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IRS Eliminates Signatures on Section 754 Elections, Offering Tax Regulatory Reform Preview (and its Complexity?)

In a notice of proposed rulemaking issued on October 11, 2017 (the “NPRM”), the U.S. Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) proposed an amendment to existing regulations (the “Proposed Regulation”) under Section 754 of the Internal Revenue Code of 1986, as amended (the “Code”). The Proposed Regulation eliminates the requirement under current Treasury regulations (the “Current Regulation”) that an election under Code Section 754 be signed in order to be effective.

This is among the first of what may be a long series of notices modifying or eliminating existing Treasury Regulations, as indicated in the Treasury’s Second Report to the President on Identifying and Reducing Tax Regulatory Burdens (the “Second Regulatory Reform Report”), which was released by Treasury Secretary Mnuchin on October 2, 2017. The substantive effect of the Proposed Regulation is as simple as it sounds – the literal extent of the change is the deletion of the existing signature requirement in the Current Regulation – but the proposed applicability date provisions in the NPRM contain provisions of interest. Read this blog post for background, information about the Proposed Regulation and its proposed applicability date, and some context relating to the Second Regulatory Reform Report.

Background and the Current Regulation

Very briefly, if a partnership makes a Code Section 754 election, the basis of partnership property is adjusted on certain distributions of property by a partnership and on the transfer of a partnership interest, as provided in Code Sections 734 and 743, respectively. The effect of a Code Section 754 election applies to the year the election is validly made and all subsequent taxable years unless validly revoked by the partnership in the manner prescribed in the Treasury regulations.

The Current Regulation provides that the Code Section 754 election be made by attaching a written statement to the partnership tax return in the year in which the election is made, and that such return be filed no later than the time prescribed for filing the return for such taxable year, including extensions. The Current Regulation requires, among other things, that the written statement be signed by any one of the partners. If unsigned, the Current Regulation would deem the Code Section 754 election for the partnership invalid unless automatic relief under Treas. Regs. Sec. 301.9100-2, if available, is sought (“9100 relief”) or a private letter ruling is secured.

The Proposed Regulation and the Proposed Applicability Date Provision of the NPRM

The Proposed Regulation, as mentioned above, would eliminate the signature requirement, full stop. The NPRM states that the Proposed Regulation would apply to partnership taxable years ending on or after the date the Proposed Regulations are published in final form (which is the usual applicability date provision for proposed regulations, except in extraordinary circumstances). However, the NPRM’s proposed applicability date provision provides that “taxpayers” may rely on the Proposed Regulation for periods preceding the proposed applicability date, and specifically states that a partnership with an otherwise valid Code Section 754 election in place need not seek 9100 relief just for want of a signature.   Some observations about this:

  • It appears that all pending 9100 relief requests relating to missing signatures on Code Section 754 elections may be withdrawn, and although not explicitly stated, all pending private letter ruling requests may also be withdrawn. The NPRM provides no information on whether user fees paid in connection with such pending ruling requests will be refunded. If the NPRM or Proposed Regulation were withdrawn (which seems highly unlikely) and the period in which 9100 relief would otherwise have been available were to have lapsed, it is not clear whether the 9100 relief period would be treated as tolled during the pendency of the NPRM, or if a taxpayer would need to seek a private letter ruling (at substantially greater cost) instead.
  • The indefinite retroactive reliance provision in the NPRM seems to mean that effectively any partnership that attempted a Code Section 754 election that was submitted unsigned now has the ability to redetermine whether such election was desirable when made – even if no relief was ever sought or even considered in the past – subject only to general rules relating to time limits for filing amended returns and various statutes of limitation. A partnership that has determined the unsigned Code Section 754 election was desirable when made is entitled by the terms of the NPRM to rely on the Proposed Regulation now, and give full effect to such election. Conversely, a partnership that has determined that the unsigned Code Section election was not desirable when made arguably could revoke that election without complying with the revocation requirements under current Treasury regulations – although query whether this would be an impermissible change in method of accounting or could trigger other limits on taxpayers changing reporting positions.
  • In either case described above, the NPRM does not indicate what steps a taxpayer retroactively relying, or not, on the Proposed Regulation would have to take to communicate that decision the to the IRS. Additionally, the reliance provision refers to “taxpayers”. This might literally be read to mean that partners in a partnership with an unsigned Code Section 754 election can selectively apply the Proposed Regulation, although this is rather plainly not the intent and such a literal reading could permit a potentially distortive application of the rule. It remains to be seen whether and how these issues will be addressed in final regulations.

