingly, based
on the correct and properly filed plan of reorganiza-
tion pursuant to §1.368-3(a)(5), the Federal income
tax consequences of the liability assumption are
determined under an operative provision described
in §1.368-1(c)(2)(ii) (that is, section 357). See para-
graph (a)(2) of this section.
(C) Distribution. The distribution is properly
included in the plan of reorganization for the sep-
aration. 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 distribu-
tion. See paragraph (e)(1)(i) of this section. Second,
the distribution is necessary to satisfy the require-
ments of section 368(a)(1)(D). See paragraph (e)
(2)(i)(A) of this section. Lastly, the distribution is
consistent with, is directly related to, and therefore
directly furthers, the fit-and-focus corporate business
purpose for the reorganization. See paragraph (e)(3)
of this section. Accordingly, based on the correct
and properly filed plan of reorganization pursuant to
§1.368-3(a)(5), the Federal income tax consequences
of the distribution are determined under the defini-
tional and operative provisions described in §1.368-
1(c)(2)(i) and (ii) (that is, sections 355 and 368(a)(1)
(D)). See paragraph (a)(2) of this section.
(8) Example 8: Scope of plan of reorganization
– boot purge through special dividend—(i) Facts.
The facts are the same as in paragraph (g)(7)(i) of
this section (Example 7), except for the following.
As part of the contribution, Distributing receives
cash from Controlled in partial exchange for the
assets contributed by Distributing to Controlled.
Distributing distributes that cash to its shareholders
pursuant to a special dividend declared by Distrib-
uting’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 defi-
nite intent, prior to the first step of the separation,
to carry out the transactions comprising the separa-
tion (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 distri-
bution agreement and other official records of Dis-
tributing, 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 regu-
larly occurring dividends made pursuant to Distrib-
uting’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 cap-
ital structure for the retained and contributed busi-
nesses (thereby facilitating Distributing’s fit-and-fo-
cus corporate business purpose). See paragraph (e)
(3) of this section. Accordingly, based on the correct
and properly filed plan of reorganization pursuant to
§1.368-3(a)(5), the Federal income tax consequences
of the special dividend boot purge are determined
under an operative provision described in §1.368-
1(c)(2)(ii) (that is, section 361). See paragraph (a)(2)
of this section.
(9) Example 9: Scope of plan of reorganization
– boot purge through special stock repurchase—(i)
Facts. The facts are the same as in paragraph (g)
(8)(i) of this section (Example 8), except that Dis-
tributing 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 para-
graph (g)(8)(ii) of this section (Example 8).
(10) Example 10: Scope of plan of reorganization
– boot purge through ordinary course dividend—(i)
Facts. The facts are the same as in paragraph (g)(8)(i)
of this section (Example 8), except for the following.
Distributing provides in the separation and distribu-
tion agreement, or other official records of Distrib-
uting, that Distributing will distribute the Controlled
cash to Distributing’s shareholders through an ordi-
nary 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 pro-
vision. See paragraph (e)(2)(i)(B) of this section.
Accordingly, the Federal income tax consequences
of the ordinary course dividend are determined under
section 301 of the Code, not an operative provision
described in §1.368-1(c)(2)(ii). See paragraph (a)(2)
of this section.
(11) Example 11: Scope of plan of reorganiza-
tion – boot purge through existing stock repurchase
program—(i) Facts. The facts are the same as in
paragraph (g)(10)(i) of this section (Example 10),
except that Distributing uses the Controlled cash to
fund a repurchase of Distributing stock pursuant to
an existing stock repurchase program approved by
Distributing’s board of directors.
(ii) Analysis. The analysis is the same as in
paragraph (g)(10)(ii) of this section (Example 10).
Accordingly, the Federal income tax consequences
of the ordinary course stock repurchase are deter-
mined under section 301 or 302 of the Code, and not
an operative provision described in §1.368-1(c)(2)
(ii).
See paragraph (a)(2) of this section.
