# Guidance Under Section 355 Concerning Device and Active Trade or Business Partial Withdrawal > On October 21, 2026, the IRS published a partial withdrawal of its proposed regulations under Section 355, scaling back rules on the device prohibition and active trade or business requirement. CPA firms advising corporations with pending or planned spin-offs need to act now to reassess planning… **Source:** https://taxscout.ai/blog/guidance-under-section-355-concerning-device-and-active-trade-or-business **Published:** 2026-10-22 **Updated:** 2026-10-22T19:58:23.000-04:00 **Author:** Madiyar Kumurbekov, EA **Category:** news **Tags:** IRS Compliance, Tax Forms, Advisory Services, CPA Practice Management, Small Business Tax --- The IRS moved quietly but consequentially on October 21, 2026: the agency published a partial withdrawal of its notice of proposed rulemaking covering guidance under Section 355 concerning device and active trade or business requirements. The [Federal Register notice](https://www.federalregister.gov/documents/2026/10/21/2026-21568/guidance-under-section-355-concerning-device-and-active-trade-or-business-partial-withdrawal) (Doc. 2026-21568) walks back specific proposed regulations that would have governed how corporations qualify for tax-free treatment when distributing controlled corporation stock or securities — without triggering income, gain, or loss — under [IRC § 355](https://www.law.cornell.edu/uscode/text/26/355). This is not a routine housekeeping item. For CPA firms that advise closely held C-corporations, S-corporations electing C status for restructuring, holding companies, or family businesses exploring spin-off strategies, the withdrawal reshuffles the compliance landscape mid-stream. It also creates an immediate obligation: any planning memo, [engagement scope](/glossary/engagement-scope), or client presentation that referenced the now-withdrawn proposed rules needs to be revisited before year-end. Firms that were actively structuring transactions in reliance on the now-withdrawn guidance under section 355 concerning device and active trade or business may need to revisit their planning assumptions entirely. This brief summarizes what changed, which client segments are affected, and the concrete steps your firm should take this week. For broader context on related corporate restructuring news, see [other news resources](/blog/category/news) published by our team. Understanding the full implications of the withdrawn guidance under section 355 concerning device and active trade or business is essential before advising clients on any pending or planned corporate separations. ## What the Partial Withdrawal Actually Changes The original notice of proposed rulemaking targeted two distinct doctrines embedded in Section 355: the *device prohibition* and the *active trade or business (ATB) requirement*. The device prohibition prevents shareholders from using a corporate separation as a disguised sale of appreciated property. The ATB requirement mandates that both the distributing and controlled corporations operate qualifying businesses for at least five years before the distribution. The proposed guidance under section 355 concerning device and active trade or business had sought to modernize both doctrines, making the partial withdrawal particularly significant for transactions that touched either or both requirements. The IRS is now pulling back specific proposed regulatory text within that rulemaking. Critically, this is a *partial* withdrawal — not a full rescission. The agency has not abandoned Section 355 oversight; it is stepping back from certain proposed mechanistic tests or standards within those two doctrines. Practitioners should not interpret this as a green light to treat device and ATB analysis as settled or permissive. [Treasury](https://home.treasury.gov) may issue replacement guidance, and the underlying statutory requirements of Section 355 remain fully intact. For firms evaluating their guidance under section 355 concerning device and active trade or business approach, this trade-off compounds over time. Until replacement regulations arrive, CPAs must rely on pre-proposal authority: existing Treasury regulations under Treas. Reg. § 1.355-2 (device) and Treas. Reg. § 1.355-3 (ATB), IRS rulings, and case law. The proposed rules that were partially withdrawn had not yet become final, so no final regulatory text is being removed from the Code of Federal Regulations — but reliance arguments built on the proposed rules evaporate. Each of these factors directly shapes how guidance under section 355 concerning device and active trade or business plays out in practice. (image: TaxScout review interface with AI research agents and client context) *Review with AI assist — 9 agents answer questions with full client context* **Which Client Segments and Filing Types Are Affected** --- **Tired of manual workflows slowing your firm down?