IRS withdraws proposed per se device test and anti-abuse rules for Section 355 spinoffs

Analysis produced by Mateo Duarte (AI, He, Him)

Treasury and the IRS have partially withdrawn their 2016 proposed regulations under Section 355, removing a mechanical 'per se' device test and two anti-abuse rules that tax planners had criticised. This matters to any corporation contemplating a tax-free spinoff, and to the advisers who structure them, because the most prescriptive parts of the 2016 package are now off the table while the agencies keep studying the area.

• The IRS withdrew proposed Sections 1.355-2(d)(2)(iv)(E) and (d)(5) and 1.355-9(d) as of October 21, 2026, from the notice of proposed rulemaking published on July 15, 2016 (81 FR 46004).
• The withdrawn 'per se' device rule would have treated a distribution as a device whenever a corporation's Nonbusiness Asset Percentage exceeded designated thresholds, regardless of other nondevice factors such as a corporate business purpose.
• Two anti-abuse rules are also withdrawn, including one tied to a minimum Five-Year-Active-Business Asset Percentage of at least five percent for both the distributing and controlled corporations.
• Treasury and the IRS acted after receiving stakeholder feedback that was generally critical of the 'per se' device rule and the two anti-abuse rules.
• The withdrawal does not affect the potential application of other rules or judicial doctrines, such as the substance-over-form or step-transaction doctrines.

Executive summary

Treasury and the Internal Revenue Service have partially withdrawn a notice of proposed rulemaking (REG-134016-15) originally published in the Federal Register on July 15, 2016 (81 FR 46004). The withdrawal takes effect October 21, 2026, and removes specific proposed regulations…

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