Internal Revenue Bulletin No. 2025–42

Executive Summary: Tips, Spinoffs, and Preparer Fees

This Internal Revenue Bulletin (IRB) addresses a diverse range of issues impacting tax practitioners and corporations alike. Key highlights include guidance on the newly enacted "qualified tips" deduction stemming from the One Big Beautiful Bill Act (OBBBA), a court-mandated reduction in Preparer Tax Identification Number (PTIN) fees, revised procedures for Section 355 corporate spinoff rulings, and the withdrawal of proposed regulations concerning corporate separation reporting.

The newly enacted One Big Beautiful Bill Act (OBBBA), officially Public Law 119-21, serves as the legislative backdrop for a significant portion of this bulletin. In particular, the OBBBA introduced Section 224 to the Internal Revenue Code, establishing a deduction for "qualified tips." The IRS is now providing guidance defining which occupations are eligible and what constitutes "qualified tips" under the new law.

Further, this bulletin reflects ongoing adjustments within the IRS in response to external pressures. The reduction in PTIN fees stems directly from litigation (specifically, Steele v. United States) challenging the IRS's authority to charge preparers for PTINs. The revised procedures for Section 355, which governs tax-free corporate separations, indicate a fluctuating landscape of agency rule-making on the issue, as do the withdrawn reporting rules.

Deep Dive: IRS Slashes PTIN Fees to $10 Amid Legal Pressure

The IRS has announced a reduction in the Preparer Tax Identification Number (PTIN) user fee, as detailed in T.D. 10035 and REG-108673-25. Effective September 30, 2025, the annual fee for applying for or renewing a PTIN has been lowered from $11 to $10, in addition to an $8.75 fee payable directly to a third-party contractor. This adjustment reflects the IRS's ongoing efforts to align the fee with the actual costs of administering the PTIN program and addresses concerns raised in the Steele v. United States litigation.

The Rule: The IRS is updating 26 CFR §300.11, which governs the fee structure for obtaining and renewing PTINs, to reflect the reduced annual user fee of $10. This change directly impacts individuals who prepare or assist in preparing all or substantially all of a tax return or claim for refund for compensation, as Section 6109(a)(4) of the Internal Revenue Code authorizes the Treasury Secretary to prescribe regulations for including a tax return preparer's identifying number on returns.

The Context: This fee reduction is a direct consequence of the legal challenge mounted in Steele v. United States. The plaintiffs successfully argued that the PTIN fees charged by the IRS for fiscal years 2011 through 2017 were excessive, violating the Independent Offices Appropriation Act (IOAA), codified at 31 U.S.C. § 9701. The IOAA allows agencies to charge user fees only to recover the cost of providing a service to identifiable recipients. The District Court, on remand from the D.C. Circuit in Montrois v. United States, scrutinized the IRS's cost methodology. The court concluded the fees improperly included costs associated with activities that provided an independent benefit to the agency and the public, rather than solely benefiting the PTIN holders. Specifically, the court identified several impermissible cost components, including: (1) activities already conceded by the government; (2) most compliance activities; (3) suitability activities; (4) most support activities; and (5) most third-party contractor activities. This legal pressure forced the IRS to re-evaluate its cost model and eliminate expenses not directly related to issuing and maintaining PTINs for preparers. The Steele case has a long history. Final regulations (TD 9503) published in 2010 established a $50 user fee. The user fee has been adjusted several times since, eventually reaching $21 plus a $14.95 contractor fee before Steele.

The Implication: Tax practitioners should be aware of the reduced PTIN fee when applying for or renewing their PTINs. The IRS's revised cost methodology, which adheres to Generally Accepted Accounting Principles (GAAP) and the Federal Accounting Standards Advisory Board (FASAB) standards, includes direct salary costs, overhead, and third-party contractor expenses directly tied to PTIN issuance and maintenance. The IRS calculates overhead by applying an overhead rate to the direct salary and benefits and other direct costs. For the FY 2025 user fee review, an overhead rate of 62.92 percent was used. Staffing costs included in the PTIN user fee calculation relate to the compliance activities of investigating ghost preparers; handling complaints regarding the improper use of a PTIN, use of a compromised PTIN, or use of a PTIN obtained through identity theft; and composing the data to refer those specific types of complaints to other IRS business units. Although the government and plaintiffs have filed appeals related to the Steele decision, the IRS is now charging the reduced fee as a result of the litigation. The total cost for fiscal years 2026 through 2028 is projected to be $28,792,946. Dividing this total cost by the projected population of users for fiscal years 2026 through 2028 results in a cost per application or application for renewal of $10.18 (rounded down to $10). In addition to this $10 fee, a contractor fee of $8.75 is also charged.

