Sec

Sec. 381. Carryovers in certain corporate acquisitions

    (a) General rule

      In the case of the acquisition of assets of a corporation by

    another corporation -

        (1) in a distribution to such other corporation to which

      section 332 (relating to liquidations of subsidiaries) applies;

or

Sections 332(a) Ex. 1, 334(b)(1) Ex.1, 337(a) Ex. 1, (c) Ex. 1, 381(a)(1) Ex. 1, (c)(2)(A) Ex. 1

P does not recognize its realized gain of 175 on the liquidation of its 80% o greater owned subsidiary. §332(a). The subsidiary S also recognizes no gain on the distribution to P, an 80-percent distributee. §§337(a),(c). P will take a carryover basis of 200 in the S assets, §334(b)(1), and a tacked holding period, §1223(2). P will succeed to S’s E&P of 60, increasing P’s E&P to 130. §§381(a)(1), (c)(2)(A). P’s AB of 125 in S disappears.

Sections 332(a) Ex. 2, 336(a) Ex. 2, 381(a)(1) Ex.2, (c)(2) Ex. 2

Assumptions: S distributes to P assets with a FMV of 243 and AB of 125. S distributes to A assets with a FMV of 57 and AB of 50.

Treatment: P, the 80-percent distributee, does not recognize a realized gain of 188 (243 – 125). §332(a). A does recognize A’s realized gain of 37 (57 – 20). §331(a). S does not recognize its realized gain of 93 (243 – 150) on the distribution of assets to P. §337(a). S does recognize its realized gain of 7 (57 – 50) on its distribution of assets to A. §336(a). P will receive a carryover basis of 150 in its assets received while A will receive a FMV basis of 57 in the S assets received. §§334(b)(1) and (a), respectively. Only P will have a tacked holding period in the assets received. §1223(2). P will succeed to all of S’s E&P of 60, increasing P’s E&P to 130.

        (2) in a transfer to which section 361 (relating to

      nonrecognition of gain or loss to corporations) applies, but only

      if the transfer is in connection with a reorganization described

      in subparagraph (A), (C), (D), (F), or (G) of section 368(a)(1),

    the acquiring corporation shall succeed to and take into account,

    as of the close of the day of distribution or transfer, the items

    described in subsection (c) of the distributor or transferor

    corporation, subject to the conditions and limitations specified in

    subsections (b) and (c). For purposes of the preceding sentence, a

    reorganization shall be treated as meeting the requirements of

    subparagraph (D) or (G) of section 368(a)(1) only if the

    requirements of subparagraphs (A) and (B) of section 354(b)(1) are

    met.

Sections 368(a)(1)(C) Ex. 1, 354(a)(1) Ex. 1, 358(a)(1) Ex. 7, 361(a) Ex.1, (c)(1) Ex. 2, (c)(4) Ex. 2, 362(b) Ex. 5,

381(a) Ex. 1, (c)(1) Ex. 1, (c)(2) Ex. 3, 1032(a) Ex. 1, 1223(1) Ex. 1, (2) Ex. 1

Treatment: The transaction is a C reorganization. §368(a)(1)(C). T does not recognize gain or loss on the exchange of its assets for P stock. §361(a). T also does not recognize gain or loss on the distribution of the P voting stock under §361(c)(1) and §336 does not apply to T. §361(c)(4). P does not recognize gain on the use of its P stock. §1032(a). A recognizes none of the realized gain of 200 (300 - 100), because A has received solely stock or securities of another party to the reorganization in exchange for stock or securities of a party to the reorganization. §354(a)(1). A's basis in the stock received will equal 100, A's basis in the T stock surrendered. §358(a)(1). A's holding period in the P stock will include A's holding period in the T stock. §1223(1). P's bases in the T assets received will equal T's 200 bases in those assets . §362(b). P's holding period in those assets will include T's holding period. §1223(2). P will succeed to certain T attributes, including T's NOL carryover (subject to possible limitations) and T's E&P. §§381(a), (c)(1) & (2).

    (b) Operating rules

      Except in the case of an acquisition in connection with a

    reorganization described in subparagraph (F) of section 368(a)(1) -

        (1) The taxable year of the distributor or transferor

      corporation shall end on the date of distribution or transfer.

        (2) For purposes of this section, the date of distribution or

      transfer shall be the day on which the distribution or transfer

      is completed; except that, under regulations prescribed by the

      Secretary, the date when substantially all of the property has

      been distributed or transferred may be used if the distributor or

      transferor corporation ceases all operations, other than

      liquidating activities, after such date.

