New reporting requirements for spin-offs and related transactions

January 2025

In brief

What happened? 

On January 13, 2025, the Treasury Department and the IRS released proposed regulations (the Proposed Reporting Regulations) that would require reporting of information regarding corporate separations under Section 355 and related provisions (spin-off transactions) and related transactions to establish their qualification for tax-free treatment. In connection with the Proposed Reporting Regulations, the IRS released a draft of a new multi-year reporting form (Form 7216) that certain taxpayers would be required to file in relation to a spin-off transaction. 

The Proposed Reporting Regulations were released alongside a separate set of proposed regulations that would introduce significant changes and new rules governing spin-off transactions and other M&A transactions, affecting and clarifying their eligibility for tax-free treatment (the Proposed Substantive Regulations). Please see the PwC Insight covering the Proposed Substantive Regulations

Why is it relevant?  

The Proposed Reporting Regulations would significantly expand and revise the information reporting and documentation requirements that taxpayers are currently required to provide to the IRS in connection with spin-off transactions. 

Action to consider

Taxpayers should consult with their advisors regarding the implications of this new reporting guidance and may want to provide comments to Treasury on areas of particular concern. Comments on the Proposed Reporting Regulations and the Proposed Substantive Regulations are each due by March 17, 2025.

In detail

Background

In a typical spin-off transaction, a corporation (the distributing corporation) distributes the stock of another corporation (the controlled corporation) to its shareholders. Under current Treasury regulations, the distributing corporation must include a statement with its federal income tax return for the tax year in which the spin-off transaction occurs. This statement must include:  

  1. The name and EIN (if any) of the controlled corporation;  
  2. The name and TIN (if any) of certain significant shareholders or security holders of the distributing corporation (significant distributee);  
  3. The date of the spin-off transaction;  
  4. 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  
  5. If applicable, the date and control number of any private letter ruling(s) issued by the IRS in connection with the spin-off transaction.  

A similar reporting requirement applies to significant distributees. Additionally, special rules apply if the distributing corporation is a controlled foreign corporation (CFC). 

If the distributing corporation transfers assets to a controlled corporation in a transaction described as a divisive reorganization, the distributing corporation also must include the statement required by Reg. 1.368-3(a) on or with its return for the year of the Section 355 transaction.  

Taxpayers are required to retain their permanent records and make those records available to any authorized IRS officers and employees.

Proposed reporting regulations

The Proposed Reporting Regulations would revise the current reporting and documentation requirements such that all “covered filers” with regard to a spin-off transaction would be required to annually file a Form 7216 with the IRS throughout a five-year period referred to as the “required reporting period.” Generally, the “required reporting period” would begin with the tax year in which the distributing corporation distributes the stock of the controlled corporation and end with the fifth tax year thereafter. 

A “covered filer” generally would include (1) a distributing corporation; (2) a controlled corporation; (3) a significant distributee; and (4) any other person required by the IRS to file the Form 7216 (or any successor form) in accordance with instructions, guidance, or publications published in the Internal Revenue Bulletin. If any of the entities in the preceding sentence is a CFC, the reporting obligation generally would be imposed on a United States shareholder of such entity. The term “covered filer” also would include any successor to an entity described above.  

The draft Form 7216 published by the IRS is a comprehensive document that would require the distributing corporation to provide detailed information demonstrating compliance with each requirement under Section 355 and related provisions. Additionally, the draft form would mandate reporting on several other provisions that may apply to spin-off transactions, including the corporate alternative minimum tax and the stock repurchase excise tax. It includes distinct sections tailored to specific categories of covered filers (that is, the distributing corporation, controlled corporation, or a significant distributee). In general, the distributing corporation and any significant distributee would be required to file the Form 7216 to the extent that they are required to file certain enumerated federal income tax returns, including a Form 1040 (U.S. Individual Income Tax Return), Form 1040-NR (U.S. Nonresident Alien Income Tax Return), Form 1065 (U.S. Return of Partnership Income), Form 1120 (U.S. Corporation Income Tax Return), Form 1120-F (U.S. Income Tax Return of a Foreign Corporation), Form 1120-S (U.S. Income Tax Return for an S Corporation), and any other form listed in instructions, guidance, or publications published in the Internal Revenue Bulletin.  

The preamble to the Proposed Reporting Regulations clarifies that a taxpayer that does not file one of the aforementioned federal income tax returns (for example, an estate, trust, or a regulated investment company) would not be considered a “covered filer.” However, a covered filer that is a US shareholder with respect to a relevant corporation would continue to be subject to the filing obligation even if the covered filer ceases to be a US shareholder 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 relevant corporation. 

The Proposed Reporting Regulations would apply to all types of spin-off transactions, including both “internal” spin-off transactions between members of an affiliated group and “external” spin-off transactions in which the distributing corporation distributes stock or securities of the controlled corporation to its external shareholders or security holders.  

Similar to the current requirements, taxpayers would be required to retain their permanent records and make those records available to any authorized IRS officers and employees.  

According to the preamble of the Proposed Reporting Regulations, the proposed modifications to the reporting requirements are intended to improve the IRS’s ability to administer Section 355 and related provisions and to ensure that transactions seeking tax-free treatment under such provisions satisfy all applicable requirements. The Treasury Department and the IRS further state that these modifications are intended to help effectuate an effort to close the “federal tax gap” resulting from potential noncompliance and abuse of Section 355 and related provisions. Additionally, by establishing a clear “line of sight” for the IRS to examine transactions, the enhanced reporting requirements are described as allowing for greater flexibility in the Proposed Substantive Regulations with respect to satisfaction of certain requirements under Section 355, such as the plan of reorganization requirement.  

Observation: The obligation to file Form 7216, which covers six pages, would significantly expand the volume of information required to be reported to the IRS with respect to a spin-off transaction. This information would include information that may not be directly related to spin-off transactions (for example, information regarding the solvency of the distributing and controlled corporations). Further, the requirement to annually file the Form 7216 throughout the five-year reporting period would require applicable taxpayers to continuously monitor and document compliance with complex statutory and regulatory provisions, some of which specify precise times for testing their satisfaction that is at odds with an annual filing obligation. 

See also

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Ed Geils

Ed Geils

Global and US Tax Knowledge Management Leader, PwC US

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