US files partial withdrawal of proposed section 355 spin-off rules

The notice targets proposed Treasury Regulations 1.355-2(d)(2)(iv)(E) and (d)(5), and 1.355-9(d), from the July 2016 proposal. These cover a conclusive device test based on nonbusiness assets and two rules disregarding transactions designed to manipulate asset percentages. The withdrawal is stated to take effect on Federal Register publication, not the public-inspection filing date.^[1]

A partial withdrawal, not a five-percent repeal

The proposed device test could disqualify a distribution despite countervailing business purposes where one corporation held at least two-thirds nonbusiness assets and the other fell below specified comparative bands. The 2016 package separately proposed a five-percent minimum for qualifying active-business assets in 1.355-9(b). That paragraph is not among the provisions identified for withdrawal: removing its associated anti-abuse rule is not the same as withdrawing the minimum itself.^[3]

Section 355 of the Internal Revenue Code still requires a qualifying distribution not to be used principally to distribute earnings and profits. Its active-business conditions include a five-year history and restrictions on taxable acquisitions. Those statutory conditions are distinct from the five-percent asset threshold proposed in 2016.^[4]

Existing qualification checks remain

Under current Treasury Regulation 1.355-2(d), device analysis generally considers all facts and circumstances, including asset use and corporate business purpose. Regulation 1.355-3(b)(2) separately examines income-producing activities and active management and operations. For MNE reorganisations, the narrow withdrawal should therefore not be treated as automatic approval of a separation involving substantial investment assets.^[5][6]

The agencies expressly preserve the potential application of other rules and judicial doctrines, including substance-over-form and step-transaction principles, and continue studying the 2016 proposals. Group tax teams should distinguish the abandoned proposed clauses from existing law and the remaining proposal, while checking the final published notice before relying on its withdrawal date.^[1]