        (3) The corporation acquiring property in a distribution or

      transfer described in subsection (a) shall not be entitled to

      carry back a net operating loss or a net capital loss for a

      taxable year ending after the date of distribution or transfer to

      a taxable year of the distributor or transferor corporation.

    (c) Items of the distributor or transferor corporation

      The items referred to in subsection (a) are:

      (1) Net operating loss carryovers

        The net operating loss carryovers determined under section 172,

      subject to the following conditions and limitations:

          (A) the taxable year of the acquiring corporation to which

        the net operating loss carryovers of the distributor or

        transferor corporation are first carried shall be the first

        taxable year ending after the date of distribution or transfer.

          (B) In determining the net operating loss deduction, the

        portion of such deduction attributable to the net operating

        loss carryovers of the distributor or transferor corporation to

        the first taxable year of the acquiring corporation ending

        after the date of distribution or transfer shall be limited to

        an amount which bears the same ratio to the taxable income

        (determined without regard to a net operating loss deduction)

        of the acquiring corporation in such taxable year as the number

        of days in the taxable year after the date of distribution or

        transfer bears to the total number of days in the taxable year.

          (C) For the purpose of determining the amount of the net

        operating loss carryovers under section 172(b)(2), a net

        operating loss for a taxable year (hereinafter in this

        subparagraph referred to as the ''loss year'') of a distributor

        or transferor corporation which ends on or before the end of a

        loss year of the acquiring corporation shall be considered to

        be a net operating loss for a year prior to such loss year of

        the acquiring corporation.  For the same purpose, the taxable

        income for a ''prior taxable year'' (as the term is used in

        section 172(b)(2)) shall be computed as provided in such

        section; except that, if the date of distribution or transfer

        is on a day other than the last day of a taxable year of the

        acquiring corporation -

            (i) such taxable year shall (for the purpose of this

          subparagraph only) be considered to be 2 taxable years

          (hereinafter in this subparagraph referred to as the

          ''pre-acquisition part year'' and the ''post-acquisition part

          year'');

            (ii) the pre-acquisition part year shall begin on the same

          day as such taxable year begins and shall end on the date of

          distribution or transfer;

            (iii) the post-acquisition part year shall begin on the day

          following the date of distribution or transfer and shall end

          on the same day as the end of such taxable year;

            (iv) the taxable income for such taxable year (computed

          with the modifications specified in section 172(b)(2)(A) but

          without a net operating loss deduction) shall be divided

          between the pre-acquisition part year and the

          post-acquisition part year in proportion to the number of

          days in each;

            (v) the net operating loss deduction for the

          pre-acquisition part year shall be determined as provided in

          section 172(b)(2)(B), but without regard to a net operating

          loss year of the distributor or transferor corporation; and

            (vi) the net operating loss deduction for the

          post-acquisition part year shall be determined as provided in

          section 172(b)(2)(B).

Sections 368(a)(1)(C) Ex. 1, 354(a)(1) Ex. 1, 358(a)(1) Ex. 7, 361(a) Ex.1, (c)(1) Ex. 2, (c)(4) Ex. 2, 362(b) Ex. 5,

381(a) Ex. 1, (c)(1) Ex. 1, (c)(2) Ex. 3, 1032(a) Ex. 1, 1223(1) Ex. 1, (2) Ex. 1

      (2) Earnings and profits

        In the case of a distribution or transfer described in

      subsection (a) -

          (A) the earnings and profits or deficit in earnings and

        profits, as the case may be, of the distributor or transferor

        corporation shall, subject to subparagraph (B), be deemed to

        have been received or incurred by the acquiring corporation as

        of the close of the date of the distribution or transfer; and

Sections 332(a) Ex. 1, 334(b)(1) Ex.1, 337(a) Ex. 1, (c) Ex. 1, 381(a)(1) Ex. 1, (c)(2)(A) Ex. 1

          (B) a deficit in earnings and profits of the distributor,

        transferor, or acquiring corporation shall be used only to

        offset earnings and profits accumulated after the date of

        transfer.  For this purpose, the earnings and profits for the

        taxable year of the acquiring corporation in which the

        distribution or transfer occurs shall be deemed to have been

        accumulated after such distribution or transfer in an amount

        which bears the same ratio to the undistributed earnings and

        profits of the acquiring corporation for such taxable year

        (computed without regard to any earnings and profits received

        from the distributor or transferor corporation, as described in

        subparagraph (A) of this paragraph) as the number of days in

        the taxable year after the date of distribution or transfer

        bears to the total number of days in the taxable year.

Sections 332(a) Ex. 2, 336(a) Ex. 2, 381(a)(1) Ex.2, (c)(2) Ex. 2

Assumptions: S distributes to P assets with a FMV of 243 and AB of 125. S distributes to A assets with a FMV of 57 and AB of 50.