Deep Dive: New Guidance for Corporate Spinoff Rulings (Rev. Proc. 2025-30)

Following the IRS's reduction of PTIN fees, Revenue Procedure 2025-30, published in IRB 2025-42, introduces updated procedures for taxpayers seeking private letter rulings (PLRs) concerning corporate spinoffs under Section 355. This revenue procedure supersedes Rev. Proc. 2024-24 and revokes Notice 2024-38, signaling a shift in the IRS's approach to these complex transactions. It also modifies Rev. Proc. 2025-1, which provides general guidance on PLR requests, and Rev. Proc. 2017-52, which specifically addresses Section 355 transactions.

1. The Rule

Rev. Proc. 2025-30 outlines the specific representations, information, and analysis required from taxpayers seeking PLRs regarding divisive reorganizations where a corporation (Distributing) spins off a controlled subsidiary (Controlled) under Section 355, and the transaction also qualifies as a reorganization under Section 368(a)(1)(D), which outlines requirements for reorganizations involving the transfer of assets to a controlled corporation.

The guidance focuses particularly on situations where Controlled assumes debt of Distributing (Distributing Debt) or where Distributing satisfies its own debt with consideration received from Controlled in the reorganization (Section 361 Consideration). Specifically, the procedure applies when seeking a ruling that no gain or loss will be recognized to Distributing upon Controlled's assumption of liability for an obligation of Distributing under Section 357(a), which generally dictates that the assumption of liabilities does not trigger gain recognition in a reorganization, and upon Distributing’s receipt of Section 361 Consideration and its distribution of that consideration to a creditor in satisfaction of Distributing’s debt obligation under Sections 361(b) and (c), which address the non-recognition of gain or loss in a reorganization.

For these purposes, "Distributing Debt" is defined as an obligation for which Distributing is the obligor, evidenced by a debt instrument as defined in Treasury Regulations Section 1.1275-1(d) (a Non-contingent Debt Instrument) payable only in money. Contingent payment debt instruments subject to Treasury Regulations Section 1.1275-4 are excluded.

The revenue procedure emphasizes that taxpayers requesting rulings related to the assumption or satisfaction of Distributing Debt must adhere to specific procedures, including providing detailed information about the debt, the Section 361 Consideration, and the mechanics of the transaction.

2. The Context

This updated guidance arrives amidst ongoing scrutiny of corporate spinoffs, particularly concerning the "device" test under Section 355(a)(1)(B), which aims to prevent the use of spinoffs as a means to distribute corporate earnings at capital gains rates. The issuance of Rev. Proc. 2025-30, along with the simultaneous withdrawal of Notice 2024-38, reflects a refinement of the IRS's approach to ruling requests in this area. Rev. Proc. 2024-24, which is now superseded, had previously removed certain representations related to the device test from the standard checklist for Section 355 PLRs. The IRS had requested feedback on these procedures via Notice 2024-38. The revocation of the notice implies the IRS has internalized the feedback and is now moving forward with a revised approach.

This revenue procedure also reflects the IRS's continued attention to situations where Distributing Debt is assumed or satisfied in a divisive reorganization, as the procedure restates guidance originally provided in Rev. Proc. 2018-53, which amplified Rev. Proc. 2017-52 and described the procedures for requesting rulings on issues relating to the assumption or satisfaction of Distributing Debt in Divisive Reorganizations and the representations, information, and analysis to be submitted in those requests.