(12) Example 12: Scope of plan of reorganiza-
tion – securities-for-debt exchange—(i) Facts. The
facts are the same as in paragraph (g)(7)(i) of this
section (Example 7), except for the following. As
part of the contribution, Distributing receives secu-
rities from Controlled in partial exchange for the
assets contributed by Distributing to Controlled.
Distributing transfers those Controlled securities to
a creditor of Distributing in a series of transactions
that satisfies all the requirements set forth in §1.361-
5(a) (securities-for-debt exchange). The separation
and distribution agreement, a resolution adopted by
Distributing’s board of directors, and other official
records of Distributing, collectively evidence a defi-
nite 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 §§1.361-5(a) and 1.368-
3(a)(5), Distributing identifies the historical Distrib-
uting 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 condi-
tions 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 agree-
ment 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 busi-

March 3, 2025 1062 Bulletin No. 2025–10
ness 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 cap-
ital structure for each of those businesses. See para-
graph (e)(3) of this section. Accordingly, based on
the correct and properly filed plan of reorganization
pursuant to §1.368-3(a)(5), the Federal income tax
consequences of the securities-for-debt exchange are
determined under an operative provision described
in §1.368-1(c)(2)(ii). See paragraph (a)(2) of this
section.
(13) Example 13: Scope of plan of reorganization
– dispositions of retained stock—(i) Facts. The facts
are the same as in paragraph (g)(7)(i) of this section
(Example 7), except for the following. On September
30, 2025, Distributing distributes to its sharehold-
ers 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 §§1.361-5(a) and 1.368-3(a)(5) (stock-for-debt
exchange). The separation and distribution agree-
ment 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 share-
holders (follow-on spin-off). Lastly, the separation
and distribution agreement provides that, to the
extent the retained stock is not disposed of after Dis-
tributing succeeds or fails in completing the stock-
for-debt exchange and follow-on spin-off, Distribut-
ing will sell the retained stock on the open market
by not later than five years after the first distribution
date (open-market sale). Distributing describes these
contingent commitments in its plan of reorganization
filed with the IRS pursuant to §1.368-3(a)(5).
(ii) Analysis—(A) Stock-for-debt exchange. The
stock-for-debt exchange is properly included in the
plan of reorganization for the separation because the
exchange satisfies all conditions required by para-
graph (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 reorgani-
zation, 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 Dis-
tributing 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. Sec-
ond, the stock-for-debt exchange would not occur
but for the separation, as evidenced by the separa-
tion 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 prop-
erly filed plan of reorganization pursuant to §1.368-
3(a)(5), the Federal income tax consequences of the
securities-for-debt exchange are determined under
an operative provision described in §1.368-1(c)(2)
(ii). See paragraph (a)(2) of this section.
(B) Follow-on spin-off. The follow-on spin-off is
properly included in the plan of reorganization for
the separation because that distribution satisfies all
conditions required by paragraph (e) of this section.
First, as substantiated by the separation and distri-
bution agreement, in which Distributing expresses
that it will carry out the follow-on spin-off, Dis-
tributing 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 com-
mits 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 dis-
tribution 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 cor-
porate 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 prop-
erly filed plan of reorganization pursuant to §1.368-
3(a)(5), the Federal income tax consequences of the
follow-on spin-off are determined under an opera-
tive provision described in §1.368-1(c)(2)(ii) (that
is, section 361). See paragraph (a)(2) of this section.
(C) Open-market sale. The open-market sale is
properly included in the plan of reorganization for
the separation because that sale satisfies all condi-
tions 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 contin-
gency 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 §1.368-1(c)(2)(i) intended to apply to
the reorganization. See paragraph (e)(2)(i)(A) of this
section. Lastly, the open-market sale is consistent
with, and directly relates to, the fit-and-focus cor-
porate 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 prop-
erly filed plan of reorganization pursuant to §1.368-
3(a)(5), the open-market sale is taken into account
along with the contribution and distribution for
determining the Federal income tax consequences of
the separation under sections 355 and 368(a)(1)(D)
(that is, the relevant definitional and operative pro-
visions described in §1.368-1(c)(2)(i) and (ii)). See
paragraph (a)(2) of this section.
