Guidance Under Section 355 Concerning Device and Active Trade or Business; Partial Withdrawal

Issuing agencies

Abstract

This document partially withdraws a notice of proposed rulemaking containing proposed regulations regarding the application of the device prohibition and the active trade or business requirement for distributions of controlled corporation stock (or stock and securities) by a distributing corporation without income, gain, or loss. The proposed regulations would affect corporations and their shareholders and security holders.

Full Text

<html>
<head>
<title>Federal Register, Volume 91 Issue 202 (Wednesday, October 21, 2026)</title>
</head>
<body><pre>
[Federal Register Volume 91, Number 202 (Wednesday, October 21, 2026)]
[Proposed Rules]
[Pages 66540-66541]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-21568]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-134016-15]
RIN 1545-BN47


Guidance Under Section 355 Concerning Device and Active Trade or 
Business; Partial Withdrawal

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Partial withdrawal of notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document partially withdraws a notice of proposed 
rulemaking containing proposed regulations regarding the application of 
the device prohibition and the active trade or business requirement for 
distributions of controlled corporation stock (or stock and securities) 
by a distributing corporation without income, gain, or loss. The 
proposed regulations would affect corporations and their shareholders 
and security holders.

DATES: The notice of proposed rulemaking published in the Federal 
Register on July 15, 2016 (81 FR 46004), is partially withdrawn as of 
October 21, 2026.

ADDRESSES: Commenters may submit public comments electronically via the 
Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> by searching 
the Docket ID number (IRS-2016-0030) or may send paper submissions to 
CC:PA:01:PR (REG-134016-15), Room 5503, Internal Revenue Service, P.O. 
Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Aglaia Ovtchinnikova at (202) 317-6847 
or Justin Du Mouchel at (202) 317-6975 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    If a distribution of stock (or stock and securities) of a 
controlled corporation (within the meaning of section 355(a)(1)(A) of 
the Internal Revenue Code (Code)) satisfies the numerous requirements 
of section 355 and other relevant provisions of the Code and the Income 
Tax Regulations (26 CFR part 1),\1\ the distribution may occur without 
recognition of any gain or loss to the distributing corporation (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 
shareholders or security holders of the distributing corporation.
---------------------------------------------------------------------------

    \1\ Unless otherwise specified, all ``section'' or ``Sec.  '' 
references are to sections of the Code or the Income Tax Regulations 
(26 CFR part 1).
---------------------------------------------------------------------------

    Among the numerous requirements to qualify for the Federal income 
tax treatment available under section 355, section 355(a)(1)(B) and 
Sec.  1.355-2(b)(4) and (d) provide that a transaction must not be used 
principally as a device for the distribution of the earnings and 
profits of the distributing corporation, the controlled corporation, or 
both (device prohibition). Additionally, section 355(a)(1)(C) and (b) 
and Sec. Sec.  1.355-2(h) and 1.355-3 require each of the distributing 
corporation and the controlled corporation to be engaged, immediately 
after the distribution, in the active conduct of a trade or business 
(active trade or business requirement).
    On July 15, 2016, the Department of the Treasury (Treasury 
Department) and the IRS published a notice of proposed rulemaking (REG-
134016-15) in the Federal Register (81 FR 46004) that would modify the 
regulations under section 355 with respect to the device prohibition 
and the active trade or business requirement. Among other proposed 
changes, those modifications would have included a ``per se'' test in 
proposed Sec.  1.355-2(d)(5) to determine whether a distribution 
violated the device prohibition and two sets of anti-abuse rules.
    Under the proposed ``per se'' device rule, if the distributing 
corporation's or the controlled corporation's ``Nonbusiness Asset 
Percentage'' (as defined in proposed Sec.  1.355-2(d)(2)(iv)(B)(5)) 
exceeded certain designated percentages (both individually and in 
comparison to the other corporation's Nonbusiness Asset Percentage), 
the transaction would have been considered a device notwithstanding the 
presence of any other nondevice factors (such as a corporate business 
purpose), with limited exceptions.
    Under the first set of anti-abuse rules in proposed Sec.  1.355-
2(d)(2)(iv)(E) and (d)(5)(iv), a transaction or series of transactions 
(such as a change in the form of ownership of an asset; an issuance, 
assumption or repayment of indebtedness; or an issuance or redemption 
of stock) would not have been given effect if undertaken with a 
principal purpose of affecting the Nonbusiness Asset Percentage of any 
corporation to avoid a determination that a distribution was a device.
    The second anti-abuse rule (minimum active trade or business anti-
abuse rule) was set forth in proposed Sec.  1.355-9(d) and related to 
the minimum active trade or business requirement in proposed

[[Page 66541]]

Sec.  1.355-9, under which the ``Five-Year-Active-Business Asset 
Percentage'' (as defined in proposed Sec.  1.355-9(a)(6)) of each of 
the distributing corporation and the controlled corporation would be 
required to be at least five percent. Under the minimum active trade or 
business anti-abuse rule, a transaction or series of transactions would 
not have been given effect if undertaken with a principal purpose of 
affecting the Five-Year-Active-Business Asset Percentage of any 
corporation to avoid a determination that a distribution does not meet 
the minimum active trade or business requirement in proposed Sec.  
1.355-9.
    The device anti-abuse rules and the minimum active trade or 
business anti-abuse rule generally would not have applied to (i) non-
transitory acquisitions or dispositions of assets, or (ii) non-
transitory transfers of assets between the distributing corporation and 
the controlled corporation.
    The Treasury Department and the IRS received feedback from 
stakeholders that generally was critical of the proposed ``per se'' 
device rule and the two anti-abuse rules. In response to the feedback 
received, the Treasury Department and the IRS are withdrawing proposed 
Sec. Sec.  1.355-2(d)(2)(iv)(E) and (d)(5) and 1.355-9(d). The 
withdrawal of these proposed rules does not affect the potential 
application of other rules or judicial doctrines, such as the 
substance-over-form or step-transaction doctrines. The Treasury 
Department and the IRS continue to study the issues addressed in the 
2016 proposed regulations.

Drafting Information

    The principal author of this document is Aglaia Ovtchinnikova of 
the Office of Associate Chief Counsel (Corporate). However, other 
personnel from the Treasury Department and the IRS participated in its 
development.

List of Subjects in 26 CFR Part 1

    Income Taxes, Reporting and recordkeeping requirements.

Partial Withdrawal of Proposed Amendments to the Regulations

    Under the authority of 26 U.S.C. 7805, proposed Sec. Sec.  1.355-
2(d)(2)(iv)(E) and (d)(5) and 1.355-9(d), contained in the notice of 
proposed rulemaking (REG-134016-15) that was published in the Federal 
Register on July 15, 2016 (81 FR 46004), are withdrawn.

Frank J. Bisignano,
Chief Executive Officer.
[FR Doc. 2026-21568 Filed 10-20-26; 8:45 am]
BILLING CODE 4831-GV-P


</pre></body>
</html>