Sections 368(a)(1)(C) Ex. 1, 354(a)(1) Ex. 1, 358(a)(1) Ex. 7, 361(a) Ex.1, (c)(1) Ex. 2, (c)(4) Ex. 2, 362(b) Ex. 5,

381(a) Ex. 1, (c)(1) Ex. 1, (c)(2) Ex. 3, 1032(a) Ex. 1, 1223(1) Ex. 1, (2) Ex. 1

      (3) Capital loss carryover

        The capital loss carryover determined under section 1212,

      subject to the following conditions and limitations:

          (A) The taxable year of the acquiring corporation to which

        the capital loss carryover of the distributor or transferor

        corporation is first carried shall be the first taxable year

        ending after the date of distribution or transfer.

          (B) The capital loss carryover shall be a short-term capital

        loss in the taxable year determined under subparagraph (A) but

        shall be limited to an amount which bears the same ratio to the

        capital gain net income (determined without regard to a

        short-term capital loss attributable to capital loss

        carryover), if any, of the acquiring corporation in such

        taxable year as the number of days in the taxable year after

        the date of distribution or transfer bears to the total number

        of days in the taxable year.

          (C) For purposes of determining the amount of such capital

        loss carryover to taxable years following the taxable year

        determined under subparagraph (A), the capital gain net income

        in the taxable year determined under subparagraph (A) shall be

        considered to be an amount equal to the amount determined under

        subparagraph (B).

      (4) Method of accounting

        The acquiring corporation shall use the method of accounting

      used by the distributor or transferor corporation on the date of

      distribution or transfer unless different methods were used by

      several distributor or transferor corporations or by a

      distributor or transferor corporation and the acquiring

      corporation.  If different methods were used, the acquiring

      corporation shall use the method or combination of methods of

      computing taxable income adopted pursuant to regulations

      prescribed by the Secretary.

      (5) Inventories

        In any case in which inventories are received by the acquiring

      corporation, such inventories shall be taken by such corporation

      (in determining its income) on the same basis on which such

      inventories were taken by the distributor or transferor

      corporation, unless different methods were used by several

      distributor or transferor corporations or by a distributor or

      transferor corporation and the acquiring corporation.  If

      different methods were used, the acquiring corporation shall use

      the method or combination of methods of taking inventory adopted

      pursuant to regulations prescribed by the Secretary.

      (6) Method of computing depreciation allowance

        The acquiring corporation shall be treated as the distributor

      or transferor corporation for purposes of computing the

      depreciation allowance under sections 167 and 168 on property

      acquired in a distribution or transfer with respect to so much of

      the basis in the hands of the acquiring corporation as does not

      exceed the adjusted basis in the hands of the distributor or

      transferor corporation.

      ((7) Repealed. June 15, 1955, ch. 143, Sec. 2(1), 69 Stat. 134)

      (8) Installment method

        If the acquiring corporation acquires installment obligations

      (the income from which the distributor or transferor corporation

      reports on the installment basis under section 453) the acquiring

      corporation shall, for purposes of section 453, be treated as if

      it were the distributor or transferor corporation.

      (9) Amortization of bond discount or premium

        If the acquiring corporation assumes liability for bonds of the

      distributor or transferor corporation issued at a discount or

      premium, the acquiring corporation shall be treated as the

      distributor or transferor corporation after the date of

      distribution or transfer for purposes of determining the amount

      of amortization allowable or includible with respect to such

      discount or premium.

      (10) Treatment of certain mining development and exploration

          expenses of distributor of transferor corporation

        The acquiring corporation shall be entitled to deduct, if it

      were the distributor or transferor corporation, expenses deferred

      under section 616 (relating to certain development expenditures)

      if the distributor or transferor corporation has so elected.

      (11) Contributions to pension plans, employees' annuity plans,

          and stock bonus and profit-sharing plans

        The acquiring corporation shall be considered to be the

      distributor or transferor corporation after the date of

      distribution or transfer for the purpose of determining the

      amounts deductible under section 404 with respect to pension

      plans, employees' annuity plans, and stock bonus and

      profit-sharing plans.

      (12) Recovery of tax benefit items

        If the acquiring corporation is entitled to the recovery of any

      amounts previously deducted by (or allowable as credits to) the

      distributor or transferor corporation, the acquiring corporation

      shall succeed to the treatment under section 111 which would

      apply to such amounts in the hands of the distributor or

      transferor corporation.

      (13) Involuntary conversions under section 1033

        The acquiring corporation shall be treated as the distributor

      or transferor corporation after the date of distribution or

      transfer for purposes of applying section 1033.

