Defining predecessor, successor and limiting recognition of gain under section 355(e) (initial impressions)

Defining predecessor, successor

Final regulations (T.D. 9888) released this week by U.S. Treasury Department and IRS for publication in the Federal Register provide guidance regarding the distribution by a distributing corporation of stock or securities of a controlled corporation without the recognition of income, gain, or loss. In general, the final regulations follow the regulations proposed in December 2016.


Related content

The final regulations [PDF 357 KB] (19 pages as published in the Federal Register) provide:

  • Guidance in determining whether a corporation is a predecessor or successor of a distributing or controlled corporation for purposes of section 355(e)
  • Certain limits on the recognition of gain in specific instances involving a predecessor of a distributing corporation
  • Rules regarding the extent to which section 355(f) causes a distributing corporation (and in certain cases, its shareholders) to recognize income or gain on the distribution of stock or securities of a controlled corporation

The final regulations apply to distributions occurring after December 15, 2019.  For distributions occurring on or before December 15, 2019, see Reg. section 1.355-8T as contained in 26 CFR part 1 revised as of April 1, 2019.


In general, section 355(e) provides that a distributing corporation (Distributing) recognizes corporate-level gain on the distribution of stock or securities of a controlled corporation (Controlled) if the distribution is part of a plan (or a series of related transactions) (Plan) pursuant to which one or more persons acquire directly or indirectly stock representing a 50% or greater interest in Distributing or Controlled (Planned 50-Percent Acquisition). Pursuant to section 355(e)(4)(D), any reference to Distributing or Controlled includes a reference to any predecessor or successor of such corporation.

Proposed and temporary regulations were promulgated in 2004 and 2016, respectively, based on the underlying theory that section 355(e) should apply to “synthetic spin-offs” when a distribution that qualifies under section 355(a) (Distribution) is used to combine the tax-free division of the assets of a corporation other than Distributing or Controlled (Divided Corporation) with a Planned 50-Percent Acquisition of the Divided Corporation.  The proposed regulations issued in November 2004 (the 2004 Regulations) set forth definitions of a predecessor of Distributing (POD) (a corporation that transferred its assets to Distributing in a transaction to which section 381 applies), and for certain limited purposes, a predecessor of Controlled.  Temporary and proposed regulations promulgated in December 2016 (the 2016 Regulations) adopted the 2004 Regulations with “significant modifications” based on comments received. 

The 2016 Regulations broadened the scope of the POD definition while narrowing its potential application. The 2016 Regulations, among other things, broadened the POD definition by removing the requirement of a section 381 transaction and instead premised the definition on the division of the POD’s property, regardless of the transactional form used.  Further, the 2016 Regulations limited POD treatment to transactions in which all of the steps of involved in the tax-free division of the POD’s property occur as part of a plan (the Plan).  For a more fulsome description of the 2016 Regulations, read TaxNewsFlash [PDF 59 KB].

Final regulations

According to the preamble, the final regulations are issued with the same goal as 2004 and 2016 Regulations—namely to provide that section 355(e) applies properly to “synthetic spins-offs” of a Divided Corporation’s assets. Similar to the 2016 regulations, the final regulations themselves provide that they have two principal purposes: 

  • The first is to provide that section 355(e) applies to a section 355 distribution if, as part of a Plan, some of the assets of a POD are transferred directly or indirectly to Controlled without full recognition of gain, and the distribution accomplishes a division of the assets of the POD.
  • The second is to provide that section 355(e) applies when there is a Planned 50-Percent Acquisition of a successor of Distributing or successor of Controlled.

The final regulations generally follow the 2016 Regulations with their complex rules and defined terms, with limited changes.  As with the 2016 Regulations, the rules are best understood by review of the preamble, the general purpose provisions, and the examples—all of which can help inform an understanding of the complex set of specific rules. 

The final regulations include a general overview of the POD rules. As in the 2016 Regulations, only a potential predecessor (Potential Predecessor) can be a POD (although, as noted below, the final regulations change the definition of Potential Predecessor). Also as in the 2016 Regulations, only corporations can be Potential Predecessors, a predecessor of Controlled, or a successor of Distributing or Controlled.  Thus, a partnership cannot be a predecessor or successor of Distributing or Controlled under the final regulations for purposes of section 355(e).

