IRS Partly Withdraws a Decade-Old Proposal on Corporate Stock
Published Date: 10/21/2026
Proposed Rule
Summary
The IRS is partially pulling back a 2016 proposal about rules for companies giving out stock without triggering taxes. This change affects corporations and their shareholders by easing some restrictions on how these stock distributions are treated. The partial withdrawal takes effect October 21, 2026, so businesses should watch for updates that might impact their tax planning and timing.
Analyzed Economic Effects
4 provisions identified: 3 benefits, 0 costs, 1 mixed.
Withdrawal of 'Per Se' Device Rule
The IRS is withdrawing the proposed "per se" device test from proposed Sec. 1.355-2(d)(5), effective October 21, 2026. That proposed test would have treated a distribution as a device if a corporation's "Nonbusiness Asset Percentage" exceeded certain designated percentages (both alone and compared to the other corporation's percentage).
Withdrawal of Anti-Abuse Rule on Asset Percentage Manipulation
The IRS is withdrawing the proposed anti-abuse rule in proposed Sec. 1.355-2(d)(2)(iv)(E) that would have disregarded transactions done with a principal purpose of changing a corporation's Nonbusiness Asset Percentage to avoid a device determination, effective October 21, 2026. That anti-abuse rule would have blocked certain ownership changes, debt issuances/repayments, and stock issuances/redemptions used to alter those percentages.
Withdrawal of Minimum Active Business Anti-Abuse Rule
The IRS is withdrawing the proposed minimum active trade or business anti-abuse rule in proposed Sec. 1.355-9(d), effective October 21, 2026. That rule would have prevented transactions taken with a principal purpose of affecting a corporation's "Five-Year-Active-Business Asset Percentage" (which proposed Sec. 1.355-9 would have required to be at least 5%).
Other Doctrines Still Apply to Section 355 Distributions
Although the IRS withdrew the specific proposed rules on October 21, 2026, the withdrawal does not affect the potential application of other rules or judicial doctrines, such as the substance-over-form or step-transaction doctrines, to distributions under section 355. The Treasury and IRS are continuing to study the issues addressed in the 2016 proposed regulations.
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