Proposed Rules Would Amend Definition of Acquiring Corporation in Corporate Reorganizations

On Tuesday, the IRS issued proposed regulations under Sec. 381 that in certain acquisitions would change which corporation succeeds to the tax attributes, including the earnings and profits (E&P), of the transferor or distributor corporation (REG-131239-13).

In earlier, related proposed regulations under Sec. 312, the IRS clarified that, in certain corporate reorganizations, the “acquiring corporation” succeeds to the full E&P account of the transferor corporation (REG-141268-11; see prior coverage here). The existing Sec. 381 regulations define 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 acquires all the assets the transferor corporation transferred or the corporation that directly acquires the assets the transferor corporation transferred if no single corporation ultimately acquires all the assets transferred in the transaction.

According to the preamble to the proposed regulations, under the proposed rules, 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 current regulations yield an identical result, except when a single controlled subsidiary of the direct transferee corporation acquires all the assets the transferor corporation transferred under a 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 a transferor corporation’s attributes by causing the direct transferee corporation either to retain or not to retain a single asset. The IRS thinks it is appropriate to eliminate this electivity.

The new definition of “acquiring corporation” will apply to transactions occurring on or after the date the rules are published as final in the Federal Register. The IRS plans to finalize the related rules under Sec. 312 and these rules at the same time.