[Federal Register Volume 90, Number 10 (Thursday, January 16, 2025)]
[Proposed Rules]
[Pages 4687-4691]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00312]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-116085-23]
RIN 1545-BR00
Multi-Year Reporting Requirements for Corporate Separations and
Related Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that would require
multi-year tax reporting for corporate separations and related
transactions. The information to be reported under these proposed
regulations would establish the taxpayer's position that the corporate
separation and related transactions qualify for nonrecognition
treatment under subchapter C of the Internal Revenue Code. The proposed
regulations would affect corporations and their shareholders and
security holders. Proposed regulations regarding certain matters
relating to corporate separations, incorporations, and reorganizations
qualifying for nonrecognition of gain or loss are published elsewhere
in the Proposed Rules section of this issue of the Federal Register.
DATES: Written or electronic comments and requests for a public hearing
must be received by March 17, 2025.
ADDRESSES: Commenters are strongly encouraged to submit public comments
on these proposed regulations and the related form and instructions
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-116085-23) by following the
online instructions for submitting comments. Requests for a public
hearing must be submitted as prescribed in the ``Comments and Requests
for a Public Hearing'' section. Once submitted to the Federal
eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comments to the IRS's public
docket. Send paper submissions to CC:PA:01:PR (REG-116085-23), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Barrett D. Cappadonna at (202) 317-6975 (not a toll-free number);
concerning submissions of comments and requests for a hearing, contact
the Publications and Regulations branch at (202) 317-6901 (not a toll-
free number) or by email to [email protected] (preferred).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed regulations under section 355 of
the Internal Revenue Code (Code) that would amend the Income Tax
Regulations (26 CFR part 1) by substantially revising the information
reporting requirements of Sec. 1.355-5 (proposed regulations). The
proposed regulations are issued under the express delegation of section
7805(a) of the Code, which authorizes the Secretary to ``prescribe all
needful rules and regulations for the enforcement of [the Code],
including all rules and regulations as may be necessary by reason of
any alteration of law in relation to internal revenue.''
Background
I. Overview of Section 355
Section 355(a)(1) provides that, if certain requirements are met, a
distribution of stock, or stock and securities, of one or more
controlled corporations by a distributing corporation to the
distributing corporation's shareholders, or to the distributing
corporation's shareholders and security holders, may be received by the
distributees without the distributees recognizing gain or loss or
including any amount in income (section 355 transaction). Section
355(c) generally provides that no gain or loss is recognized to a
distributing corporation upon a distribution of qualified property that
is not in pursuance of a plan of reorganization (section 355(c)
distribution). Section 355(c)(2)(B) defines ``qualified property'' as
any stock or securities in a controlled corporation. If, in addition to
the distribution of qualified property, the distributing corporation
distributes other property in the section 355 transaction and the fair
market value of that other property exceeds the distributing
corporation's adjusted basis in that other property, gain is recognized
to the distributing
[[Page 4688]]
corporation as if the property were sold to the distributee at its fair
market value. See section 355(c)(2)(A).
Taxpayers also may carry out a section 355 transaction as part of a
transaction that qualifies as a reorganization under section
368(a)(1)(D) or (G) of the Code and to which neither section 354 of the
Code nor so much of section 356 of the Code as relates to section 354
applies (divisive reorganization). A transfer by a distributing
corporation of part of its assets to a controlled corporation is a
divisive reorganization if, immediately after the transfer, one or more
of the distributing corporation's shareholders (including persons who
were shareholders immediately before the transfer) have control (as
defined in section 368(c)) of the controlled corporation and if,
pursuant to the plan of reorganization, stock or securities of the
controlled corporation are distributed in a transaction that qualifies
under section 355.
Section 361(c) of the Code generally provides that no gain or loss
is recognized to a distributing corporation upon a distribution of
qualified property in pursuance of a plan of reorganization. Section
361(c)(2)(B) defines ``qualified property'' as (i) any stock, right to
acquire stock, or obligation (including a security) of the distributing
corporation, or (ii) any stock, right to acquire stock, or obligation
(including a security) of a controlled corporation received by the
distributing corporation as part of the divisive reorganization. If, in
addition to the distribution of qualified property, the distributing
corporation distributes other property as part of a divisive
reorganization and the fair market value of that other property exceeds
the distributing corporation's adjusted basis in that other property,
gain is recognized to the distributing corporation as if the property
were sold to the distributee at its fair market value. See section
361(c)(2)(A).
