Divisive Reorganizations, Distributing Debt, and the IRS’s New Roadmap: Revenue Procedure 2025-30

Corporate spin-offs, split-offs, and split-ups are among the most powerful tools in the U.S. tax code. Properly structured, they allow companies to separate lines of business tax-free, giving shareholders new investment opportunities and businesses sharper focus. But these transactions, known as divisive reorganizations, sit at the intersection of complex rules in § 355 and § 368(a)(1)(D).

One of the trickiest areas involves corporate debt: what happens when the distributing company (“Distributing”) uses the spin-off transaction to settle or shift obligations? The IRS’s newly issued Revenue Procedure 2025-30 aims to clarify the rules, tighten compliance, and restore confidence in a space where aggressive planning has occasionally blurred the lines.

This article walks through the concepts, illustrates with practical examples, and explains the IRS’s latest guidance.

The Basics: What Is a Divisive Reorganization?

A divisive reorganization occurs when a company separates part of its operations into a new corporation (“Controlled”) and distributes that subsidiary’s stock to shareholders.

• Spin-off: Shareholders keep their stock in Distributing and receive additional stock in Controlled.
• Split-off: Shareholders exchange their Distributing shares for shares in Controlled.
• Split-up: Distributing liquidates and distributes stock in multiple Controlled corporations.

The tax code, under § 355, allows these to be tax-free if strict requirements are satisfied:

• Each company must be engaged in an active trade or business.
• The transaction must serve a real business purpose (not just a tax dodge).
• It cannot be a “device” to distribute earnings and profits.
• Shareholders must maintain continuity of interest.

Where § 368(a)(1)(D) Fits In

Section 368(a)(1)(D) defines the mechanics of a Type D reorganization:

• Distributing transfers property to Controlled.
• Controlled gives stock (and possibly other consideration) back to Distributing.
• Distributing then distributes Controlled stock to its shareholders.

When this is paired with § 355, we get the divisive D reorganization: the backbone of most modern spin-offs.

The Debt Dimension: § 361 Consideration

Here’s where it gets interesting.

• Distributing Debt = debt owed by Distributing.
• § 361 Consideration = property received by Distributing in the reorganization, which may include:
  • Controlled stock,
  • Cash or securities,
  • Debt obligations of Controlled.

Example 1: Debt Assumption
Distributing owes BankCo $200 million. In the spin-off, Controlled assumes this debt. For tax purposes, this assumption is treated as Distributing receiving property in the reorganization.

Example 2: Debt Satisfaction
Distributing owes $100 million to Bondholders. As part of the transaction, it distributes Controlled stock directly to the Bondholders instead of cash. That use of § 361 consideration can also qualify as tax-free.

Why the IRS Is Concerned

Without guardrails, these rules could be exploited:

• Companies could issue new debt right before the spin-off and have Controlled assume it, effectively converting cash into a tax-free dividend.
• Related-party creditors could be used to funnel value out of the structure.
• Newly created obligations could masquerade as historic debt.

The IRS therefore insists that:

• The debt must be historic, not manufactured for the deal.
• Creditors must be unrelated parties.
• Any exchanges must reflect true business needs, not disguised distributions.

Enter Rev. Proc. 2025-30: The IRS’s New Playbook

The IRS’s Rev. Proc. 2025-30 resets the framework for taxpayers seeking private letter rulings on divisive reorganizations. Here’s what it does:

1. Reinstates Key Representations: Taxpayers must certify that the debt is legitimate, historic, and not held by related parties.
2. Adds Documentation Requirements: Detailed descriptions of the debt, its history, and the consideration used must be provided.
3. Clarifies Contingencies: If debt satisfaction is delayed, there must be substantial business reasons—and usually no more than 180 days can elapse.
4. Modifies Prior Guidance: It supersedes Rev. Proc. 2024-24, modifies Rev. Proc. 2017-52 and 2025-1, and revokes Notice 2024-38.
5. Encourages Pre-Submission Conferences: Taxpayers can meet with IRS Counsel before filing, reducing uncertainty in complex deals.

Practical Example: SpinCo Debt Allocation

Imagine HealthCo, a conglomerate with a pharma division and a medical devices division.

• HealthCo wants to spin off DevicesCo to shareholders.
• HealthCo has $500M in long-term debt.
• Under the plan:
  • DevicesCo assumes $200M of the debt.
  • HealthCo distributes $50M worth of DevicesCo stock directly to its bondholders.
  • Shareholders receive the remaining DevicesCo stock.

With Rev. Proc. 2025-30 in play:

• HealthCo must prove that the $200M is historic debt incurred well before the spin-off planning began.
• It must certify that its bondholders are not related parties.
• It must document why part of the debt is being satisfied with DevicesCo stock (e.g., capital structure optimization, creditor demands).
• If any debt payoff happens more than 30 days after the spin, it must justify the delay with substantial business reasons.

Why This Matters for Businesses and Advisors

• For CFOs and Tax Directors: This guidance raises the bar for compliance. Any spin-off planning must begin months or years in advance to ensure debt qualifies as historic.
• For Advisors: PLR requests will be more demanding. Expect to produce detailed histories of debt issuance, credit terms, and business purposes.
• For Investors: Clearer IRS oversight reduces the risk of spin-offs being challenged later, adding certainty to market transactions.

Conclusion: A New Era of Transparency

Divisive reorganizations under §§ 355 and 368(a)(1)(D) remain powerful, but they are also ripe for abuse if not tightly policed. With Rev. Proc. 2025-30, the IRS is signaling:

• “We’ll allow tax-free treatment, but only if you can prove the debt and consideration flows are real, historic, and aligned with business needs.”

For companies and advisors, this means better documentation, earlier planning, and tighter execution. For students of tax law, it’s a reminder that the place where corporate finance and tax policy meet is often where the most fascinating complexity lies.