3. The Implication

Tax practitioners advising corporations contemplating divisive reorganizations must carefully review Rev. Proc. 2025-30 to ensure compliance with the updated requirements for PLR requests. Key implications include:

• Detailed Representations Required: Taxpayers must provide specific representations, information, and analysis regarding the Distributing Debt, including its terms, the date it was incurred, and the Section 361 Consideration used for satisfaction. They also must provide information to establish that any assumption of Distributing Debt by Controlled will be consideration received by Distributing in the Divisive Reorganization, and that any distribution of Section 361 Consideration by Distributing to its creditors in satisfaction of Distributing Debt will be in connection with the plan of reorganization.

• 'Distributing as Obligor in Substance' Representation: Taxpayers must represent that Distributing is the true obligor of the debt, even if other parties provide guarantees or similar arrangements. Detailed information regarding such arrangements must be submitted.

• 'Holder Not a Related Person' Representation: A key requirement is the representation that no holder of Distributing Debt is related to Distributing or Controlled within the meaning of Section 267(b), which defines related parties to include certain family members, corporations, and partnerships, or Section 707(b)(1), which defines related parties in the context of partnerships. If a holder is a related person, the taxpayer must demonstrate that the Section 361 Consideration received will be used to satisfy an obligation evidenced by a Non-contingent Debt Instrument held by an unrelated person. Potential application of the consolidated return regulations, including Treasury Regulations Section 1.1502-13(g), which addresses the treatment of obligations between members of a consolidated group, must also be addressed.

• 'Distributing Debt as Historic Debt' Representation: Taxpayers must represent that the Distributing Debt was incurred before a request for any relevant ruling is submitted and no later than 60 days before the earliest of (i) the date of the first public announcement of the reorganization, (ii) the date of entering into a binding agreement, or (iii) the date of board approval. If Distributing incurred or will incur any of the Distributing Debt that will be assumed or satisfied at a later time, the taxpayer should establish that, based on all the facts and circumstances, the borrowing and the assumption or satisfaction of such Distributing Debt will result in an allocation of historic Distributing Debt between Distributing and Controlled or an exchange of historic Distributing Debt for Controlled stock.

• 'Historic Average' Representation: A critical representation focuses on the amount of Distributing Debt relative to its historical levels. Taxpayers must represent that the total adjusted issue price (determined under Treasury Regulations Section 1.1275-1(b)) of Distributing Debt does not exceed the historic average of (a) Distributing Debt owed to persons other than Related Persons and (b) obligations that are evidenced by Non-contingent Debt Instruments and are owed by other members of Distributing’s separate affiliated group (within the meaning of Section 355(b)(3)(B)) to persons other than Related Persons. This average is to be calculated based on debt outstanding as of the close of the eight fiscal quarters ending immediately before the board's approval date. Section 355(b)(3)(B) defines a separate affiliated group by reference to Section 1504(a), but substitutes "more than 50 percent" for "at least 80 percent."

• 'No Replacement of Distributing Debt' Representation: Distributing cannot replace any Distributing Debt that will be assumed or satisfied with previously committed borrowing, other than borrowing in the ordinary course of business pursuant to a revolving credit agreement or similar arrangement. The purpose of this representation is to establish that the application of Section 361 to the proposed transactions is consistent with the purposes of Section 361. If Distributing is a prospective borrower under a revolving credit agreement or similar arrangement, the taxpayer should submit information and analysis to establish that the agreement or arrangement was not entered into, and amounts of borrowing provided for therein were not increased, in a transaction related to the Divisive Reorganization.

• Impact on Pending Ruling Requests: For ruling requests pending as of September 29, 2025, taxpayers may consider submitting supplemental information to comply with the new requirements.

By providing this detailed guidance, Rev. Proc. 2025-30 aims to enhance transparency and consistency in the PLR process for Section 355 transactions involving the assumption or satisfaction of Distributing Debt. Practitioners must diligently adhere to these procedures to navigate the complexities of corporate spinoffs and secure favorable rulings from the IRS.

Deep Dive: IRS Withdraws Controversial Spinoff Reporting Rules

Following the issuance of Rev. Proc. 2025-30 and its detailed guidance on providing information for Private Letter Ruling (PLR) requests pending as of September 29, 2025, taxpayers may consider submitting supplemental information to comply with the new requirements.