(14) Example 14: Scope of plan of reorgani-
zation – dispositions of retained stock—(i) Facts.
The facts are the same as in paragraph (g)(13)(i)
of this section (Example 13), except for the follow-
ing. With regard to the retained stock, the separa-
tion 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 sat-
isfies the requirements set forth in §§1.361-5(a)
and 1.368-3(a)(5) (stock-for-debt exchange). The
separation and distribution agreement and other
official records of Distributing also provide that
Distributing might distribute that retained stock to
Distributing’s shareholders (follow-on spin-off).
Lastly, those documents provide that, to the extent
the retained stock is not disposed of after Distrib-
uting 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 §1.368-3(a)(5).
(ii) Analysis—(A)
Stock-for-debt exchange.
The stock-for-debt exchange is properly excluded
from the plan of reorganization for the separation
because the exchange fails to satisfy all conditions
required by paragraph (e) of this section. Specifi-
cally, as evidenced by the separation and distribu-
tion agreement and other official records of Dis-
tributing, Distributing treats the occurrence of the
stock-for-debt exchange as a contemplated possi-
bility, 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 rele-
vant operative provision described in §1.368-1(c)
(2)(ii), does not apply). See paragraph (a)(2)(ii) of
this section.
(B) Follow-on spin-off. The analysis is the same
as in paragraph (g)(14)(ii)(A) of this section (Exam-
ple 14). Therefore section 361(c), the otherwise rele-
vant operative provision described in §1.368-1(c)(2)
(ii), does not apply.

Bulletin No. 2025–10 1063 March 3, 2025
(C) Open-market sale. The open-market sale is
properly included in the plan of reorganization for
the separation because the sale satisfies all con-
ditions required by paragraph (e) of this section.
First, as substantiated by the separation and distri-
bution agreement, in which Distributing expresses
that it will carry out the open-market sale, Dis-
tributing 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 Distribut-
ing’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 dis-
position 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 pro-
vision described in §1.368-1(c)(2)(i) intended to
apply to the reorganization. See paragraph (e)(2)
(i)(A) of this section. Lastly, the open-market sale
is consistent with, and directly relates to, the fit-
and-focus corporate business purpose for the sep-
aration because it would further the separation of
the retained and contributed businesses. See para-
graph (e)(3) of this section. Accordingly, based on
the correct and properly filed plan of reorganiza-
tion pursuant to §1.368-3(a)(5), the open-market
sale is taken into account along with the contribu-
tion and distribution for determining the Federal
income tax consequences of the separation under
the relevant definitional provisions described in
§1.368-1(c)(2)(i). See paragraph (a)(2) of this sec-
tion.
(15) Example 15: Scope of plan of reorganization
– dispositions of retained stock—(i) Facts. The facts
are the same as in paragraph (g)(14)(i) of this section
(Example 14), except for the following. With regard
to the retained stock, the separation and distribution
agreement and other official records of Distributing
provide that the open-market sale also is a contem-
plated 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 (Exam-
ple 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 sepa-
ration and distribution agreement and other official
records of Distributing, Distributing treats the occur-
rence of the open-market sale as a contemplated pos-
sibility, 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 §1.368-
1(c)(2)(i), pursuant to a plan of reorganization cor-
rected 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 regula-
tions in the Federal Register]:
(1) The date of the first public
announcement (as defined in §1.355-7(h)
(10)) of the transaction.
(2) The date of entry by the taxpayer
into a written agreement to engage in the
transaction.
(3) The date of approval of the transac-
tion by the board of directors of the tax-
payer.
(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.
(Filed 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)

Bulletin No. 2025–10 i March 3, 2025
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.
