IRS Withdraws Proposed Regulations on Spin-Off Transactions and Reorganizations

On September 29, 2025, Treasury and the IRS announced the withdrawal of prior guidance concerning the retention of stock or securities of a controlled subsidiary (“SpinCo”) in spin-offs, debt exchanges involving SpinCo stock or securities, plans of reorganization, assumption of liabilities and multi-year reporting requirements for corporate separations.[1] Specifically, Treasury and the IRS announced the withdrawal of two notices of proposed rulemaking (the “proposed regulations”) published on January 16, 2025. The proposed regulations would have expanded on and modified the initial guidance provided in Revenue Procedure 2024-24 (the “Rev. Proc.”) and Notice 2024-38 (the “Notice”), issued on May 1, 2024.

As previously discussed (prior alert), the Rev. Proc. and Notice:

• Imposed a “pick a lane” requirement, where if the parent corporation (“Parent”) retains stock or securities of SpinCo beyond the initial spin-off, Parent was required to commit to a taxable or tax-free subsequent disposition, without flexibility to change course.
• Required tax-free debt exchanges or “clean-up” spin-offs of retained SpinCo stock or securities to be completed within 12 months of the initial distribution.
• Prohibited the use of the so-called “direct issuance” mechanism that had been the prevalent model in the market for accomplishing debt exchanges, in favor of the more costly “intermediated exchange” model.
• Restricted “replacement” of historic Parent debt satisfied in a debt exchange with new Parent debt.

The now-withdrawn proposed regulations (see prior alert) would have substantially revised the guidance in the Rev. Proc. and Notice by:

• Eliminating the “pick a lane” requirement, but with new limitations, including an “echo vote” requirement on retained SpinCo shares, limits on officer/director overlap, and requirements for detailed retention plans with “stacking” of potential alternatives.
• Allowing “direct issuance” debt exchanges (but with a 30-day holding period which was significantly longer than prior market practice), tightening the definition of “historical” Parent debt, and limiting re-borrowings.
• Imposing new and highly-detailed requirements for “plans of reorganization” and “plans of distribution,” including a new multi-year reporting regime for corporate separations.

The withdrawal notice states that the withdrawal of the proposed regulations is in response to multiple comments that were “generally … critical.” While the proposed regulations generally represented a more pragmatic approach than the Rev. Proc. and Notice, they continued to attract criticism as overly burdensome on the ability to effect spin-offs and tax-free reorganizations. 

While the withdrawal notice did not formally withdraw the Rev. Proc. and Notice, it would appear that those pronouncements no longer represent the views of Treasury and the IRS. Presumably, Treasury and the IRS intend to withdraw the Rev. Proc. and Notice, although it is not entirely clear if and when they will do so.