- The per se device test, related device anti-abuse rule, and minimum active trade or business anti-abuse rule proposed in 2016 are withdrawn as of October 21, 2026.
- Distributions under Section 355 must still satisfy the existing device prohibition and active trade or business requirement to qualify for nonrecognition treatment.
- The Treasury Department and IRS continue to study the issues addressed in the 2016 proposed regulations.
- Other rules and judicial doctrines such as substance-over-form and step-transaction remain applicable.
Background on Section 355 Distributions
Under Section 355, a distributing corporation may distribute stock or stock and securities of a controlled corporation without recognizing gain or loss, and without causing gain recognition or income inclusion for its shareholders or security holders, provided all requirements are met.
These requirements include the device prohibition, which bars using the transaction principally as a device for distributing earnings and profits, and the active trade or business requirement, under which both the distributing and controlled corporations must engage in the active conduct of a trade or business immediately after the distribution.
Partial Withdrawal of 2016 Proposed Regulations
On July 15, 2016, the Treasury Department and IRS issued a notice of proposed rulemaking that would have modified regulations under Section 355 regarding the device prohibition and active trade or business requirement.
The 2016 proposal included a per se device test based on Nonbusiness Asset Percentage thresholds that would have disqualified distributions regardless of other factors, along with two anti-abuse rules addressing transactions intended to manipulate those percentages or the Five-Year-Active-Business Asset Percentage.
As of October 21, 2026, the IRS has withdrawn the proposed per se device rule, the related device anti-abuse rule, and the minimum active trade or business anti-abuse rule in response to critical stakeholder feedback.
Effect of the Withdrawal
The partial withdrawal leaves current regulations on the device prohibition and active trade or business requirement in place.
The action does not affect the potential application of other rules or judicial doctrines, such as substance-over-form or step-transaction.
The Treasury Department and IRS continue studying the issues raised in the 2016 proposal.
Next Steps and Provider Note
Public comments on the remaining portions of the 2016 notice may be submitted electronically through the Federal eRulemaking Portal by searching Docket ID IRS-2016-0030 or by mail to the IRS address listed in the Federal Register notice.
Corporations and shareholders planning distributions under Section 355 should review how the existing device prohibition and active trade or business tests apply to their planned transactions.
Republic Tax Relief provides private tax-resolution services for individuals and businesses facing IRS or state tax issues and advertises a free, no-obligation initial consultation to evaluate suitability, scope, fees and availability of help communicating with the IRS.
Announcement covered: Oct 21, 2026.
General information only, not individual tax, legal, or financial advice. Rules, deadlines, and eligibility depend on your circumstances. Check current official guidance or consult a qualified professional.
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