The IRS has simultaneously withdrawn two notices of proposed rulemaking concerning corporate separations. This action comes after significant criticism from the public regarding the proposed regulations. Specifically, the IRS has withdrawn REG-112261-24 and REG-116085-23.

1. The Rule (What is the IRS updating?).

   The IRS is withdrawing two proposed regulations: REG-112261-24 and REG-116085-23. REG-112261-24 contained proposed technical regulations under Sections 355, 357, 361, and 368 of the Internal Revenue Code relating to corporate separations, incorporations, and reorganizations that qualify, in whole or in part, for nonrecognition of gain or loss. Section 355 allows a corporation to distribute stock and securities in a controlled corporation to its shareholders and security holders tax-free, provided certain requirements are met. Section 357 addresses the assumption of liabilities in certain corporate reorganizations. Section 361 governs the nonrecognition of gain or loss to corporations in reorganizations. Section 368 defines various types of corporate reorganizations. REG-116085-23 contained proposed regulations that would have required multi-year tax reporting for corporate separations and related transactions.

2. The Context (Politics/Industry/History).

   These proposed regulations were initially published on January 16, 2025. REG-116085-23 was reportedly consistent with recommendations from a report by the Treasury Inspector General for Tax Administration advocating for increased scrutiny of corporate mergers and acquisitions. However, the IRS received numerous critical comments concerning both proposed regulations. The "Device" test is a safeguard to ensure that the Section 355 transaction is not being used primarily as a device to bail out earnings and profits (E&P) at favorable capital gains rates or via basis recovery.

3. The Implication (What do practitioners need to know?).

   Tax practitioners should be aware that the IRS has responded to public concerns by withdrawing these proposed regulations. This suggests a potential shift in the IRS's approach to regulating corporate separations, possibly indicating a greater willingness to consider taxpayer concerns and potentially re-evaluate its regulatory strategy in this area. It is essential to monitor future developments and guidance from the IRS regarding corporate separations to ensure compliance and optimize tax planning strategies.

Deep Dive: 'Qualified Tips' Deduction Defined Under New OBBBA Law

The Internal Revenue Bulletin addresses REG-110032-25, which provides guidance on the new deduction for "qualified tips" under Section 224, introduced by the 'One, Big, Beautiful Bill Act' (OBBBA). This is a significant development for workers in traditionally tipped occupations, but comes with specific requirements and limitations.

1. The Rule:

The proposed regulations define "qualified tips" eligible for deduction under Section 224(a). Section 224 was added to the Internal Revenue Code by Section 70201(a) of the OBBBA. Section 224(a) provides for a deduction in an amount equal to the qualified tips received by an individual in a taxable year that are included on statements furnished to the individual pursuant to Section 6041(d)(3) which concerns information returns for direct sales, Section 6041A(e)(3) which concerns returns regarding payments of remuneration for services and direct sales, Section 6050W(f)(2) which concerns information returns for payment card and third party network transactions, or Section 6051(a)(18), which concerns information returns on wages, tips, and other compensation, or are reported by the taxpayer on Form 4137 (or successor).

The proposed regulations define "qualified tips" as cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024. "Cash tips" are defined as tips received from customers paid in a cash medium of exchange (cash, check, credit card, debit card, etc.) or through a mandatory or voluntary tip-sharing arrangement, but exclude items like event tickets or services not exchangeable for cash. Payments must be voluntary, not subject to negotiation, and determined by the payor. This means service charges, automatic gratuities, and mandatory amounts added to a bill are generally not qualified tips unless the customer has the explicit option to modify or disregard them without consequence. The deduction is capped at $25,000 per year, regardless of filing status, per Section 224(b)(1). It is then subject to a modified adjusted gross income (MAGI) phaseout, where the deduction is reduced by $100 for each $1,000 that MAGI exceeds $150,000 (single) or $300,000 (joint), as dictated by Section 224(b)(2).

