Updated Reporting Obligations for Spin-Offs and Related Transactions
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- On February 3, 2025
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IRS Form 7216 Draft Instructions
On January 13, 2025, the Treasury Department and the IRS issued proposed regulations (Proposed Reporting Regulations) introducing new reporting requirements for corporate separations under Section 355 (spin-off transactions) and related provisions.
These regulations would mandate taxpayers to report detailed information to verify the tax-free qualification of such transactions. As part of this initiative, the IRS also released a draft of Form 7216, a multi-year reporting form that certain taxpayers would be required to file for spin-off transactions.
Comparison of Current vs. Proposed Reporting Requirements for Spin-Off Transactions
A spin-off in U.S. tax law involves a parent company (distributing corporation) creating a new independent company (controlled corporation) by distributing shares of the controlled corporation to its existing shareholders.
The table below outlines a comparison of the existing and proposed reporting requirements.
| Category | Current Reporting Requirements | Proposed Reporting Requirements |
| Entities Required to File | The below-listed entities must include a statement with their federal income tax return for the year of the spin-off.
– Distributing corporation – Significant distributees – Special rules apply to controlled foreign corporations (CFCs). |
All “covered filers” – Distributing corporation, Controlled corporation, Significant distributes, U.S. shareholders of CFCs and other entities, as required by the IRS, including any successor to the entity, must file Form 7216 annually for five years. |
| Information to Report | Names & EINs/TINs of the controlled corporation and significant distributees. – Transaction date and aggregate fair market value of distributed stock/securities. – IRS private letter ruling details, if applicable. | Detailed compliance information on Section 355 requirements. – Additional reporting on corporate alternative minimum tax and stock repurchase excise tax. – Expanded entity-specific reporting sections for different types of covered filers. |
| Duration of Reporting | One-time reporting in the year of the spin-off. | Annual reporting for five years after the spin-off. |
| Applicability to Spin-Offs | Applies to both internal (within an affiliated group) and external (public shareholder) spin-offs. | Continues to apply to all spin-off transactions, with greater compliance oversight. |
| Divisive Reorganization Reporting | If assets are transferred in a divisive reorganization, additional reporting under Reg. 1.368-3(a) is required. | No specific changes, but Form 7216 will require enhanced disclosures for such transactions. |
| Record Retention | Taxpayers must maintain permanent records and provide them to the IRS upon request. | Same requirement but with a ,more extended compliance period (five years). |
| IRS Oversight & Compliance | The IRS can review spin-off transactions based on the filed statement. | Expanded IRS oversight with enhanced reporting requirements to close tax compliance gaps. |
Key Takeaways
- Proposed regulations significantly expand reporting obligations by introducing Form 7216, which must be filed annually for five years instead of just once.
- The scope of required information is broader, covering additional taxes and compliance details.
- The IRS gains more visibility into spin-off transactions, aiming to reduce potential noncompliance and enhance enforcement.
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