The IRS has issued proposed regulations (REG-141268-11) under
Treas. Reg. Sec. 1.312-11 related to the allocation of a
corporation's earnings and profits (E&P) upon a transfer
under section 381(a).
Section 381(a) generally provides that an acquiring corporation
in a transfer succeeds to certain tax attributes of the target
corporation when there is an acquisition of the target
corporation's assets (target assets) by another
in a distribution to which Section 332 applies (relating to
liquidations of subsidiaries),
in a transfer to which Section 361 (relating to nonrecognition
of gain or loss to a corporation) applies in connection with a
reorganization defined in sections 368(a)(1)(A), (C), (D), (F) or
(G) (a Section 381 reorganization).
The acquiring corporation is defined in Treas. Reg. Sec.
1.381(a)-1(b)(2) as (1) the corporation that acquires the assets of
its subsidiary corporation in a complete liquidation under Section
332, and (2) the corporation that, pursuant to the plan of
reorganization, ultimately acquires, directly or indirectly, all of
the assets transferred by the transferor corporation in a Section
Furthermore, if in a Section 381 reorganization, no one
corporation ultimately acquires all of the target assets, the
corporation that directly acquires the assets is the acquiring
corporation even though that corporation ultimately retains none of
the target assets. Whether a corporation acquired all of the target
assets is a question of facts and circumstances. To illustrate,
Treas. Reg. Sec. 1.381(a)-1(b)(2)(ii), example 4, provides the
Corporation acquired all the assets
of Z Corporation solely in exchange for voting stock of X
Corporation in a transaction qualifying under Section 368(a)(1)(C).
Thereafter, pursuant to the plan of reorganization, X Corporation
transferred one-half of the assets so acquired to Y Corporation,
its wholly-owned subsidiary, and the other half of such assets to M
Corporation, another wholly-owned subsidiary of X Corporation. X
Corporation is the acquiring corporation for purposes of Section
Under new Prop. Treas. Reg. Sec. 1.312-11, upon a transfer
described in Section 381(a), the acquiring corporation and only the
acquiring corporation succeeds to the E&P of the target
corporation. Proposed Treas. Reg. Sec. 1.312-11(a) would also
provide that, except as provided in Treas. Reg. Sec. 1.312-10, in
any other case in which property is transferred from one
corporation to another and no gain or loss is recognized (or is
recognized only to the extent of the property received other than
that permitted to be received without the recognition of gain), no
allocation of the transferor's E&P is made to a
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The Internal Revenue Service has recently published an IRS Large Business & International Directive, which updates an earlier directive to field agents addressing the examination of capitalization and repair costs issues.