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 Ss E&P of 60, increasing Ps E&P to 130. 381(a)(1), (c)(2)(A). Ps 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 As 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 Ss E&P of 60, increasing Ps 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

 

 

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).

 

 
 
 (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

 
 

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 Ss E&P of 60, increasing Ps E&P to 130. 381(a)(1), (c)(2)(A). Ps AB of 125 in S disappears.

 
 
 (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.

 

Treatment: P, the 80-percent distributee, does not recognize a realized gain of 188 (243 125). 332(a). A does recognize As 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 Ss E&P of 60, increasing Ps E&P to 130.

 
 

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).

 

 
 
 
 (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.