IRS Issues Final Regulations on Allocation of Earnings and Profits

Regulations

Final regulations under Sec. 381 will change which corporation succeeds to the tax attributes, including the earnings and profits (E&P), of the transferor or distributor corporation in certain acquisitions. T.D. 9700 also finalizes other related proposed regulations under Sec. 312 clarifying that, in certain corporate reorganizations, the “acquiring corporation” succeeds to the full E&P account of the transferor corporation.

The prior Sec. 381 regulations defined the acquiring corporation for purposes of transactions described in Sec. 381(a)(2) (relating to certain Sec. 368 reorganizations) as either the corporation that ultimately acquired all the assets the transferor corporation transferred or the corporation that directly acquired the assets the transferor corporation transferred if no single corporation ultimately acquired all the assets transferred in the transaction. Under the new final regulations, in a transaction described in Sec. 381(a)(2), the acquiring corporation will be the corporation that directly acquires the assets the transferor corporation transferred, even if the transferee corporation ultimately retains none of the transferred assets.

The prior regulations yielded an identical result as the new regulations, except when a single controlled subsidiary of the direct transferee corporation acquired all the assets the transferor corporation transferred under a plan of reorganization. In that case, the prior regulations treated the subsidiary as the acquiring corporation, a result that effectively permitted a taxpayer 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. The IRS wanted to eliminate this electivity.

The proposed Sec. 312 regulations (REG-141268-11) were adopted with only a clarifying, nonsubstantive change. The Sec. 312 proposed regulations provided that

[e]xcept as provided in §1.312-10, in all other cases in which property is transferred from one corporation to another and no gain or loss is recognized (or is recognized only to the extent of the property received other than that permitted to be received without the recognition of gain), no allocation of the earnings and profits of the transferor is made to the transferee.

The final regulations remove the language “and no gain or loss is recognized (or is recognized only to the extent of the property received other than that permitted to be received without the recognition of gain),” because this language, the IRS says, inappropriately implies that allocation of E&P may be permitted in cases in which gain not expressly described is recognized on the transfer of property between corporations (e.g., gain required to be recognized under Sec. 367 or 1001). Thus, except as provided in Regs. Sec. 1.312-10, in all other cases in which property is transferred from one corporation to another, no allocation of E&P is made.

The final regulations apply to transactions occurring on or after Nov. 10, 2014.