—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

March 3, 2025 ii Bulletin No. 2025–10
Numerical Finding List
1
Bulletin 2025–10
Announcements:
2025-2, 2025-2 I.R.B. 305
2025-3, 2025-2 I.R.B. 306
2025-4, 2025-2 I.R.B. 306
2025-1, 2025-3 I.R.B. 431
2025-5, 2025-3 I.R.B. 433
2025-6, 2025-5 I.R.B. 526
Notices:
2025-1, 2025-3 I.R.B. 415
2025-2, 2025-3 I.R.B. 418
2025-4, 2025-3 I.R.B. 419
2025-5, 2025-3 I.R.B. 426
2025-3, 2025-4 I.R.B. 488
2025-7, 2025-5 I.R.B. 524
2025-9, 2025-6 I.R.B. 681
2025-10, 2025-6 I.R.B. 682
2025-11, 2025-6 I.R.B. 704
2025-13, 2025-6 I.R.B. 710
2025-6, 2025-8 I.R.B. 799
2025-8, 2025-8 I.R.B. 800
2025-12, 2025-8 I.R.B. 813
2025-14, 2025-10 I.R.B. 980
Proposed Regulations:
REG-117213-24, 2025-3 I.R.B. 433
REG-134420-10, 2025-4 I.R.B. 513
REG-105479-18, 2025-5 I.R.B. 527
REG-116610-20, 2025-5 I.R.B. 638
REG-115560-23, 2025-6 I.R.B. 716
REG-123525-23, 2025-6 I.R.B. 726
REG-124930-21, 2025-7 I.R.B. 772
REG-100669-24, 2025-8 I.R.B. 819
REG-101268-24, 2025-8 I.R.B. 836
REG-107420-24, 2025-8 I.R.B. 854
REG-116085-23, 2025-8 I.R.B. 865
REG-118988-22, 2025-8 I.R.B. 869
REG-107895-24, 2025-9 I.R.B. 972
REG-110878-24, 2025-9 I.R.B. 979
REG-112261-24, 2025-10 I.R.B. 983
Revenue Procedures:
2025-1, 2025-1 I.R.B. 1
2025-2, 2025-1 I.R.B. 118
2025-3, 2025-1 I.R.B. 142
2025-4, 2025-1 I.R.B. 158
2025-5, 2025-1 I.R.B. 260
2025-7, 2025-1 I.R.B. 301
2025-8, 2025-3 I.R.B. 427
2025-9, 2025-4 I.R.B. 491
2025-10, 2025-4 I.R.B. 492
2025-11, 2025-4 I.R.B. 501
2025-12, 2025-4 I.R.B. 512
Revenue Procedures:—Continued
2025-6, 2025-6 I.R.B. 713
2025-14, 2025-7 I.R.B. 770
2025-13, 2025-8 I.R.B. 816
Revenue Rulings:
2025-1, 2025-3 I.R.B. 307
2025-2, 2025-3 I.R.B. 309
2025-3, 2025-4 I.R.B. 443
2025-4, 2025-7 I.R.B. 758
2025-5, 2025-7 I.R.B. 767
Treasury Decisions:
10016, 2025-3 I.R.B. 313
10020, 2025-3 I.R.B. 408
10018, 2025-4 I.R.B. 446
10019, 2025-4 I.R.B. 482
10017, 2025-5 I.R.B. 517
10028, 2025-6 I.R.B. 660
10022, 2025-8 I.R.B. 773
10026, 2025-9 I.R.B. 878
10027, 2025-9 I.R.B. 897
10029, 2025-9 I.R.B. 936
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2024–27 through 2024–52 is in Internal Revenue Bulletin
2024–52, dated December 23, 2024.

Bulletin No. 2025–10 iii March 3, 2025
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2025–10
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2024–27 through 2024–52 is in Internal Revenue Bulletin
2024–52, dated December 23, 2024.

Internal Revenue Service
Washington, DC 20224
Official Business
Penalty for Private Use, $300
INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.
We Welcome Comments About the Internal Revenue Bulletin
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it,
we would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.
NW, IR-6230 Washington, DC 20224.