The proposed regulations also clarify that the deduction is not allowed under Section 224 unless the taxpayer includes their Social Security number (SSN) on their tax return. This is consistent with Section 224(e) of the Code.

Critically, the definition excludes tips received in the course of a "Specified Service Trade or Business" (SSTB), as defined in Section 199A(d)(2). This exclusion significantly narrows the scope of the deduction.

2. The Context:

The OBBBA, enacted in July 2025, represents a significant piece of tax legislation aiming to provide targeted tax relief. The inclusion of Section 224, the qualified tips deduction, reflects a political focus on supporting low-to-moderate income workers in service industries. However, the simultaneous limitation via the SSTB exclusion underscores ongoing debates about who precisely should be targeted for such tax benefits. Section 199A, originally part of the Tax Cuts and Jobs Act (TCJA), allowed a deduction for qualified business income from pass-through entities, with limitations for SSTBs at higher income levels. The OBBBA’s use of the SSTB definition within Section 224 suggests a desire to prevent high-income professionals from disproportionately benefiting from the tip deduction.

This guidance arrives amidst broader policy discussions about income inequality and the tax burden on service workers, particularly those who rely on tips as a substantial portion of their earnings.

3. The Implication:

Tax practitioners must carefully advise clients on the eligibility requirements for the Section 224 deduction, paying close attention to the definition of "qualified tips" and the SSTB exclusion.

• SSTB Scrutiny: The SSTB exclusion is paramount. Section 199A(d)(2) defines an SSTB as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or that involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities. An amount received by an individual in the course of an SSTB (as defined in Section 199A(d)(2) and § 1.199A-5(b)) is not a qualified tip.

  Tips received by owners or employees of SSTBs – such as lawyers, accountants, performing artists, consultants, financial advisors, and the like – are not considered qualified tips. For employees, if the employer's business is an SSTB, the employee's tips are not qualified, even if the employee's individual occupation would otherwise be eligible.

• Eligible Occupations: The proposed regulations include a list of occupations that are eligible for the deduction (provided they are not received in connection with an SSTB). These fall into broad categories:

  • Beverage and Food Service (bartenders, wait staff, cooks, etc.)
  • Entertainment and Events (gambling dealers, dancers, musicians, etc.)
  • Hospitality and Guest Services (bellhops, concierges, hotel desk clerks, maids, etc.)
  • Home Services (maintenance workers, landscapers, plumbers, etc.)
  • Personal Services (personal care aides, pet caretakers, tutors, etc.)
  • Personal Appearance and Wellness (hairdressers, massage therapists, manicurists, etc.)
  • Recreation and Instruction (golf caddies, tour guides, ski instructors, etc.)
  • Transportation and Delivery (taxi/rideshare drivers, shuttle drivers, delivery people, etc.)

  The IRS's methodology for creating this list involved reviewing IRS data (Forms W-2 and 4137), legislative history, survey data, and the DOL's guidance under the Fair Labor Standards Act (FLSA). They considered occupations that "customarily and regularly" received tips (more than occasionally) during a calendar year ending on or before December 31, 2024. The Treasury Department and the IRS also consulted the House Budget Committee report on the OBBBA, H. Rept. 119-106, at 1502 (2025), for additional information regarding occupations that traditionally and customarily received tips on or before December 31, 2024.

• Voluntary Payments: Practitioners must also advise clients to retain records demonstrating that tips were voluntary payments, freely determined by the payor, to withstand IRS scrutiny.

• MAGI Considerations: Because Section 224(b)(2) limits the amount of the deduction based on a taxpayer’s modified adjusted gross income, which is a taxpayer’s adjusted gross income for the taxable year increased by any amount excluded from gross income under Section 911 (concerning citizens or residents of the United States living abroad), Section 931 (concerning income from sources within Guam, American Samoa, or the Northern Mariana Islands), or Section 933 (concerning income from sources within Puerto Rico), practitioners must calculate the effect of the phaseout. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

Ultimately, the new Section 224 deduction offers a potential tax benefit to many service workers. However, the limitations, especially the SSTB exclusion, mean practitioners must conduct careful due diligence to ensure their clients accurately claim the deduction.