The IRS issued proposed regulations (REG-131239-13) under Section 381 that would modify the definition of "acquiring corporation" for purposes of determining the location of earnings and profits and other tax attributes in certain nonrecognition transactions.
In general, Section 381 provides that in certain corporate nonrecognition transactions, the "acquiring corporation" succeeds to the transferor corporation's tax attributes, including earnings and profits. Under the current, final regulations (originally promulgated in 1960), an "acquiring corporation" is defined as (i) the corporation that directly receives the assets of the transferor corporation (the direct acquirer), or (ii) a subsidiary of the direct acquirer if the subsidiary receives all the assets of the transferor corporation (emphasis added). As a result, under the final regulations, the direct acquirer can often choose the location of a transferor corporation's tax attributes by either (i) distributing all the acquired assets to one of its subsidiaries so that the subsidiary succeeds to the transferor corporation's tax attributes or (ii) leaving one or more transferred assets at the direct acquirer (i.e., the original transferee) so that the direct acquirer succeeds to the transferor corporation's tax attributes.
The proposed regulations change the definition of "acquired corporation" to include only the direct acquirer. As a result of this proposed change, the direct acquirer would succeed to the transferor corporation's tax attributes even if the direct acquirer transferred all the assets acquired from the transferor corporation to the direct acquirer's subsidiary.
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