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Proposed regs issued on carryover of tax attribute in corporate acquisitions

In Prop Reg § 1.381(a)-1, IRS has issued proposed regs that would modify the definition of an acquiring corporation for purposes of Code Sec. 381 for certain asset acquisitions. The proposed regs, which would complement proposed Code Sec. 312 regs dealing with earnings and profits (E&P), would provide that the direct acquiring corporation would succeed to the E&P and other tax attributes governed by Code Sec. 381. It’s anticipated that the proposed Code Sec. 381 regs and the proposed Code Sec. 312 regs would be concurrently published as final regs after the comment period for the proposed Code Sec. 381 regs has closed on Aug. 6, 2014.

Background. Code Sec. 381(a) generally provides that in certain acquisitions of the assets of a distributor or transferor corporation by another corporation, the acquiring corporation succeeds to the tax attributes, including the E&P, of the distributor or transferor corporation. For this purpose, current Reg. § 1.381(a)-1(b)(2) defines the acquiring corporation with regard to transactions described in Code Sec. 381(a)(2) (relating to certain reorganizations under Code Sec. 368) as either the corporation that ultimately acquires all of the assets transferred by the transferor corporation, or the corporation that directly acquires the assets transferred by the transferor corporation if no single corporation ultimately acquires all of the assets so transferred.

Reg. § 1.381(a)-1(b)(3)(ii) provides that if the corporation that directly acquires the assets transferred by the transferor corporation is the acquiring corporation, and it transfers any acquired assets to one or more controlled subsidiaries, then the carryover of items described in Code Sec. 381(c) to any controlled subsidiary isn’t governed by Code Sec. 381.

Proposed regs under Code Sec. 312 that were issued in April of 2012 provide that in a transfer described in Code Sec. 381(a), the acquiring corporation (as defined in Reg. § 1.381(a)-1(b)(2)) would succeed to the E&P of the distributor or transferor corporation. After receiving comments on these proposed regs, IRS has concluded that a change in the Code Sec. 381 regs – which are cross-referenced by the proposed Code Sec. 312 regs – is needed.

Proposed regs. The proposed Code Sec. 318 regs would provide that, in a transaction described in Code Sec. 381(a)(2), the acquiring corporation is the corporation that directly acquires the assets transferred by the transferor corporation, even if the transferee corporation ultimately retains none of the assets so transferred. (Prop Reg § 1.381(a)-1(b)(2)(i))

IRS notes that the proposed regs yield the same result as the current Code Sec. 381 regs, except when a single controlled subsidiary of the direct transferee corporation acquires all of the assets transferred by the transferor corporation pursuant to a plan of reorganization. In that case, the current regs treat the subsidiary as the acquiring corporation – a result that effectively allows a taxpaayer to choose the location of a transferor corporation’s attributes by causing the direct transferee corporation either to retain or not to retain a single asset. IRS believes that the proposed rule produces more appropriate results by eliminating this electivity.

The proposed rule would also eliminate the administrative burden under the current regs associated with determining whether a particular corporation in fact has acquired all of the assets transferred by the transferor corporation pursuant to a plan of reorganization. And, it would eliminates the disparate effect of the presence or absence of a plan of reorganization and produce results consistent with those obtained if a corporation that has not engaged in a reorganization transfers assets to a controlled subsidiary in a nonrecognition transaction. In addition, IRS believes the proposed rule is appropriate for determining the location of the E&P of a transferor corporation because it generally maintains such E&P at the corporation closest to the transferor corporation’s former shareholders, except in the case of triangular reorganizations.

The proposed Code Sec. 381 regs would also remove current Reg. § 1.381(a)-1(b)(3)(ii), relating to a transfer by the acquiring corporation of the acquired assets to a controlled subsidiary, as unnecessary in light of the proposed Code Sec. 381 regs.

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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