On September 30, 2025, the Treasury Department and the Internal Revenue Service (IRS) took a significant step by withdrawing two comprehensive sets of proposed regulations issued earlier in the year that would have substantially altered the landscape for corporate separations, incorporations, and reorganizations. The first set of proposed regulations, REG-112261-24, provided detailed substantive rules under Internal Revenue Code (the "Code") sections 355, 357, 361, and 368. The second, REG-116085-23, introduced extensive multi-year reporting requirements for corporate separations. The withdrawal came after the IRS received several critical comments from the public.

In conjunction with this withdrawal, the IRS issued Rev. Proc. 2025-30, which supersedes Rev. Proc. 2024-24 and largely reinstates prior procedural guidance for taxpayers seeking private letter rulings (PLRs) on divisive reorganizations. This move signals a return to a more established, case-by-case approach to complex transactions, particularly those involving the satisfaction of distributing corporation debt. This article provides a technical overview of these developments for tax professionals.

The Withdrawal of Ambitious Proposed Regulations

The proposed regulations, issued on January 16, 2025, were intended to establish a "comprehensive set of rules" to implement core provisions of subchapter C. The Treasury Department and the IRS stated that the existing regulatory framework was "incomplete, outdated, and not reflective of their importance to the Federal corporate income tax system". A primary goal was to provide authoritative guidance to reduce taxpayers’ reliance on the PLR process, thereby improving horizontal equity among taxpayers and tax advisors.

The proposed substantive regulations (REG-112261-24) would have introduced significant new rules, including:

A detailed definition and framework for a "plan of reorganization," including requirements for documentation, adoption, and timely completion, which would have replaced the more flexible and sometimes vague standards under Treas. Reg. § 1.368-2(g).
Objective safe harbors and facts-and-circumstances tests for "qualifying retentions" of controlled corporation stock under section 355(a)(1)(D)(ii) to rebut the presumption of a tax-avoidance purpose.
Bright-line rules for determining whether debt-elimination transactions, such as intermediated exchanges and direct issuances, would be respected or recast as taxable sales of controlled corporation stock.

Accompanying these substantive rules, the proposed reporting regulations (REG-116085-23) would have required "covered filers" to submit a new Form 7216, Multi-Year Reporting Related to Section 355 Transactions, for a five-year period following a corporate separation. This initiative was consistent with a 2019 Treasury Inspector General for Tax Administration (TIGTA) report that recommended enhancing IRS compliance tools for corporate mergers and acquisitions. The IRS viewed this enhanced reporting as integral to providing greater transactional flexibility in the substantive rules.

However, after receiving critical public feedback, the Treasury Department and the IRS withdrew both sets of proposed regulations on September 30, 2025.

Impact of Rev. Proc. 2025-30 on Prior IRS Guidance

With the withdrawal of the proposed regulations, Rev. Proc. 2025-30 effectively reverses the procedural changes introduced by Rev. Proc. 2024-24 and largely restores the prior ruling landscape.

Key changes implemented by Rev. Proc. 2025-30 include:

Superseding Rev. Proc. 2024-24: This action eliminates the highly detailed representations and extensive analyses that Rev. Proc. 2024-24 had required for PLR requests concerning divisive reorganizations.
Reinstating Guidance from Rev. Proc. 2018-53: Section 3 of Rev. Proc. 2025-30 explicitly restates the guidance originally provided in section 3 of Rev. Proc. 2018-53, which governs PLR requests on the assumption or satisfaction of "Distributing Debt" in divisive reorganizations. Distributing Debt is narrowly defined as a non-contingent debt instrument payable only in money.
Reinstating Guidance from Rev. Proc. 2017-52: Section 4 of Rev. Proc. 2025-30 restates the guidance from Representations 2, 4, and 17 through 21 in the Appendix to Rev. Proc. 2017-52, which Rev. Proc. 2024-24 had deleted. These representations cover key issues such as control requirements, solvency, and the application of sections 357 and 361.
Revoking Notice 2024-38: This notice had accompanied Rev. Proc. 2024-24 and detailed the IRS’s views and concerns on numerous technical issues, such as the distinction between delayed distributions and retentions, the plan of reorganization requirement, and the application of substance-over-form principles to debt monetization transactions. Its revocation signals a retreat from the specific positions articulated therein, returning these issues to a state governed by existing law and prior administrative practice.