In addition, the general overview notes that a Potential Predecessor can only be a POD if as part of a Plan, the Distribution accomplishes a division of its assets. Assets are treated as so divided if: (1) as part of a Plan, the property of Potential Predecessor is transferred to Controlled in one or more tax deferred transactions prior to Distribution (when certain assets are retained by Distributing); or (2) the Potential Predecessor’s assets included stock of Controlled that, as part of a Plan, was transferred to Distributing in one or more tax-deferred transactions prior to the Distribution.

The final regulations take a middle ground approach between the 2004 regulations and 2016 Regulations by limiting the definition of a POD to any corporation other than Distributing or Controlled, but only if either (1) as part of a Plan, the corporation transfers property to a Potential Predecessor, Distributing, or a member of the same Expanded Affiliated Group as Distributing in a transaction to which section 381 applies, or (2) immediately after completion of the Plan, the corporation is a member of the same Expanded Affiliated Group (affiliated group as defined in section 1504 without regard to section 1504(b)) as Distributing. The limitation for Expanded Affiliated Group members serves to distinguish between situations where Distributing has the ability to unilaterally eliminate built-in gain in the property previously held by the POD through internal restructuring, and thereby achieve a “synthetic spin-off,” from situations where Distributing lacks such an ability. POD treatment would obtain in the former scenario but not the latter.

This change results in a change to the conclusion of Example 5 in Reg. section 1.355-8T(h).  In Example 5, as part of a Plan, (1) corporation P contributes assets to D in exchange for 10% of D stock in a section 351 exchange (the other shareholders of D also make contributions of property), (2) D takes one of the assets of P and contributes it to C and C is spun-off to D’s shareholders, and (3) 51% of the stock of P is acquired by an unrelated entity. The 2016 Regulations concluded that P was a POD although the final regulations now conclude that P is not because the transfer of assets from P to D was not a 381 transaction and P did not become a member of D’s Expanded Affiliated Group.

As in the 2016 Regulations, the final regulations provide that two pre-Distribution requirements (the Relevant Property Requirement and the Reflection of Basis Requirement) and one post-distribution requirement (the Division of Relevant Property) must be satisfied for a Potential Predecessor to be a POD.

In addition, the final regulations amend the Relevant Property Requirement (one of the pre-Distribution requirements) to replace the requirement that gain on Relevant Property not be recognized in full “as part of a Plan” with the requirement that gain (if any) on Relevant Property not be recognized in full “at any point during the Plan Period.” Plan Period is defined as the period ending immediately after the Distribution and beginning on the earliest date on which any pre-Distribution step is part of the Plan. This requirement is intended to provide that property of another corporation which is contributed by Distributing to Controlled does not result in the other corporation being a POD if the gain on such property has been fully recognized at any point during the Plan Period. According to the preamble, the modification is intended to clarify that fluctuations in the value of Relevant Property during the Plan Period do not affect the determination of POD status.

As in the 2016 Regulations, (1) a corporation can only be a predecessor of Controlled for limited circumstances related to intragroup distributions, and (2) a corporation is only a successor of Distributing or Controlled if Distributing or Controlled, respectively, transfers property to such corporation in a transaction to which section 381 applies after the Distribution. 

The final regulations retain the gain limitation rules of the 2016 Regulations with certain limited revisions. Finally, the final regulations retain the prohibition contained in the 2016 Regulations that precludes a section 336(e) election if the amount of gain required to be recognized by Distributing with respect to the Distribution is less than the corporate gain amount that would otherwise be recognized as a result of application of section 355(e) (including the application of the predecessor/successor gain limitation rules). This notwithstanding, the Treasury Department and IRS continue to study and request comments on several issues relating to the permissibility of a 336(e) election in this context.


For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Todd Prewett | +1 (202) 533-5332 |

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Want to do business with KPMG?


loading image Request for proposal