Reorganizations and Tax Attribute Survival

By Ryan M. Svoboda, MS, CPA, CVA, DZH Phillips LLP, San Francisco, CA

Editor: Michael D. Koppel, CPA, MSA, MBA, PFS, CITP

Corporations & Shareholders

Whether tax attributes will survive corporate tax reorganizations often becomes a critical consideration in assessing the ramifications of a proposed transaction. The many beneficial attributes that often exist and the speed at which reorganizations tend to move make a good foundational understanding of the relevant rules crucial for practitioners assisting taxpayers with reorganizations.

Issues surrounding corporate reorganizations begin with Sec. 368, with its seven types of reorganization (A–G). A full discussion of each is beyond the scope of this item, but it is important to note that type D sometimes appears as a divisive reorganization while at other times it is nondivisive.

Two other equally important factors are Secs. 381 and 361. Sec. 381 establishes the tax attribute carryover rules for two types of tax-free transactions: liquidations of controlled subsidiaries under Sec. 332 and various acquisitive and nondivisive reorganizations. This item ignores the former and explores the latter, so any further reference to the application of Sec. 381 is limited to its application to reorganizations.

Under Sec. 381(a), the tax attribute carryover rules apply to any transaction to which Sec. 361 applies. Sec. 361(a) states that no gain or loss to a corporation will be recognized if that corporation is a party to a reorganization and exchanges property solely for stock of another corporation involved in the reorganization. Sec. 381(a)(2) describes five of the seven types of reorganization as potentially eligible to use the attribute carryover rules. However, divisive type D reorganizations and G reorganizations that are not acquisitive and nondivisive reorganizations are not eligible to use the carryover rules.

Sec. 381(a) states that the attributes specifically enumerated in Sec. 381(c) will survive the eligible reorganizations discussed. Sec. 381(c) lists most of the traditional attributes considered, such as net operating losses and credits. But what about those attributes not listed? For example, like-kind exchanges under Sec. 1031 are noticeably absent from the list. Consider a situation in which a piece of property in California is exchanged for property in Nevada, and the taxpayer wants to use a type F reorganization to change from a California corporation to a Nevada corporation to escape California’s minimum tax. A strict interpretation of Sec. 381(a) would lead to the conclusion that any attribute not listed in Sec. 381(c) would be lost, so in this example a type F reorganization after the corporation transfers the California property but before it receives the Nevada property could cause the exchange not to qualify for Sec. 1031 nonrecognition treatment.

Regs. Sec. 1.381(a)-1(b)(3)(i) states that “[i]n a case where section 381 does not apply to a transaction, item, or tax attribute by reason of [the preceding sentence], no inference is to be drawn from the provision of section 381 as to whether an item or tax attribute shall be taken into account by the successor corporation.” In other words, just because Sec. 381(c) does not list an attribute (such as a Sec. 1031 exchange) as a transferable tax attribute does not mean it is not transferred.

Further supporting this interpretation, the IRS has ruled in Letter Rulings 9252001 and 200151017 that the nonrecognition treatment for a like-kind exchange may be carried over to a successor corporation. Under Letter Ruling 9252001, like-kind treatment survived both a type A reorganization and a divisive type D reorganization. In Letter Ruling 200151017, a Sec. 1031 exchange survived a type A reorganization. In both rulings, the IRS went through the same analysis outlined above and cited the application of Sec. 381 to reorganization transactions to which Sec. 361 applies. It then cited Regs. Sec. 1.381(a)-1(b)(3)(i) to conclude that attribute carryovers were not intended to apply only to those specifically listed in Sec. 381(c).

While both these letter rulings discuss the addition of Sec. 1031 as an attribute that will survive an eligible reorganization, the law and analysis certainly support the idea that other nonlisted attributes will likely survive as well. Thus, except in the case of nondivisive type D reorganizations and certain type G reorganizations, attributes not listed in Sec. 381(c) should survive a reorganization.


Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.

For additional information about these items, contact Mr. Koppel at (781) 407-0300 or

Unless otherwise noted, contributors are members of or associated with CPAmerica International.

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