Treasury and IRS withdraw key proposed section 355 spin-off rules
A Notice of Withdrawal issued October 21, 2026 partially withdraws proposed section 355 rules on the device prohibition and related limits, easing uncertainty for corporate spin-off structuring.
On October 21, 2026, the US Department of the Treasury and the Internal Revenue Service published a Notice of Withdrawal that partially withdraws the proposed regulations issued under Internal Revenue Code section 355, the statutory provision governing tax-free spin-offs. The withdrawn items include the proposed "device prohibition," under which the government had sought to deny tax-free treatment to a spin-off whose distribution or corporate purpose was viewed as lacking sufficient corporate business purpose, together with at least one further item the summary description of the notice does not specify.
Sophisticated counsel will care because the 2025 proposal would have narrowed the safe harbors on which a large share of public-to-private, parent-to-sibling and holding-company reorganization transactions depend, and it created taxable-gain exposure for structures previously executed without question. Withdrawal removes that prospective regime and returns taxpayers to the pre-existing statutory and case-law framework, although it does not resolve the underlying judicial challenges to the device tax that produced divergent appellate decisions, and the notice is described as a partial withdrawal, so some proposed rules may survive in revised form.
Practical next steps for clients: confirm that pending spin-off steps rely on the statutory and regulatory rules as they stood before the proposal, and treat any revised proposal or renewed litigation as a live risk requiring updated structuring analyses and disclosure positions.