Read the proposed regulations [PDF 207 KB]
Section 381 provides that the acquiring corporation (“Acquiring Corporation”) in a section 368 reorganization will inherit the tax attributes of the target (“Target”) described in section 381(c). Current regulations under section 381 provide that the Acquiring Corporation for this purpose either will be the corporation that directly acquires the Target assets or another corporation if that other corporation receives all of the assets of the Target pursuant to the plan of reorganization.
Under this rule, for example, if Target merges into corporation X in a transaction constituting a section 368(a)(1)(A) reorganization and X transfers less than all of the Target assets to a wholly owned subsidiary (“Sub”) as a part of the plan of reorganization pursuant to section 368(a)(2)(C), X will be the Acquiring Corporation and inherit all of Target’s attributes described in section 381(c). On the other hand, if X transfers all of Target’s assets to Sub as part of the plan of reorganization pursuant to section 368(a)(2)(C), Sub will be the Acquiring Corporation and inherit all of Target’s tax attributes described in section 381(c). Due to some ambiguities in the regulations under section 312, it was unclear how this rule applied to earnings and profits (“E&P”).
In April 2012, the IRS and Treasury proposed regulations under section 312 clarifying that the all-or-nothing rule of section 381 also applied to E&P.
Read an initial report on the April 2012 proposed regulations in TaxNewsFlash-United States.
Today’s proposed regulations
Today’s release notes that the government received a number of comments regarding the April 2012 proposed regulations. Some commentators expressed concerns that the all-or-nothing approach of the April 2012 proposed regulations would inappropriately allow taxpayers to elect the location of the Target’s E&P based on whether X retained a single asset or transferred all of its assets to Sub.
Commentators also recommended an approach under which the Target’s E&P would move to the corporation that owned “substantially all” of the Target’s assets as a result of the plan of reorganization. Other commentators recommended an approach under which the first corporation to receive the assets would retain Target’s E&P regardless of whether it retained any of Target’s assets.
The government expressed concerns about electivity of E&P location and administrative issues in determining whether one corporation received all or substantially all of the Target’s assets in connection with a reorganization.
Today’s proposed regulations would amend section 381 to provide that the first corporation to receive Target’s assets in the reorganization would retain all of Target’s attributes described in section 381(c), including E&P, regardless of whether it transferred some, all, or none of Target assets pursuant to the reorganization.
This proposal represents a significant change in policy. First, it applies not only to E&P but to all section 381(c) attributes, extending beyond the scope of the April 2012 proposed regulations. Second, it represents a departure from the historical (but imperfectly implemented) approach of the regulations that attributes generally should follow assets. As a practical matter, it will affect the planning of reorganization transactions in which the location of attributes will be an issue.
The IRS and Treasury anticipate that the proposed section 312 regulations (that merely cross reference the section 381 regulations) and proposed section 381 regulations will be concurrently published as final regulations after the comment period for today’s regulations has closed (which will be 90 days after May 7, 2014, when these proposed regulations will appear in the Federal Register) and after the IRS and Treasury have had time to consider the comments received.