2025-00321. Guidance Regarding Certain Matters Relating to Nonrecognition of Gain or Loss in Corporate Separations, Incorporations, and Reorganizations

Table 1 to Paragraph (f)(1)(ii)
Stock received, fair market value	$8,000x
Money received	3,000x
Liability assumed by transferee corporation	4,000x
Total consideration received	15,000x
Less: Adjusted basis of property transferred	10,000x
Gain realized	5,000x

The gain recognized to Individual A is limited to the $3,000x of money received, because the assumption of the $4,000x liability does not constitute money or other property. See paragraph (a) of this section and section 351(b).

(2) Example 2: Dominion or control —(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 reorganization. In a taxable year following the year of the distribution, the contingent liability becomes fixed and determinable. To satisfy the liability, Controlled makes a $200x payment to a segregated account maintained by Distributing, and Distributing uses the $200x in the segregated account to make payment to the obligee.

(ii) Analysis. Distributing is treated as having dominion or control over the $200x payment despite its receipt of the payment in a segregated account. See paragraphs (e)(2)(i) and (ii) of this section. Accordingly, the $200x payment is treated as money received by Distributing in the contribution, and the rules in section 361(b) apply. See paragraph (e)(1) of this section.

(3) Example 3: Exception to dominion or control —(i) Facts. The facts are the same as in paragraph (f)(2)(i) of this section ( Example 2), except that, as part of the contribution, Distributing and Controlled enter into an indemnity agreement with respect to a contingent liability of Distributing that Controlled cannot assume in form under State law. Pursuant to the indemnity agreement, Distributing remains the primary obligor for State law purposes, but Controlled must reimburse Distributing for any payment that Distributing is required to make to satisfy the contingent liability. The indemnity agreement is treated as an assumption by Controlled of the contingent liability under paragraph (d) of this section. In a taxable year following the year of the distribution, the contingent liability becomes fixed and determinable, and Distributing makes a $200x payment to the obligee to satisfy the liability. Pursuant to the terms of the indemnity agreement, Controlled transfers to Distributing $200x, which Distributing retains. The $200x payment from Controlled to Distributing places Distributing in the same net economic position it would have been in if Controlled were allowed to assume the contingent liability under State law.

(ii) Analysis. For purposes of paragraph (e)(1) of this section, Distributing is treated as not having dominion or control over the $200x payment despite its receipt of the payment. See paragraph (e)(2)(iii)(A) of this section. Accordingly, the $200x payment is not treated as money received by Distributing in the contribution. See paragraph (a) of this section.

Par. 10. Sections 1.357-3 through 1.357-5 are added to read as follows:

§ 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 assumption by a transferee corporation of a liability described in paragraph (a)(1) of this section, a principal purpose is presumed to exist if the liability was not incurred in the ordinary course of a business of the transferor.

(b) Amount of gain recognized. For purposes of determining the amount of gain recognized upon an exchange described in paragraph (a) of this section, the total amount of liabilities assumed or acquired pursuant to that exchange (and not merely a particular liability with respect to which the tax avoidance or non-business purpose existed) is treated as money or other property received by the transferor under section 351(b) or 361(b) (as applicable) of the Code upon the exchange.

(c) Burden of proof. If the Commissioner determines that the transferor's principal purpose with respect to the assumption of a liability by a transferee corporation was to avoid Federal income tax on the exchange or was not a bona fide business purpose, and if the transferor contests that determination, the burden is on the transferor to prove by a clear preponderance of the evidence that the liability assumption should not be treated as the receipt of money or other property. Therefore, the transferor must prove by such a clear preponderance of all the evidence that the absence of a purpose to avoid Federal income tax on the exchange, or the presence of a bona fide business purpose, is unmistakable.

(d) Eligible distributing corporation liabilities —(1) Scope. The rules of this ( print page 5268) paragraph (d) apply solely to divisive reorganizations.

(2) In general. A distributing corporation is presumed to have the principal purpose described in paragraph (a) of this section (and, as a result, is presumed to be treated as recognizing an amount of gain determined under paragraph (b) of this section) if the controlled corporation assumes a distributing corporation liability that is not eligible to be assumed under paragraph (d)(3) of this section.

(3) Eligible assumptions of Distributing corporation liabilities. Distributing corporation liabilities are eligible to be assumed under § 1.357-2(a) in a divisive reorganization if—

(i) The distributing corporation liabilities to be assumed are described in a plan of reorganization or original plan of reorganization (if amended);

(ii) The distributing corporation liabilities were incurred in the ordinary course of business of the distributing corporation; and

(iii) The assumption of such distributing corporation liabilities is necessary—

(A) To ensure the transfer to the controlled corporation of all liabilities properly associated with the business assets transferred to that corporation; and

(B) To result in the controlled corporation assuming liabilities in an amount that properly relates to its business operations, the earnings of which will be used to properly satisfy those liabilities.