The IRS’s Renewed Analytical Framework

The withdrawal of the proposed regulations and Rev. Proc. 2024-24 means that practitioners must now rely on the pre-existing framework of statutes, regulations, case law, and administrative guidance that the IRS had sought to clarify and codify.

Satisfaction of Distributing Corporation Debt

The procedures now follow the more established framework of Rev. Proc. 2018-53. Taxpayers seeking rulings on the satisfaction of Distributing Debt must provide information on the debt, the section 361 consideration used, and the implementing transactions. Key representations now reinstated include:

Distributing as the Substantive Obligor: Taxpayers must represent that the distributing corporation is the obligor "in substance" of any debt to be assumed or satisfied.
Historic Debt Requirement: The debt must generally have been incurred at least 60 days prior to the earliest of a public announcement, binding agreement, or board approval of the transaction. An exception is available if the taxpayer can establish that a more recently incurred debt effectively represents an allocation of historic debt, such as by refinancing historic debt (citing the principles of Rev. Rul. 79-258, 1979-2 C.B. 143).
Limitation to Historic Average Debt: The amount of debt to be satisfied or assumed is limited to the historic eight-quarter average of debt owed by the distributing corporation’s affiliated group to unrelated persons.
No Replacement of Debt: Distributing generally must represent it will not replace satisfied debt with previously committed borrowing, except for ordinary course borrowing under a revolving credit facility.

Retention of Controlled Corporation Stock

The framework for analyzing retentions of controlled corporation stock under section 355(a)(1)(D)(ii) also reverts to prior standards. Rev. Proc. 2025-30 reinstates representation 21 from Rev. Proc. 2017-52, which simply requires a representation that after the transaction, the fair market value of the assets of both Distributing and Controlled will exceed their respective liabilities. This is a far less stringent requirement than the detailed solvency and viability representations mandated by Rev. Proc. 2024-24.

Practitioners must continue to rely on foundational guidance like Rev. Rul. 75-321, 1975-2 C.B. 123, which held that retaining 5% of controlled stock as collateral for short-term financing was not for a tax-avoidance purpose where a genuine separation was effectuated and practical control was relinquished.

Plan of Reorganization

The highly structured "plan of reorganization" framework in the proposed regulations, which required a single, comprehensive document detailing all steps and their intended tax treatment, has been withdrawn. The definition now reverts to the principles-based standard in Treas. Reg. § 1.368-2(g), which the Tax Court has described as having "qualities of flexibility and vagueness" and providing "substantial elasticity" (Int’l Telephone & Telegraph Corp. v. Comm’r, 77 T.C. 60, 75 (1981); J.E. Seagram Corp. v. Comm’r, 104 T.C. 75, 96 (1995)). Courts have often applied doctrines like the step-transaction doctrine to determine the existence and scope of a plan, even in the absence of a formal written document (King Enterprises, Inc. v. United States, 418 F.2d 511 (Ct. Cl. 1969); Redfield v. Comm’r, 34 B.T.A. 967 (1936)).

Rationale for the Change in Course

The IRS explicitly stated that the proposed technical and reporting regulations were withdrawn "in response to the comments received," which "generally were critical of the proposed guidance". The initial motivation for the proposed rules was to provide certainty, enhance tax administration, and respond to TIGTA’s recommendations for better compliance tools.

The issuance of Rev. Proc. 2025-30 marks a return to a more familiar and flexible, albeit less certain, administrative posture. This approach allows the IRS to continue ruling on transactions that are not strictly "Distributing Debt" (such as contingent liabilities) on a case-by-case basis under the general procedures of Rev. Proc. 2025-1 and Rev. Proc. 2017-52, without being constrained by the prescriptive rules that were proposed. This suggests the IRS has determined that the complex, fact-intensive nature of these transactions is better addressed through the targeted PLR process rather than a one-size-fits-all regulatory regime.

For practitioners, this reversal underscores the continued importance of mastering the existing body of case law and administrative guidance when structuring complex corporate reorganizations and advising clients on their federal income tax consequences.

Prepared with assistance from NotebookLM.