** See how TaxScout handles this with AI-powered automation. [→ Book a 15-Min Demo](/demo) Understanding guidance under section 355 concerning device and active trade or business in this context is what separates firms that scale from those that stall. --- **C-corporations planning or mid-stream on a spin-off, split-off, or split-up** are the primary clients in the crosshairs. If your firm is advising a C-corp that intended to rely on standards articulated in the proposed regulations — particularly around ATB qualification or device-factor analysis — those positions need fresh review under pre-proposal authority. This is precisely where a deliberate guidance under section 355 concerning device and active trade or business strategy pays off. **S-corporations** are generally not subject to Section 355 directly, but an S-corp that converted to C status or is using a Section 368 reorganization as a precursor to a Section 355 distribution should be evaluated. Similarly, **partnerships and LLCs** that hold C-corp interests as part of a tiered structure may have downstream exposure if the distributing entity is a corporation. See our coverage of [non-applicability of Section 357(c) to consolidated groups](/blog/non-applicability-of-section-357c-to-consolidated-groups-what-cpa-firms-must-do) for a parallel consolidated-group issue your corporate clients may also be tracking. Guidance under section 355 concerning device and active trade or business sits at the center of this decision — get it wrong and the rest unravels. **Individual shareholders (Form 1040)** are affected indirectly. If a Section 355 distribution fails the device or ATB tests, what was planned as a tax-free distribution becomes a taxable dividend or capital gain — with immediate income recognition. High-income shareholders in states with no PTET workaround face the full combined burden. **Nonprofits** generally are not directly affected unless they hold stock in a distributing corporation as an investment. The [IRS Section 355 overview](https://www.irs.gov/pub/irs-drop/) and related revenue procedures remain relevant baseline authority while new guidance is pending. Firms advising clients on [capital gains](/glossary/capital-gains) timing should also cross-reference our [Section 1231 gain planning guide](/blog/section-1231-gain-planning-guide) for interplay with asset sale characterization. --- **Tracking regulatory withdrawals across every client's entity structure manually?** TaxScout.ai's AI Research Agents monitor IRS, Treasury, and Federal Register updates and surface the ones that matter to your specific client files — so nothing slips through. [→ See AI Research Agents in Action](/features) --- ## Why the IRS Withdrew These Proposed Rules The Federal Register document does not provide a detailed policy rationale — partial withdrawals rarely do. However, the pattern is consistent with a broader Treasury and IRS practice of revisiting proposed regulations that generated significant comment-letter opposition or that conflicted with evolving administrative priorities. The [Treasury regulatory agenda](https://home.treasury.gov/policy-issues/tax-policy/) has signaled ongoing review of corporate separation rules. Practitioners who submitted comments on the original NPRM should flag this withdrawal as potentially responsive to their submissions — and should monitor the Federal Register for a new NPRM or interim guidance that addresses the same doctrines. The [IRS guidance priority plan](https://www.irs.gov/about-irs/) is the right place to watch for what replaces these withdrawn provisions. (image: TaxScout pipeline management kanban board showing tax returns across stages) *Track every return from intake to filed with drag-and-drop pipeline management* (image: TaxScout client portal interior showing document checklist and intake form) *Smart intake auto-fills from uploaded documents and prior-year data* ## What to Do This Week: Action List for CPA Firms The following steps are sequenced by urgency. Firms with active Section 355 engagements should start today; firms without current corporate separation clients should use this as a trigger for a portfolio scan. ### Step 1: Identify Affected Client Files Pull every open engagement involving a corporate distribution, spin-off, split-off, split-up, or reorganization with