United States

Clarification on party receiving tax attributes and E&P in asset deals


The IRS recently proposed regulations under section 381, seeking to eliminate uncertainty and electivity surrounding which corporation succeeds to the tax attributes and earnings and profits (E&P) of the transferring business in certain asset reorganizations. The proposed regulations (REG-131239-13) provide that the corporation that directly acquires the assets in a section 381(a)(2) reorganization will retain the tax attributes and E&P of the transferring business, regardless of any subsequent transfer of those assets to a subsidiary. 

The current section 381 regulations provide a similar result as the proposed rules except in transactions where a single controlled subsidiary of the direct transferee corporation acquires all of the assets pursuant to the plan of reorganization. In that case, the current regulations treat the subsidiary as the acquiring corporation, a result that effectively permits a taxpayer to choose the location of the transferring business’ tax attributes and E&P by causing the acquiring corporation to either retain or not retain at least a single asset. 

This proposed change eliminates the possibility that a transfer of all assets acquired in an asset reorganization to a controlled subsidiary could lead to the controlled subsidiary being treated as the acquiring corporation and, therefore, as the successor to the transferring business’ tax attributes and E&P. 

The proposed regulations were initiated in response to comments the IRS received on the 2012 proposed regulations under section 312. Current Reg. section 1.312-11(a) provides that a proper adjustment and allocation of the E&P of the transferor shall be made between the transferor and the transferee with respect to (1) section 351 contributions, (2) section 368 reorganizations, (3) section 332 liquidations, and (4) intercompany transfers during a period of affiliation. The language of this regulation has generated uncertainty as to whether an allocation of E&P is appropriate where less than all of the assets are transferred to a single subsidiary. As a result, tax practitioners have argued for an allocation of E&P in asset reorganizations when there are multiple transferees or less than all of the assets are transferred to a single subsidiary.

The proposed regulations under section 312 were intended to clarify inconsistency with respect to the allocation of E&P in nonrecognition transfers of property. Prop. Reg. section 1.312-11(a) (2012) provides that in a reorganization described in section 381(a), the acquiring corporation (as defined in section 381), and only that corporation, succeeds to the E&P of the distributor. However, due to the way “acquiring corporation” is defined in the section 381 regulations, this proposal still left the door open for the corporation directly acquiring the assets to either (1) transfer all of the assets to a direct subsidiary, with the E&P following, or (2) transfer all but a single asset to the direct subsidiary and retain the E&P. As a result, the IRS issued Prop. Reg. section 1.381(a)-1(b)(2), which eliminates this option and makes clear that the E&P and tax attributes will remain with the direct acquirer, regardless of subsequent transfers.

The IRS believes the proposed change to the section 381 regulations will yield more appropriate results while preserving simplicity for the taxpayer. Taxpayers should consult their tax advisors if these proposed regulations may have an impact on any present or future dealings.

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