The Second Regulatory Reform Report and the Context of the Proposed Regulation

The NPRM is the first regulatory amendment to be issued subsequent to the Second Regulatory Reform Report, and presumably the first of the “over 200” regulations earmarked for modification or revocation by Treasury and identified in the Second Regulatory Reform Report beyond the eight specifically discussed there. It remains to be seen whether the open-ended taxpayer reliance provision contained in the NPRM is indicative of the approach Treasury and the IRS intend to take in modifying or revoking these regulations generally.

Finally, following from the above, these observations about the NPRM and the Proposed Regulation – while seemingly slight in this context – highlight the voluminous details that even the wholesale revocation of existing regulations will require the Treasury and IRS to address. Given that the Second Regulatory Reform Report states that there are potentially hundreds more notices of proposed rulemaking (and subsequent Treasury Decisions finalizing regulations) or notices withdrawing regulations entirely to come pursuant to this project, taxpayers and anyone else affected by the operation of the U.S. tax laws will need to be prepared to evaluate carefully with their advisors the effect of each such notice that potentially applies in their individual circumstances. And, the effect of such a massive undertaking on the further hundreds of existing issues on the IRS’s priority guidance plan also remains to be seen.

Tax Planning is Crucial to Achieve Potential Spin-Off Benefits

Today, the Wall Street Journal considers again, on its front page above the fold, the potential benefits of corporate spin-off transactions ( (subscription required)). The Journal article notes that the S&P Spin-Off Index has outperformed the S&P 500 Index by nearly 190 percentage points in the last ten years. Also discussed are the wide-ranging reasons investors favor spin-off transactions – but that corporate spin-off transactions are also tracking to historic lows this year. While the reasons why spin-off activity has been depressed is not entirely clear, there is no question that tax complexity and tax uncertainty are considerable barriers. To overcome these barriers and to complete a successful corporate spin-off (and potentially to achieve the benefits discussed in the Journal), careful tax planning is essential.

A positive development towards reducing U.S. tax uncertainty for corporate spin-offs has been the IRS’s recent decision to resume issuing “transactional” private letter rulings. Transactional rulings address all the significant U.S. tax issues in a spin-off. Such rulings are much more valuable than more limited “significant issues” rulings, which were the only corporate spin-off rulings available for the last several years (this change in IRS policy was discussed here in detail: ( In the absence of a transactional ruling, a corporation generally would have to rely on opinions of counsel on all issues affecting the tax-free status of a spin-off unless there was a “significant issue.” An IRS private letter ruling gives the highest level of assurance on the tax treatment of a transaction. The possibility of securing a transactional ruling could provide an opportunity for companies that have been considering spin-offs but have determined that the risk of either shareholder- or corporate-level tax must be reduced to the greatest extent possible.[1]

There is also general uncertainty relating to U.S. tax reform. While the form and timing of any major tax legislation being enacted is uncertain (and beyond the scope of this discussion), no proposal to date would alter fundamentally the U.S. rules governing tax-free spin-offs. While this is positive, in the sense that companies that might benefit from undertaking a spin-off have no immediate need to suspend planning based on the current tax reform framework,[2] the undeniable complexity of the current tax-free spin-off rules in the United States remains a significant challenge.

Any U.S. corporation or other corporation with substantial U.S. shareholders or businesses that believes a spin-off could be beneficial will need, of necessity, to engage with tax advisors at the earliest possible stage, as the required planning is formidable. The importance of tax planning only increases if the potential transaction involves a proposed subsequent combination of the spun-out business with another company, or the separation of businesses located in different countries.

As the Journal article notes, the potential economic benefits of a corporate spin-off (or other separation transaction, such as a split-up or split-off) can be substantial, especially if the transaction is tax-free to the shareholders and the company. Of course, there are situations where a tax-free corporate spin-off may simply not be technically achievable (or only partially achievable) under current U.S. tax laws.[3] However, an ample reward for the investment of time and effort in careful tax planning can be the creation of two separate, stand-alone corporate enterprises in a tax-free transaction.


