Treasury Withdrew the Rule That Could Have Taxed Spin-Offs

The Treasury just withdrew the rule that would have decided, by arithmetic, whether a company could spin off a business without paying tax. Nothing changes for any deal today, because the rule was never final. What changes is that a threat hanging over every cash-rich corporate breakup for ten years got smaller, on the same week Abbott announced a spin-off of its own. I think the retreat is right, I think it is smaller than it looks, and I think the real fix still belongs to Congress.

Key Highlights

• The withdrawal: On October 21, 2026 the IRS and Treasury withdrew three pieces of a July 2016 proposal on tax-free spin-offs: a "per se" test for when a distribution is a device to pull out earnings, and two anti-abuse rules.¹
• The reason: The agencies said stakeholders were generally critical of those rules, and that the withdrawal does not affect other rules or court doctrines such as substance over form and step transaction.¹
• What is left: Three other 2016 proposals remain outstanding, including a 20% nonbusiness-asset threshold, a narrower business-purpose factor and a 5% minimum active-business requirement.²
• The backdrop: 2026 has had the strongest start to carve-out and spin-off activity in five years, with $234.3 billion of announced transactions across 1,025 deals through April, up 18% from 2025.³
• The idea: Abbott Laboratories (ABT) traded at $98.25 on Wednesday morning, down 4.1%, after announcing a tax-free spin-off of its $8.5 billion Nutrition business by the end of 2027.⁴

Here is the sentence that explains why this matters. If a distributing or controlled company held too many "nonbusiness assets," the 2016 proposal would have treated the spin-off as a device "notwithstanding the presence of any other nondevice factors (such as a corporate business purpose)".¹ A formula would have overruled a business reason. Treasury has now said it will not do that, at least not in that form.

The surface story

Start with what a spin-off is. A company distributes shares of a subsidiary to its own shareholders. If the transaction meets the requirements of section 355 of the tax code, nobody pays tax on the distribution: not the parent, and not the shareholders.¹ Without that treatment, a spin-off would be a taxable sale of the business at fair market value, with a bill large enough to kill most deals.

Two of the many requirements matter here. The transaction must not be used principally as a device to distribute earnings and profits. And both the parent and the new company must be engaged in an active trade or business right after the distribution.¹ Today the device question is answered by weighing facts and circumstances, with a corporate business purpose counting as evidence against a device. The stronger the evidence of device, the stronger the business purpose has to be.²

In July 2016 the agencies proposed to replace some of that judgment with mechanics. Under the "per se" rule, if either company's Nonbusiness Asset Percentage exceeded set levels, both individually and relative to the other company, the spin-off would be a device regardless of business purpose, with limited exceptions. Two anti-abuse rules would have ignored transactions undertaken with a principal purpose of moving those percentages, such as a change in the form of ownership of an asset or an issuance or repayment of debt.¹

Those three pieces are now gone. The remainder of the 2016 proposal is still pending, and the agencies say they "continue to study the issues".¹

The mechanism

Notice the sentence I keep repeating: the rule was never final. Proposed regulations apply only to transactions after final regulations are published, subject to transition rules.² So no company that has spun off anything since 2016 was bound by the per se test.

The cost was uncertainty. A proposal that sits for ten years tells every board how the agency thinks, and the safe reading is that it might return. A company with a large pile of cash or investments next to a small operating business had to plan for a future rule that could have made the spin-off taxable regardless of how good the reason was. A company in that position could have chosen to delay, to restructure or to skip the deal.

The withdrawal removes that specific risk. As Gibson Dunn puts it, a distribution involving significant assets not used in an active business will "continue to be tested under the facts-and-circumstances rules of the existing regulations".² That is the same test that has governed spin-offs for decades.

This is the second retreat in about a year. On September 29, 2025 the agencies withdrew two sets of proposed regulations released in January 2025, one on technical section 355 rules and one that would have required multiyear tax reporting for corporate separations. Treasury said the comments were generally critical.⁵ The same day it issued Rev. Proc. 2025-30, which reinstated the earlier private letter ruling procedures for spin-offs.⁶

Winners and losers

Cash-rich conglomerates win first. The per se rule bit hardest on a parent or spun-off company with a large share of its assets in investments, cash or other things that are not an operating business.

Boards planning separations win a little. The market is busy. Honeywell completed the spin-off of Honeywell Aerospace on June 29, 2026.⁷ Comcast announced a tax-free spin-off of NBCUniversal and Sky on June 29, 2026, targeted for roughly a year out.⁸ Flex is targeting a first-quarter 2027 close for its cloud and power spin-off.⁹ National Fuel Gas announced on October 14 that it will spin off its upstream and gathering business in the second half of 2027.¹⁰ And on October 21 Abbott announced its Nutrition separation.¹¹

The Treasury loses a tool, not revenue. The per se test was aimed at transactions that look like a way to extract cash from a corporation at capital gains rates. The agencies still have the existing device factors, the substance-over-form doctrine and the step-transaction doctrine, which the notice explicitly preserves.¹

Tax advisers lose some certainty and some work. Gibson Dunn calls the withdrawal welcome but "less helpful than it might have been," because the agencies left in place a different proposed rule that would undercut even a strong business purpose for separating nonbusiness assets from business assets.²

The numbers that matter

The activity data is the part I would not ignore. Globally, 2026 has seen the strongest start to announced carve-outs and spin-offs in five years: $234.3 billion across 1,025 deals through April, up 18% from the same stretch of 2025.³ That count includes carve-outs and sales, not only tax-free spin-offs, so read it as a measure of appetite for breakups and not as a count of section 355 deals.