II. Current Reporting Requirements for Section 355 Transactions
Section 1.355-5(a)(1) currently requires the distributing
corporation to report a section 355 transaction to the IRS by including
a statement with the distributing corporation's Federal income tax
return for the year of the section 355 transaction (Sec. 1.355-5(a)
statement). The Sec. 1.355-5(a) statement must include: (i) the name
and employer identification number (if any) of the controlled
corporation; (ii) the name and taxpayer identification number (if any)
of every ``significant distributee'' (as defined in Sec. 1.355-
5(c)(1)); (iii) the date of the section 355 transaction; (iv) the
aggregate fair market value and basis, determined immediately before
the section 355 transaction, of the stock, securities, or other
property (including money) distributed by the distributing corporation;
and (v) the date and control number of any private letter ruling(s)
issued by the IRS in connection with the section 355 transaction.
If the distributing corporation is a controlled foreign corporation
within the meaning of section 957 of the Code (CFC), each United States
shareholder (within the meaning of section 951(b) of the Code) with
respect to the CFC must include a Sec. 1.355-5(a) statement on or with
its return. See Sec. 1.355-5(a)(1). If the distributing corporation
transfers assets to a controlled corporation in a transaction described
in a divisive reorganization, then the distributing corporation (or, if
the distributing corporation is a CFC, each United States shareholder)
also must include the statement required by Sec. 1.368-3(a) on or with
its return for the year of the section 355 transaction. See Sec.
1.355-5(a)(2).
Section 1.355-5(b) currently imposes requirements similar to those
in Sec. 1.355-5(a) upon significant distributees. More specifically,
Sec. 1.355-5(b)(1) requires every significant distributee to include a
statement on or with the significant distributee's return for the year
in which the section 355 transaction is received (Sec. 1.355-5(b)
statement). The Sec. 1.355-5(b) statement must include: (i) the names
and employer identification numbers (if any) of the distributing and
controlled corporations; (ii) the date of the section 355 transaction;
(iii) the aggregate basis, determined immediately before the section
355 transaction, of any stock or securities transferred by the
significant distributee in the transaction; and (iv) the aggregate fair
market value, determined immediately before the section 355
transaction, of the stock, securities, or other property (including
money) received by the significant distributee in the section 355
transaction. If a significant distributee is a CFC, each United States
shareholder with respect to the CFC must include this statement on or
with the United States shareholder's return.
Section 1.355-5(d) currently imposes substantiation requirements.
More specifically, Sec. 1.355-5(d) requires taxpayers to retain their
permanent records (specifically including information regarding the
amount, basis, and fair market value of all property distributed or
exchanged in the section 355 transaction, and relevant facts regarding
any liabilities assumed or extinguished as part of the section 355
transaction) and make those records available to any authorized IRS
officers and employees. See Sec. 1.6001-1(e).
Explanation of Provisions
The Treasury Department and the IRS are of the view that enhancing
the reporting requirements for section 355 transactions would improve
the IRS's ability to administer section 355 (and related provisions of
the Code) to ensure that transactions intended to qualify under section
355 (and such related provisions) satisfy the requirements for
nonrecognition treatment. Accordingly, these proposed regulations would
revise Sec. 1.355-5 to require all covered filers, as defined in
proposed Sec. 1.355-5(b)(1), to file with the IRS an annual report
with regard to each section 355 transaction (Form 7216, Multi-Year
Reporting Related to Section 355 Transactions) that would be attached
to the covered filer's Federal income tax return.
For purposes of the proposed regulations, the term ``section 355
transaction'' includes both divisive reorganizations and section 355(c)
distributions. The term ``covered filer'' would include, with regard to
any section 355 transaction: (i) a distributing corporation or a person
that, immediately before the first distribution, was a United States
shareholder (within the meaning of section 951(b)) with respect to a
controlled foreign corporation (within the meaning of section 957 of
the Code, but determined without applying subparagraphs (A), (B), and
(C) of section 318(a)(3) of the Code) that is the distributing
corporation; (ii) a controlled corporation or a person that,
immediately before the first distribution, was a United States
shareholder with respect to a controlled foreign corporation that is
the controlled corporation; (iii) a significant distributee or a person
that, immediately before the first distribution, was a United States
shareholder with respect to a controlled foreign corporation that is a
significant distributee; or (iv) any other person required by the
Commissioner of Internal Revenue (Commissioner) to file Form 7216 (or
any successor form) in instructions, guidance, or publications
published in the Internal Revenue Bulletin (see Sec. Sec.
