Federal Register / Vol. 77, No. 73 / Monday, April 16, 2012 / Proposed Rules 22515 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–141268–11] 

RIN 1545–BK73 

Allocation of Earnings and Profits in 

Tax-Free Transfers From One 

Corporation to Another 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations under section 312 

of the Internal Revenue Code (Code). 

The proposed regulations clarify the 

regulations under section 312 regarding 

the allocation of earnings and profits in 

tax-free transfers from one corporation 

to another. The proposed regulations 

affect corporations involved in these 

transfers and their shareholders. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by July 16, 2012. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–141268–11), Room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to: CC:PA:LPD:PR (REG–141268– 

11), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue NW., 

Washington, DC. Submissions may also 

be sent electronically via the Federal 

eRulemaking Portal at http:// 

www.regulations.gov (IRS REG–141268– 

11). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Stephanie D. Floyd at (202) 622–7930 or 

Isaac W. Zimbalist at (202) 622–7550 

(not toll-free numbers); concerning 

submissions of comments and/or 

requests for a public hearing, 

Oluwafunmilayo (Fumni) Taylor, at 

202–622–7180. 

SUPPLEMENTARY INFORMATION: 

Background and Explanation of 

Provisions 

This document contains proposed 

amendments to 26 CFR part 1 

concerning the allocation of earnings 

and profits in tax-free transfers from one 

corporation to another. The IRS has 

historically interpreted the regulations 

under section 312 as providing that the 

earnings and profits of the transferor 

corporation do not move to the 

transferee in whole or in part other than 

in a transfer described in section 381 or, 

to the extent provided under § 1.312–10, 

in a divisive reorganization. 

Furthermore, the IRS has interpreted the 

regulations to provide that in a 

corporate reorganization described in 

section 381, the acquiring corporation, 

as defined in § 1.381(a)–1(b)(2), 

succeeds to the full earnings and profits 

account of the transferor corporation. 

Thus, the earnings and profits account 

is not divided if the acquiring 

corporation in an acquisitive asset 

reorganization subsequently transfers 

target assets to one or more controlled 

subsidiaries. Practitioners have 

suggested that this result may be unclear 

under current law. See § 1.381(c)(2)– 

1(d) (providing that where part of the 

acquired assets is transferred to one or 

more controlled corporations, or all of 

the acquired assets are transferred to 

two or more controlled corporations, the 

allocation of earnings and profits is 

made without regard to section 381); 

§ 1.312–11(a) (providing for proper 

adjustment and allocation of earnings 

and profits with respect to asset 

transfers in connection with 

reorganizations, and cross-referencing 

the section 381 regulations for specific 

rules). 

Consistent with the longstanding 

administrative position, the proposed 

regulations clarify that, except as 

provided in § 1.312–10, if property is 

transferred from one corporation to 

another and no gain or loss is 

recognized, no allocation of the earnings 

and profits of the transferor is made to 

the transferee unless the transfer is 

described in section 381(a). The 

proposed regulations further clarify that, 

in a transfer described in section 381(a), 

only the acquiring corporation, as 

defined in § 1.381(a)–1(b)(2), succeeds 

to the earnings and profits of the 

distributor or transferor corporation 

(within the meaning of § 1.381(a)–1(a)). 

The IRS and Treasury Department 

believe the proposed rule is appropriate 

because earnings and profits measures 

the capacity of a corporation to pay 

dividends to its shareholders and the 

corporation that has an interest, directly 

or indirectly, in all of the target’s assets 

has the dividend-paying capacity that is 

most comparable to that of the target. 

Further, the IRS and Treasury 

Department believe the rules for the 

allocation of earnings and profits should 

conform to the rules for the allocation 

of other tax attributes under section 381. 

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is not a 

significant regulatory action as defined 

in Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

has also been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these proposed regulations, and 

because these regulations do not impose 

a collection of information on small 

entities, the Regulatory Flexibility Act 

(5 U.S.C. chapter 6) does not apply. 

Pursuant to section 7805(f) of the Code, 

these regulations were submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on their impact on small business. 

Comments and Requests for Public 

Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

written (a signed original and eight (8) 

copies) or electronic comments that are 

submitted timely to the IRS. All 

comments will be available for public 

inspection and copying. A public 

hearing will be scheduled if requested 

in writing by any person that timely 

submits written or electronic comments. 

If a public hearing is scheduled, notice 

of the date, time, and place for the 

public hearing will be published in the 

Federal Register. 

Drafting Information 

The principal author of these 

proposed regulations is Stephanie D. 

Floyd of the Office of Associate Chief 

Counsel (Corporate). Other personnel 

from the IRS and Treasury Department 

participated in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

Paragraph 1. The authority citation 

for part 1 continues to read, in part, as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

Par. 2. Section 1.312–11 is amended 

by revising paragraph (a) and adding 

paragraph (e) to read as follows: 

§ 1.312–11 Effect on earnings and profits 

of certain other tax-free exchanges, tax-free 

distributions, and tax-free transfers from 

one corporation to another. 

(a) In a transfer described in section 

381(a), the acquiring corporation, as 

defined in § 1.381(a)–1(b)(2), and only 

that corporation, succeeds to the 

earnings and profits of the distributor or 

transferor corporation (within the 


emcdonald on DSK29S0YB1PROD with PROPOSALS
22516 Federal Register / Vol. 77, No. 73 / Monday, April 16, 2012 / Proposed Rules 

meaning of § 1.381(a)–1(a)). Except 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. 