What I cannot give you is the dollar value of the withdrawn rule. No source I found estimates how many transactions it would have blocked, and I will not guess. The honest statement is that it removes a risk without quantifying it.

There is also a practical limit. The three remaining 2016 proposals still apply to future transactions if finalized, so a company with a high nonbusiness-asset share or a small active business still has something to watch. Nothing in this notice changes the law today.²

The free-market read

I like the direction and I want to be careful about how much credit to give. A spin-off is a corporate reorganization. The shareholders own the same assets before and after. Taxing the distribution at full value would be a tax on changing your mind about how to organize a company, and the section 355 conditions exist to separate real separations from disguised cash-outs.

The per se test tried to catch the disguised cash-outs with a bright line. Bright lines are tempting because they are predictable, but this one overruled the very thing that should matter most, which is whether there is a real business reason. A rule that says no business purpose can save you is a rule that has stopped asking the question. I would rather have a facts-and-circumstances test that is clear on its factors than a formula that is clear and wrong.

Now the part where I temper my own view. This is an agency retreating from a proposal, not Congress repealing a limit. The authority to write device rules stays, and the pieces that remain could come back in a final rule. For related reading on how agencies handle authority they were never given, see The SEC Just Proposed Ending the Shareholder Proposal Rule and The Treasury Just Killed Its Two Biggest Crypto Surveillance Rules. The cleaner fix would be a statute that says what a device is. That is a job for Congress, and Congress has had decades to do it.

Pro-market also means honest about incentives. A company that spins off a business to create value is betting that the market will price the pieces better than the whole. Sometimes that works and sometimes it moves risk from the parent to a standalone company that lacks the parent's balance sheet. The tax rule should not push boards in either direction.

The bear case

The bear case has four parts.

First, the abuse concern is real. Spin-offs have been used to move cash and low-basis assets out of a corporation in ways that look like a distribution of earnings. A per se test is a blunt instrument, but it would have stopped some of that. With it gone, Treasury relies on a case-by-case analysis that is harder to enforce.

Second, the withdrawal is partial. The nonbusiness-asset evidence factor, the narrowed business-purpose factor and the 5% minimum active-business rule all remain outstanding.² A future administration could finalize them.

Third, the effect on actual deals is hard to see. Large operating-company spin-offs, which are most of the headlines, did not have a nonbusiness-asset problem in the first place. The withdrawal matters at the margin for companies with big investment or cash holdings.

Fourth, spin-offs do not always create value. The Abbott announcement shows the other side: the stock fell 4.1% on the day it announced a separation, a day that also brought a lower sales-growth outlook.⁴

The Idea

Abbott Laboratories (ABT). Let me be direct about the link. Abbott is a live example of the process, not a beneficiary of this withdrawal. Its Nutrition business is an operating business, so the per se test would not have applied to it. The reason to look at Abbott is that the market sold it on the day it announced a tax-free separation, and I think that reaction deserves a closer look.

ABT traded at $98.25 Wednesday morning, down 4.1%, with a market value of $170.0 billion. The 52-week range is $81.97 to $132.03, so the shares sit 25.6% below the high and 19.9% above the low by my arithmetic.⁴ Abbott guided 2026 adjusted earnings to $5.50 to $5.55 a share, so the price is about 17.8 times the midpoint by my arithmetic.¹² The quarterly dividend is $0.63 a share.¹³

The third-quarter report was mixed. Sales were $13.01 billion, up 14.5% reported and 7.0% on a comparable basis, and adjusted earnings of $1.42 a share matched estimates. GAAP earnings fell to $0.53 from $0.94.¹³ Abbott cut its comparable sales growth outlook to about 6% from 6.5% to 7.5%, and medical-device sales came in below analyst estimates, while it tightened its earnings range.¹⁴

The case for the spin-off rests on the segment data. Over the first nine months of 2026, Nutrition was the only one of Abbott's four businesses with lower comparable sales, down 2.1% against gains of 3.8% to 8.7% elsewhere, and it earned an 18.4% segment margin in 2025 against 33.7% for medical devices.¹⁵ Nutrition did grow 4.9% in the third quarter.¹¹

Why Abbott and not another separating company. It is the largest, it is liquid, and the stock reaction created a lower entry price than a week ago. It also pays a dividend.

Risks and what proves it wrong. Total debt was $32.6 billion against $5.1 billion of cash at June 30, up from $15.1 billion of debt at the end of 2025, after the Exact Sciences purchase.¹⁷ Higher interest costs and nutrition litigation are open concerns.¹⁸ The thesis is wrong if the heart-device slowdown spreads to the rest of the portfolio, if the nutrition business cannot stand alone, or if the separation takes more of the company's value than it frees. The separation also will not finish for over a year, and Abbott said the transaction will affect its 2026 and 2027 outlook.¹⁴ This is a valuation idea with a corporate-event kicker. It is not advice, and I have no price target.

What to watch next

Three things will tell you whether this matters.

First, whether Treasury finalizes or abandons the three remaining 2016 proposals. A final rule on nonbusiness assets would bring the problem back, and a withdrawal would settle it. The agencies say they are still studying the issue.

Second, the next large separations that hold cash or investments. Watch for companies that disclose a tax opinion or a private letter ruling as a closing condition. The reinstated ruling procedures from September 2025 are the path most boards will use.⁶

Third, Abbott's Form 10 and its first disclosure of how the Nutrition company would be capitalized. That filing will say more about the deal than any tax notice.

The Treasury spent ten years holding a threat over breakups it did not need to hold. Taking part of it back is the right move. Finishing the job, in a statute, is not.

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