601.601(d)(2) and 601.602 of this chapter). The term ``covered filer''
also would include any successor (within the meaning of section 381(a)
of the Code) to an entity described in the preceding sentence. The
proposed regulations also would revise the definition of a
``significant distributee'' in current Sec. 1.355-5(c)(1)(i) by
raising the ownership threshold for
[[Page 4689]]
non-publicly traded stock from one percent to five percent.
However, the term ``covered filer'' would be defined to encompass
solely taxpayers required to file certain specified Federal income tax
returns. These returns would be limited to: (i) Form 1040, U.S.
Individual Income Tax Return; (ii) Form 1040-NR, U.S Nonresident Alien
Income Tax Return; (iii) Form 1065, U.S. Return of Partnership Income;
(iv) Form 1120, U.S. Corporation Income Tax Return; (v) Form 1120-F,
U.S. Income Tax Return of a Foreign Corporation; (vi) Form 1120-S, U.S.
Income Tax Return for an S Corporation; and (vii) any other form listed
in instructions, guidance, or publications published in the Internal
Revenue Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602 of this
chapter). Accordingly, a taxpayer that is not required to file one of
these specified Federal income tax returns (such as an estate, a trust,
or a regulated investment company (as defined in section 851(a) of the
Code)) would not be required to file Form 7216. The Treasury Department
and the IRS request comments as to whether taxpayers required to file
additional types of Federal income tax returns should be required to
file Form 7216.
Each covered filer would be required to file Form 7216 with regard
to each section 355 transaction for the required reporting period. For
this purpose, the term ``required reporting period'' would mean the
period (i) beginning in the covered filer's taxable year in which the
first distribution occurs, and (ii) ending in the fifth taxable year of
the covered filer after the taxable year in which the control
distribution occurs. The five-year required reporting period would
apply to a covered filer (or its successor) even in cases where the
covered filer (or its successor) ceases to be a United States
shareholder with respect to a relevant corporation and is no longer
required to file Form 5471, Information Return of U.S. Persons With
Respect To Certain Foreign Corporations, with respect to such
corporation.
Consistent with current Sec. 1.355-5(d), the proposed regulations
would require that, under Sec. 1.6001-1(e), a covered filer must
retain its permanent books and records and make those books and records
available for inspection by any authorized IRS officers and employees.
In addition, the proposed regulations would provide that, in connection
with the section 355 transaction, the covered filer's books and
records, as relevant to the section 355 transaction, will be considered
to be complete and accurate if they contain all information necessary
to document and substantiate satisfaction of the requirements under
section 355.
The proposed regulations would significantly enhance the IRS's
ability to identify section 355 transactions that pose the highest risk
of potential Federal income tax noncompliance and abuse. These proposed
regulations also would help effectuate a broader effort by the Treasury
Department and the IRS to close the portion of the Federal tax gap
(that is, the difference between all Federal taxes that are owed and
those that are collected) due to such potential noncompliance and
abuse.
Because the enhanced reporting requirements in these proposed
regulations would augment the IRS's ability to identify section 355
transactions with the highest risk of potential noncompliance and
abuse, the Treasury Department and the IRS are of the view that
additional flexibility can be provided in the substantive rules
applicable to section 355 transactions (for example, by affording
taxpayers additional time to carry out a plan of distribution).
Proposed regulations that would provide guidance regarding certain
matters relating to corporate separations, incorporations, and
reorganizations qualifying, in whole or in part, for nonrecognition of
gain or loss are published elsewhere in the Proposed Rules section of
this issue of the Federal Register.
