#### § 1.381(c)(12)-1 Recovery of bad debts, prior taxes, or delinquency amounts.

(a) *Carryover requirement.*

(1) If, as a result of a distribution or transfer to which section 381(a) applies, the acquiring corporation is entitled to the recovery of a bad debt, prior tax, or delinquency amount on account of which a deduction or credit was allowed to a distributor or transferor corporation for a prior taxable year, and such debt, tax, or amount is recovered by the acquiring corporation after the date of distribution or transfer, then under the provisions of section 381(c)(12) the acquiring corporation is required to include in its gross income for the taxable year of recovery the same amount of income attributable to the recovery as the distributor or transferor corporation would have been required to include under section 111 and the regulations thereunder had the distribution or transfer not occurred.

(2) The rule prescribed by paragraph (a)(1) of this section and by section 381(c)(12) with respect to bad debts, prior taxes, and delinquency amounts applies equally with respect to the recovery by the acquiring corporation of all other losses, expenditures, and accruals made on the basis of deductions from the gross income of a distributor or transferor corporation for prior taxable years, including war losses referred to in section 127 of the Internal Revenue Code of 1939, but not including deductions with respect to depreciation, depletion, amortization, or amortizable bond premiums. An item which is not a “section 111 item” for purposes of the regulations under section 111 is not subject to the provisions of section 381(c)(12). The provisions of section 111(c) shall be applied with respect to a recovery by the acquiring corporation in the same manner as they would have been applied by the distributor or transferor corporation.

(b) *Amount of recovery exclusion allowable for year of recovery.* For the year of any recovery by the acquiring corporation, the amount of the recovery exclusion for the original taxable year shall be determined in accordance with paragraph (b) of § 1.111-1. For the purpose of this paragraph and section 381(c)(12), the recovery exclusion for any year with respect to section 111 items of the acquiring corporation shall be kept separate from the recovery exclusion for any year with respect to section 111 items of each distributor or transferor corporation. The recovery by the acquiring corporation of any section 111 item of such corporation after the date of the distribution or transfer shall be considered separately from recoveries by the acquiring corporation of any such item which was deducted or credited by a distributor or transferor corporation. Any recovery by the acquiring corporation of a section 111 item shall be excluded from the gross income of the acquiring corporation to the extent of the recovery exclusion

(1) determined for the original year for which that item was deducted or credited by the specific corporation which claimed the deduction or credit and

(2) reduced by the excludable recoveries (whether made by the acquiring corporation, or by the distributor or transferor corporation) in intervening years with respect to the recovery exclusion of such corporation for such original year. There shall be taken into account the effect of net operating loss carryovers and carrybacks or capital loss carryovers.

(c) *Illustration of carryover of recovery exclusion* —

(1) *Facts.*

(i) The application of section 381(c)(12) may be illustrated by the following example. M and N Corporations are both organized on January 1, 1957, and both corporations compute their taxable income on the basis of the calendar year. On December 31, 1959, M Corporation transfers all its assets to N Corporation in a reorganization to which section 381(a) applies.

(ii) The section 111 items of the two corporations for the following taxable years are as follows, identification of such items being made by an appropriate letter:

| Taxable year of deduction or credit | M Corporation (transferor) | N Corporation (acquirer) |
| --- | --- | --- |
| 1957 | $500(g) | $200(h) |
| 1958 | 300(i) | 400(j) |
| 1959 | 600(k) | 100(m) |

(iii) The recovery exclusions in respect of such taxable years, computed in accordance with § 1.111-1(b)(2), are assumed to be as follows:

| Taxable year | M Corporation (transferor) | N Corporation (acquirer) |
| --- | --- | --- |
| 1957 | $400 | $150 |
| 1958 | 200 | 300 |
| 1959 | 500 | 75 |

(iv) The recoveries of the above-mentioned section 111 items by the two corporations are as follows:

| Taxable year of recovery | M Corporation (transferor) | N Corporation (acquirer) |
| --- | --- | --- |
| 1958 | $25 (g) | $50 (h) |
| 1959 | 50 (g)30 (i) | 20 (h)15 (j) |
| 1960 | | 350 (g)225 (i)550 (k)100 (h)350 (j)85 (m) |