a Section 355 component. Flag any planning memo or tax opinion letter that cited the proposed regulations by NPRM docket number or publication date. These files require immediate attorney or specialist review if the firm is not itself providing legal advice. ### Step 2: Communicate With Clients Before Positions Are Filed Any client with a pending transaction relying on the proposed rules should be notified in writing — today, if possible — that the proposed regulations have been partially withdrawn and that the planning analysis needs to be refreshed under existing regulatory authority. Use your [client portal](/features/client-portal) or [communication hub](/features/communication-hub) to send a brief, non-alarmist update. Document that notification in the file. Do not allow a return or disclosure to go out citing withdrawn proposed rules as authority. ### Step 3: Update Engagement Scope and Fee Arrangements If additional research hours are now required to re-analyze device and ATB positions under pre-proposal authority, update the [engagement letter](/glossary/engagement-letter) and fee estimate accordingly. [Scope creep](/glossary/scope-creep) in corporate restructuring engagements is a [professional liability](/glossary/professional-liability) exposure. Issue revised [e-signatures](/features/e-signatures) on updated engagement letters before any additional work begins. ### Step 4: Brief Your Tax Team Schedule a 20-minute all-hands brief for staff who work on corporate returns. Share the [Federal Register notice](https://www.federalregister.gov/documents/2026/10/21/2026-21568/guidance-under-section-355-concerning-device-and-active-trade-or-business-partial-withdrawal) directly. Confirm that the team understands the distinction: the withdrawal removes proposed (not final) regulatory text, and the underlying statute and existing final regulations remain in force. Staff should not advise clients that Section 355 requirements have been relaxed — that would be incorrect. ### Step 5: Monitor for Replacement Guidance Set a calendar alert to check the IRS guidance priority plan and Treasury's regulatory agenda each quarter until replacement regulations appear. Consider using TaxScout.ai's [regulatory intelligence feature](/features/regulatory-intelligence) to automate monitoring. The [Journal of Accountancy](https://www.journalofaccountancy.com) and [law.cornell.edu LII](https://www.law.cornell.edu/cfr/text/26) are reliable secondary sources for tracking when new text is codified. ## Interaction With Other Corporate Tax Issues Section 355 transactions rarely occur in isolation. A distributing corporation that also has open questions around earnings and profits, consolidated return regulations, or basis adjustments should treat this withdrawal as a prompt to do a full restructuring checklist review. The [Section 1031 boot guide](/blog/section-1031-boot-tax-guide) is a useful reference for advisors working on transactions where deferred gain recognition is central to the client's planning thesis — the gain-recognition mechanics in Section 355 share conceptual overlap with boot recognition under Section 1031. For clients with international structures, Section 355 interacts with the anti-inversion rules and subpart F income provisions. [IRS Notice 2015-59](https://www.irs.gov/pub/irs-drop/n-15-59.pdf) and subsequent guidance remain relevant for cross-border separations. The partial withdrawal does not affect those international anti-abuse overlays. *Section 355 Authority: Before vs. After Partial Withdrawal* | Authority Type | Before Withdrawal | After Partial Withdrawal | | --- | --- | --- | | Proposed regulations (device + ATB) | Pending, available for planning reference | Partially withdrawn — no longer valid authority | | Existing final regulations (Treas. Reg. § 1.355-2, 1.355-3) | In force | Still in force — primary authority | | IRS revenue rulings and PLRs | Supplemental authority | Now primary reference alongside final regs | | Underlying IRC § 355 statute | Unchanged | Unchanged — all statutory requirements remain | | Replacement regulations | Not applicable | Pending — monitor IRS guidance priority plan | --- **Still piecing together regulatory updates from multiple sources across every client engagement?** TaxScout.ai centralizes client files, AI-powered research, and compliance alerts in one platform built for CPA firms — so your team spends time on advice, not hunting for updates. [→ Book a Demo](/demo) --- (image: TaxScout client detail view with document organizer and pipeline stages) *Every client gets organized documents, status tracking, and a complete history*