The proposed reporting requirements would apply to all types of
section 355 transactions with a covered filer. Specifically, the
proposed regulations would apply to (i) section 355 transactions within
an affiliated group (as defined in section 1504(a)(1) of the Code,
without regard to the exceptions in section 1504(b)) (internal section
355 transaction), and (ii) section 355 transactions in which stock or
securities of a controlled corporation are distributed to a
distributing corporation shareholder or security holder that is not a
member of the distributing corporation's affiliated group (external
section 355 transaction). To reflect the differences between internal
section 355 transactions and external section 355 transactions
(including the different statutory requirements and potential for
Federal income tax noncompliance or abuse), the proposed regulations
would impose, through the annual Form 7216, different reporting
requirements for each type of section 355 transaction.
These proposed regulations are consistent with the recommendations
set forth in the Treasury Inspector General for Tax Administration
(TIGTA) report titled ``A Strategy Is Needed to Assess the Compliance
of Corporate Mergers and Acquisitions With Federal Tax Requirements,''
Ref. No. 2019-30-050 (Sept. 5, 2019). In that report, TIGTA recommended
that the Commissioner determine whether merger and acquisition (M&A)
tax forms, and information provided on those forms, could be used as a
compliance tool within a larger strategy to assess risk and ensure that
corporate M&A transactions are compliant with the Code. These proposed
regulations would enable the IRS to collect information on section 355
transactions from taxpayers engaging in those transactions and utilize
that information to identify potential noncompliance with section 355
and other related provisions of the Code.
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
requires that a Federal agency obtain the approval of the Office of
Management and Budget (OMB) before collecting information from the
public, whether such collection of information is mandatory, voluntary,
or required to obtain or retain a benefit. A Federal agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection of information displays
a valid control number.
The collections of information in these proposed regulations
contain reporting and recordkeeping requirements that are necessary to
identify potential noncompliance with the requirements of section 355
and related sections of the Code. These collections of information
generally would be used by the IRS for tax compliance purposes and by
taxpayers to facilitate proper reporting and compliance.
The recordkeeping requirements within this proposed regulation are
considered general tax records under Sec. 1.6001-1. These records are
required for the IRS to validate that taxpayers have met the
requirements under section 355 and related sections of the Code. For
PRA purposes, general tax records are already approved by OMB under
control numbers 1545-0123 for
[[Page 4690]]
business filers and 1545-0074 for individual filers.
The reporting requirements outlined in Sec. 1.355-5 will be
covered within the form and instructions for IRS Form 7216 (or any
successor form). This form will be approved under 1545-0123 for
business filers and 1545-0074 for individual filers. The IRS will be
submitting the form to OMB for approval under these OMB control numbers
in accordance with the PRA procedures in 5 CFR 1320.10.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these proposed regulations would not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that these proposed regulations
primarily would affect corporations that are publicly traded
corporations, which tend to be larger businesses. Specifically, the
Research, Applied Analytics, and Statistics Division of the IRS
estimates that approximately 110 small businesses with gross receipts
under $25 million would be subject to collection of information in
these regulations annually. In addition, the collection of information
in these proposed regulations is an incremental, additional obligation
on small entities to a currently existing collection of information.
Moreover, the economic impact of these proposed regulations will not be
significant.
Therefore, these proposed regulations would not create significant
additional obligations for, or impose any meaningful economic impact
on, a substantial number of small entities. Accordingly, the Secretary
certifies that the proposed regulations would not have a significant
economic impact on a substantial number of small entities and a
regulatory flexibility analysis is not required.
Pursuant to section 7805(f) of the Code, the proposed regulations
have been submitted to the Chief Counsel for the Office of Advocacy of
the Small Business Administration for comment on its impact on small
business.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. These proposed regulations do not include any Federal
mandate that may result in expenditures by State, local, or Tribal
governments, or by the private sector, in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. This proposed rule does not have
federalism implications and does not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in the preamble under the ADDRESSES heading.
The Treasury Department and the IRS request comments on all aspects of
the proposed regulations. All commenters are strongly encouraged to
submit comments electronically. The Treasury Department and the IRS
will publish for public availability any comment submitted
electronically or on paper to its public docket on https://www.regulations.gov.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing also are encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Barrett D.
Cappadonna of the Office of Associate Chief Counsel (Corporate).
However, other personnel from the Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
0
Par. 2. Section 1.355-5 is revised to read as follows:
Sec. 1.355-5 Information reporting and record retention
requirements.