      (14) Dividend carryover to personal holding company

        The dividend carryover (described in section 564) to taxable

      years ending after the date of distribution or transfer.

      ((15) Repealed. Pub. L. 101-508, title XI, Sec. 11801(c)(10)(A),

          Nov. 5, 1990, 104 Stat. 1388-526)

      (16) Certain obligations of distributor or transferor corporation

        If the acquiring corporation -

          (A) assumes an obligation of the distributor or transferor

        corporation which, after the date of the distribution or

        transfer, gives rise to a liability, and

          (B) such liability, if paid or accrued by the distributor or

        transferor corporation, would have been deductible in computing

        its taxable income,

      the acquiring corporation shall be entitled to deduct such items

      when paid or accrued, as the case may be, as if such corporation

      were the distributor or transferor corporation.  A corporation

      which would have been an acquiring corporation under this section

      if the date of distribution or transfer had occurred on or after

      the effective date of the provisions of this subchapter

      applicable to a liquidation or reorganization, as the case may

      be, shall be entitled, even though the date of distribution or

      transfer occurred before such effective date, to apply this

      paragraph with respect to amounts paid or accrued in taxable

      years beginning after December 31, 1953, on account of such

      obligations of the distributor or transferor corporation.  This

      paragraph shall not apply if such obligations are reflected in

      the amount of stock, securities, or property transferred by the

      acquiring corporation to the transferor corporation for the

      property of the transferor corporation.

      (17) Deficiency dividend of personal holding company

        If the acquiring corporation pays a deficiency dividend (as

      defined in section 547(d)) with respect to the distributor or

      transferor corporation, such distributor or transferor

      corporation shall, with respect to such payments, be entitled to

      the deficiency dividend deduction provided in section 547.

      (18) Percentage depletion on extraction of ores or minerals from

          the waste or residue of prior mining

        The acquiring corporation shall be considered to be the

      distributor or transferor corporation for the purpose of

      determining the applicability of section 613(c)(3) (relating to

      extraction of ores or minerals from the ground).

      (19) Charitable contributions in excess of prior years'

          limitation

        Contributions made in the taxable year ending on the date of

      distribution or transfer and the 4 prior taxable years by the

      distributor or transferor corporation in excess of the amount

      deductible under section 170(b)(2) for such taxable years shall

      be deductible by the acquiring corporation for its taxable years

      which begin after the date of distribution or transfer, subject

      to the limitations imposed in section 170(b)(2). In applying the

      preceding sentence, each taxable year of the distributor or

      transferor corporation beginning on or before the date of

      distribution or transfer shall be treated as a prior taxable year

      with reference to the acquiring corporation's taxable years

      beginning after such date.

      ((20), (21) Repealed. Pub. L. 94-455, title XIX, Sec.

          1901(a)(54), (b)(16), Oct. 4, 1976, 90 Stat. 1773, 1796)

      (22) Successor insurance company

        If the acquiring corporation is an insurance company taxable

      under subchapter L, there shall be taken into account (to the

      extent proper to carry out the purposes of this section and of

      subchapter L, and under such regulations as may be prescribed by

      the Secretary) the items required to be taken into account for

      purposes of subchapter L in respect of the distributor or

      transferor corporation.

      (23) Deficiency dividend of regulated investment company or real

          estate investment trust

        If the acquiring corporation pays a deficiency dividend (as

      defined in section 860(f)) with respect to the distributor or

      transferor corporation, such distributor or transferor

      corporation shall, with respect to such payments, be entitled to

      the deficiency dividend deduction provided in section 860.

      (24) Credit under section 38

        The acquiring corporation shall take into account (to the

      extent proper to carry out the purposes of this section and

      section 38, and under such regulations as may be prescribed by

      the Secretary) the items required to be taken into account for

      purposes of section 38 in respect of the distributor or

      transferor corporation.

      (25) Credit under section 53

        The acquiring corporation shall take into account (to the

      extent proper to carry out the purposes of this section and

      section 53, and under such regulations as may be prescribed by

      the Secretary) the items required to be taken into account for

      purposes of section 53 in respect of the distributor or

      transferor corporation.

      (26) Enterprise zone provisions

        The acquiring corporation shall take into account (to the

      extent proper to carry out the purposes of this section and

      subchapter U, and under such regulations as may be prescribed by

      the Secretary) the items required to be taken into account for

      purposes of subchapter U in respect of the distributor or

      transferor corporation.

    (d) Operations loss carrybacks and carryovers of life insurance

        companies

          For application of this part to operations loss carrybacks

        and carryovers of life insurance companies, see section 810.