(2) *M Corporation's 1958 recovery.*

| Total recovery of section 111 items for 1957 | $25 |
| --- | --- |
| Less: Recovery exclusion for 1957 | 400 |
| Amount included in gross income of M Corporation for 1958 | 0 |

(3) *M Corporation's 1959 recoveries.*

| (i) Total recovery of section 111 items for 1957 | $50 |
| --- | --- |
| Less: Recovery exclusion for 1957 | $400 | |
| Minus excludable recovery | 25 | |
| | | 375 |
| Amount included in gross income of M Corporation for 1959 | 0 |
| (ii) Total recovery of section 111 items for 1958 | 30 |
| Less: Recovery exclusion for 1958 | 200 |
| Amount included in gross income of M Corporation for 1959 | 0 |

(4) *N Corporation's 1958 recovery.*

| Total recovery of section 111 items for 1957 | $50 |
| --- | --- |
| Less: Recovery exclusion for 1957 | 150 |
| Amount included in gross income of N Corporation for 1958 | 0 |

(5) *N Corporation's 1959 recoveries.*

| (i) Total recovery of section 111 items for 1957 | $20 |
| --- | --- |
| Less: Recovery exclusion for 1957 | $150 | |
| Minus excludable recovery in 1958 | 50 | |
| | | 100 |
| Amount included in gross income of N Corporation for 1959 | 0 |
| (ii) Total recovery of section 111 items for 1958 | 15 |
| Less: Recovery exclusion for 1958 | 300 |
| Amount included in gross income of N Corporation for 1959 | 0 |

(6) *N Corporation's 1960 recoveries.*

| (i) Total recovery of section 111 items of M Corporation for 1957 | $350 |
| --- | --- |
| Less: Recovery exclusion of M Corporation for 1957 | $400 |
| Minus: | | | |
| Excludable recovery in 1959 | $50 | | |
| Excludable recovery in 1958 | 25 | | |
| | | 75 | |
| | | | 325 |
| Amount included in gross income of N Corporation for 1960 | 25 |
| (ii) Total recovery of section 111 items of M Corporation for 1958 | 225 |
| Less: Recovery exclusion of M Corporation for 1958 | $200 | |
| Minus excludable recovery in 1959 | 30 | |
| | | 170 |
| Amount included in gross income of N Corporation for 1960 | 55 |
| (iii) Total recovery of section 111 items of M Corporation for 1959 | 550 |
| Less: Recovery exclusion of M Corporation for 1959 | 500 |
| Amount included in gross income of N Corporation for 1960 | 50 |
| (iv) Total recovery of section 111 items of N Corporation for 1957 | 100 |
| Less: Recovery exclusion of N Corporation for 1957 | $150 | |
| Minus: | | | |
| Excludable recovery in 1959 | $20 | | |
| Excludable recovery in 1958 | 50 | | |
| | | 70 | |
| | | | 80 |
| Amount included in gross income of N Corporation for 1960 | 20 |
| (v) Total recovery of section 111 items of N Corporation for 1958 | $350 |
| Less: Recovery exclusion of N Corporation for 1958 | $300 | |
| Minus excludable recovery in 1959 | 15 | |
| | | 285 |
| Amount included in gross income of N Corporation for 1960 | 65 |
| (vi) Total recovery of section 111 items of N Corporation for 1959 | 85 |
| Less: Recovery exclusion of N Corporation for 1959 | 75 |
| Amount included in gross income of N Corporation for 1960 | 10 |

(7) *Summary of recoveries included in gross income of N Corporation for 1960.*

| (i) Recovery of M Corporation items for: | | |
| --- | --- | --- |
| 1957 | $25 | |
| 1958 | 55 | |
| 1959 | 50 | |
| | | $130 |
| (ii) Recovery of N corporation items for: | | |
| 1957 | 20 | |
| 1958 | 65 | |
| 1959 | 10 | |
| | | 95 |
| Total amount included in gross income | 225 |

[T.D. 6559, 26 FR 2984, Apr. 7, 1961]