(a) Reporting of transaction information--(1) Annual reporting
form--(i) In general. For each taxable year of the required reporting
period, a covered filer must file annually with the IRS a complete and
accurate Form 7216, Multi-Year Reporting Related to Section 355
Transactions (or as provided in publications, forms, instructions, or
other guidance), with regard to a section 355 transaction.
(ii) Manner of filing form. A covered filer must file Form 7216 (or
any successor form)--
(A) With the specified Federal income tax return of the covered
filer for the taxable year (see section 6011 of the Code and Sec.
1.6011-1); and
(B) In the manner prescribed by the Commissioner in instructions,
guidance, or publications published in the Internal Revenue Bulletin
(see Sec. Sec. 601.601(d)(2) and 601.602 of this chapter).
(2) [Reserved]
(3) [Reserved]
(b) Definitions. The following definitions apply for purposes of
this section:
(1) Covered filer--(i) In general. The term covered filer means a
taxpayer that is required to file a specified Federal income tax return
and that is--
(A) A distributing corporation or a person that, immediately before
the first distribution, was a United States shareholder (within the
meaning of section 951(b) of the Code) with respect to a controlled
foreign corporation (within the meaning of section 957 of the Code, but
determined without applying subparagraphs (A), (B), and (C) of section
318(a)(3)) that is the distributing corporation;
(B) A controlled corporation or a person that, immediately before
the first distribution, was a United States shareholder with respect to
a controlled foreign corporation that is the controlled corporation;
(C) A significant distributee or a person that, immediately before
the first distribution, was a United States shareholder with respect to
a controlled foreign corporation that is a significant distributee; or
(D) Any other person required by the Commissioner to file Form 7216
(or any
[[Page 4691]]
successor form) in accordance with instructions, guidance, or
publications published in the Internal Revenue Bulletin (see Sec. Sec.
601.601(d)(2) and 601.602 of this chapter).
(ii) Successors. The term covered filer includes any successor
(within the meaning of section 381(a) of the Code) to an entity
described in paragraph (b)(1)(i) of this section.
(2) Required reporting period. The term required reporting period
means the period--
(i) Beginning in the taxable year of the covered filer during which
the first distribution occurs; and
(ii) Ending in the fifth taxable year of the covered filer after
the taxable year in which the control distribution occurs.
(3) Significant distributee. The term significant distributee
means:
(i) A holder of stock of a distributing corporation that--
(A) Receives stock of a controlled corporation in a section 355
transaction; and
(B) Owned at least five percent (by vote or value) of the total
outstanding stock of the distributing corporation immediately before
the first distribution.
(ii) A holder of securities of a distributing corporation that--
(A) Receives stock or securities of a controlled corporation in a
section 355 transaction; and
(B) Owned securities in the distributing corporation with a basis
of at least $1,000,000 immediately before the first distribution.
(4) Specified Federal income tax return. The term specified Federal
income tax return means--
(i) Form 1040, U.S. Individual Income Tax Return;
(ii) Form 1040-NR, U.S. Nonresident Alien Income Tax Return;
(iii) Form 1065, U.S. Return of Partnership Income;
(iv) Form 1120, U.S. Corporation Income Tax Return;
(v) Form 1120-F, U.S. Income Tax Return of a Foreign Corporation;
(vi) Form 1120-S, U.S. Income Tax Return for an S Corporation; or
(vii) Any other form listed in instructions, guidance, or
publications published in the Internal Revenue Bulletin (see Sec. Sec.
601.601(d)(2) and 601.602 of this chapter).
(c) Substantiation information. Under Sec. 1.6001-1(e), a covered
filer must retain its permanent books and records and make those books
and records available for inspection by any authorized IRS officers and
employees. In connection with the section 355 transaction, the covered
filer's books and records, as relevant to the section 355 transaction,
will be considered to be complete and accurate if they contain all
information necessary to document and substantiate satisfaction of the
requirements under section 355.
(d) Applicability date--(1) In general. Except as provided in
paragraph (d)(2) of this section, the rules of this section apply to
taxable years ending after [date of publication of final regulations in
the Federal Register] with respect to section 355 transactions
occurring after January 16, 2025. For rules applicable to prior taxable
years, see Sec. 1.355-5 as in effect and contained in 26 CFR part 1,
as revised April 1, 2024.
(2) [Reserved]
Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2025-00312 Filed 1-13-25; 4:15 pm]
BILLING CODE 4830-01-P