* * * * * 

(e) Effective/Applicability date. 

Paragraph (a) of this section applies to 

transactions occurring on or after the 

date of publication of the Treasury 

decision adopting this rule as a final 

regulation in the Federal Register. 

§ 1.381(c)(2)–1(d) [Removed] 

Par. 3. Section 1.381(c)(2)–1(d) is 

removed. 

Steven T. Miller, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2012–9003 Filed 4–13–12; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–139991–08] 

RIN 1545–BI84 

Certain Transfers of Property to 

Regulated Investment Companies 

[RICs] and Real Estate Investment 

Trusts [REITs] 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed amendments to regulations 

under section 337(d) of the Internal 

Revenue Code. The proposed 

regulations provide guidance 

concerning certain transfers of property 

from a C corporation to a Regulated 

Investment Company (RIC) or a Real 

Estate Investment Trust (REIT) and will 

affect the parties to such transactions. 

This document also invites comments 

from the public regarding these 

proposed regulations. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by July 16, 2012. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–139991–08), room 

5205, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–139991– 

08), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue NW., 

Washington, DC, or sent electronically, 

via the Federal eRulemaking Portal at 

http://www.regulations.gov (IRS REG– 

139991–08). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Grid Glyer (202) 622–7930 or Maury 

Passman (202) 622–7750 with respect to 

the corporate issues, and David H. Kirk 

(202) 622–3060 with respect to the 

partnership issues; concerning 

submissions of comments, 

Oluwafunmilayo Taylor (202) 622–7180 

(not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

Congress repealed the General 

Utilities doctrine in the Tax Reform Act 

of 1986 (Pub. L. 99–514, 100 Stat. 2085), 

as amended by the Technical and 

Miscellaneous Revenue Act of 1988 

(Pub. L. 100–647, 102 Stat. 3342), when 

sections 336 and 337 of the Internal 

Revenue Code were amended to require 

corporations to recognize gain or loss on 

the distribution of property in 

connection with complete liquidations 

other than certain subsidiary 

liquidations. Section 337(d)(1) directs 

the Secretary to prescribe regulations as 

may be necessary to carry out the 

purposes of General Utilities repeal, 

including rules to ‘‘ensure that such 

purposes may not be circumvented 

* * * through the use of a regulated 

investment company, a real estate 

investment trust, or tax-exempt entity 

* * *.’’ 

On March 18, 2003, regulations under 

§ 1.337(d)–7 (the regulations) were 

published in the Federal Register (TD 

9047, 68 FR 12817). The regulations 

generally provide (in paragraphs (a) and 

(b)(1)) that if property of a C corporation 

(the C corporation transferor) becomes 

the property of a RIC or REIT by the 

qualification of that C corporation as a 

RIC or REIT or by the transfer of assets 

of that C corporation to a RIC or REIT 

(a conversion transaction), then the RIC 

or REIT will be subject to tax on the net 

built-in gain in the converted property 

under the rules of section 1374 and the 

underlying regulations. This treatment, 

however, does not apply if the C 

corporation transferor elects to 

recognize gain and loss as if it sold the 

converted property to an unrelated party 

at fair market value (deemed sale 

treatment). 

Explanation and Summary of 

Comments 

This preamble first discusses the 

proposal as it relates to net built-in gain 

property acquired by a RIC or REIT 

either in a like-kind exchange (where 

the C corporation transferor’s gain is not 

recognized by reason of section 1031) or 

in an involuntary conversion (where 

such gain is not recognized by reason of 

section 1033). This preamble then 

discusses a proposed revision to the 

definition of a C corporation in the 

regulations, which provides that a 

transfer of property by a tax-exempt 

entity to a RIC or REIT is not treated as 

a conversion transaction unless the taxexempt entity would have been subject 

to tax if a deemed sale election had been 

made. 

In addition, the proposed regulations 

also add definitions for the terms RIC, 

REIT, and S corporation. While these 

terms are not explicitly defined in the 

regulations, their meanings are both 

self-evident and unambiguous in that 

context. Nonetheless, for clarification 

and ease of use, the proposed 

regulations add explicit definitions. 

A. Like-Kind Exchanges and Involuntary 

Conversions 

The current regulations generally 

provide that if property of a C 

corporation becomes the property of a 

RIC or REIT in a conversion transaction, 

then, absent a deemed sale election, the 

RIC or REIT will be subject to tax on the 

net built-in gain in the converted 

property under the rules of section 1374 

and the underlying regulations (as 

modified in paragraph (b) of the 

regulations), as if the RIC or REIT were 

an S corporation. 

Commentators have expressed 

concern that the general rule may 

inappropriately expose property 

transferred in certain exchanged basis 

transactions—specifically, like-kind 

exchanges and involuntary 

conversions—to this treatment. In these 

transactions, the C corporation 

transferor replaces property it 

transferred to a RIC or REIT with 

property that has an equivalent basis 

and built-in gain, and as a result, the 

built-in gain remains subject to 

corporate tax in the hands of the 

transferor. Therefore, there would not be 

any circumvention of the purposes of 

General Utilities repeal. Section 

1.337(d)–4(b)(3) provides an exception 

in an analogous context (where a C 

corporation transfers all or substantially 

all of its assets to a tax-exempt entity) 

to the extent the transaction qualifies for 

nonrecognition treatment under section 

1031 or section 1033. 


emcdonald on DSK29S0YB1PROD with PROPOSALS