[1] There are certain aspects of a spin-off transaction on which the IRS historically has declined to rule, such as whether a spin-off has a good corporate business purposes.  However, the ability to get a ruling on all material aspects of a transaction that are not specifically no-rule issues has significant value, particularly in transactions where substantial internal restructuring pre-spin is required or there are complicated ancillary tax issues to consider.

[2] For thoughts on the latest tax reform framework proposal, see

[3] This post focuses on spin-off transactions where both resulting companies are corporations for U.S. tax purposes – this is the transaction type most commonly pursued by U.S. public companies and thus the most common structure for transactions considered in the Journal article. However, where the goal is value creation for a company and where two separate corporations is not the essential result, a spin-off would be one of a variety of transaction structures that might be considered, with a wide variety of tax and non-tax considerations taken into account.

Some Quick Thoughts on the “Big Six” Unified Framework

Yesterday, the Trump Administration, the House Committee on Ways and Means, and the Senate Finance Committee proposed a “unified framework” for tax reform. The members of the working group are House Speaker Paul Ryan (R-WI), Senate Finance Chairman Orrin Hatch (R-UT), Senate Majority Leader Mitch McConnell (R-TN), House Ways and Means Chairman Kevin Brady (R-TX), Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn.  These individuals are known as the “Big Six”.

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SEC Adopts Additional Guidance on CEO Pay Ratio Rule

On September 21, 2017, the Securities and Exchange Commission (the “SEC”) adopted interpretive guidance regarding Item 402(u) of Regulation S-K, which governs pay ratio disclosure. The interpretive guidance is intended to provide assistance to companies choosing to use statistical sampling in determining their median employee. In the interpretive guidance, the SEC indicated that it would not pursue enforcement actions against companies that use reasonable estimates, assumptions or methodologies, unless the related disclosures were made without a reasonable basis or provided other than in good faith. The interpretive guidance also clarifies how companies can use internal records to identify the median employee. In addition, the SEC’s staff also released guidance in using statistical sampling and other reasonable methodologies. Finally, the SEC staff revised its Compliance and Disclosure Interpretations to conform prior guidance to the aforementioned interpretive guidance and to permit companies to refer to its pay ratio as a reasonable estimate.

Please visit our initial post on this topic.

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Please feel free to contact any member of the Proskauer Employee Benefits & Executive Compensation Group or the Capital Markets Group with any questions about this post.

IRS Resumes Issuing Transactional Spin-Off Rulings

On September 21, 2017, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 2017-52[1] (the “Rev. Proc.”), introducing an 18-month “pilot program” in respect of corporate “spin-off,” “split-up” and “split-off” transactions (“Spin-off Transactions[2]). Under this pilot program, the IRS will again issue private letter rulings on the general federal income tax consequences of Spin-off Transactions intended to qualify as tax-free under Section 355 (a “Transactional Ruling”).[3] Continue Reading

UK Tax Round Up: September 2017

Welcome to the September 2017 edition of the Proskauer UK Tax Round Up. Since our last edition, the Finance (No 2) Bill has been published and started its passage through the House of Commons, draft legislation for inclusion in next year’s Finance Bill has been published and the date for the first Autumn budget has been announced as 22 November. Please view this month’s issue of the UK Tax Round Up.

Looking Ahead to the 2018 Proxy Season: Preparing for CEO Pay Ratio Rules Disclosure Requirements

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in July 2010, Congress directed the Securities and Exchange Commission (SEC) to adopt pay ratio disclosure requiring public companies to disclose the ratio between the annual total compensation of the median employee and the company’s principal executive officer (PEO), generally the company’s chief executive officer (CEO). The Pay Ratio rules required the SEC to amend Item 402 of Regulations S-K, related to company compensation disclosures. Item 402(u) requires companies to disclose:

  1. the median of the annual total compensation of all employees of the company (excluding the company’s PEO);
  2. the annual total compensation of the company’s PEO; and
  3. the ratio of the two amounts.

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