(4) Distributing corporation debt —(i) In general. Except as provided in paragraph (d)(4)(ii) of this section, distributing corporation debt eligible to be assumed under paragraph (d)(3) of this section must qualify as historical distributing corporation debt.

(ii) Exceptions. The following exceptions apply to the general rule in paragraph (d)(4)(i) of this section:

(A) Qualifying trade payables. For purposes of paragraph (d)(4)(i) of this section, solely trade payables of the distributing corporation that meet the requirements set forth in paragraph (d)(3) of this section are not required to qualify as historical distributing corporation debt.

(B) Assumptions of refinanced distributing corporation debt. For purposes of paragraph (d)(4)(i) of this section, refinanced distributing corporation debt is treated as historical distributing corporation debt if all the following requirements are met:

( 1) The distributing corporation has a direct business purpose for the controlled corporation's assumption of the refinanced distributing corporation debt. For purposes of this paragraph (d)(4)(ii)(B)( 1), the modification of the capital structure of the distributing corporation or the controlled corporation is not a direct business purpose unless that modification directly accomplishes a corporate business purpose of the distributing corporation.

( 2) The distributing corporation's refinancing of its historical distributing corporation debt is completed before the controlled corporation's assumption of that refinanced distributing corporation debt.

( 3) Following the controlled corporation's assumption of the refinanced distributing corporation debt, the distributing corporation and the controlled corporation are in the same net economic position as each corporation would have been had the controlled corporation assumed the historical distributing corporation debt.

( 4) The distributing corporation's refinancing of its historical distributing corporation debt and the subsequent assumption of that refinanced distributing corporation debt are included in the plan of reorganization for the divisive reorganization.

( 5) There is no untaxed gain or other Federal income tax benefit resulting to the distributing corporation or the controlled corporation from the distributing corporation's refinancing of a historical distributing corporation debt and the assumption by the controlled corporation of that refinanced distributing corporation debt.

( 6) The business assets transferred by the distributing corporation to the controlled corporation in the exchange described in section 361(a) are associated with the refinanced distributing corporation debt assumed by the controlled corporation.

( 7) The refinancing of a historical distributing corporation debt by the distributing corporation and the subsequent assumption of that refinanced distributing corporation debt by the controlled corporation result in the controlled corporation assuming liabilities in an amount that properly relates to its business operations and will be properly satisfied with earnings generated by those operations.

(C) Qualifying assumption of a traveling note. For purposes of paragraph (d)(4)(i) of this section, a controlled corporation's assumption of a traveling note (within the meaning of § 1.357-2(c)) issued to refinance a historical distributing corporation debt will be treated as historical distributing corporation debt only if all requirements set forth in paragraph (d)(4)(ii)(B) of this section are satisfied.

(D) Revolving credit agreements. For purposes of paragraph (d)(4)(i) of this section, a revolving credit agreement to which the distributing corporation is a debtor qualifies as historical distributing corporation debt only if—

( 1) The distributing corporation entered into the agreement before the earliest applicable date;

( 2) That agreement does not expire until after the date of the exchange described in § 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 examples: any liability assumption is provided for in an agreement or a plan of reorganization entered into between the transferor and transferee corporation before the date of the exchange; and the amount of liabilities assumed by the transferee corporation does not exceed the adjusted basis of the assets transferred to the transferee corporation in the exchange.

(1) Example 1: Application of general rule —(i) Facts. In an exchange that qualifies under section 351, Individual A transfers to a transferee corporation property with an adjusted basis of $10,000x in exchange for stock of the corporation with a fair market value of $8,000x, money amounting to $3,000x, and the assumption by the corporation of debt of Individual A amounting to $4,000x. Individual A's principal purpose for causing the transferee corporation to assume the $4,000x liability is to avoid Federal income tax on the exchange.

(ii) Analysis. Individual A's realized gain is $5,000x, computed as follows:

Table 1 to Paragraph (e)(1)(ii)
Stock received, fair market value	$8,000x
Money received	3,000x
Liability assumed by transferee corporation	4,000x
Total consideration received	15,000x
Less: Adjusted basis of property transferred	10,000x
Gain realized	5,000x

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Document Information

Published:: 01/16/2025
Department:: Internal Revenue Service
Entry Type:: Proposed Rule
Action:: Notice of proposed rulemaking.
Document Number:: 2025-00321
Dates:: Written or electronic comments and requests for a public hearing must be received by March 17, 2025.
Pages:: 5220-5295 (76 pages)
Docket Numbers:: REG-112261-24
RINs:: 1545-BR32
Topics:: Income taxes, Reporting and recordkeeping requirements
PDF File:: 2025-00321.pdf
CFR: (1): 26 CFR 1