[Federal Register Volume 79, Number 217 (Monday, November 10, 2014)]
[Rules and Regulations]
[Pages 66616-66617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-26546]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9700]
RINs 1545-BK73; 1545-BL80


Allocation of Earnings and Profits in Tax-Free Transfers From One 
Corporation to Another; Acquiring Corporation for Purposes of Section 
381

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations under section 312 of 
the Internal Revenue Code (Code) that clarify the regulations under 
section 312 regarding the allocation of earnings and profits in tax-
free transfers from one corporation to another. These regulations 
affect corporations involved in these transfers and their shareholders. 
This document also contains final regulations under section 381 of the 
Code that modify the definition of an acquiring corporation for 
purposes of section 381 with regard to certain acquisitions of assets. 
These regulations affect corporations that acquire the assets of other 
corporations in corporate reorganizations.

DATES: Effective Date: These regulations are effective on November 10, 
2014.
    Applicability Date: These regulations apply to transactions 
occurring on or after November 10, 2014.

FOR FURTHER INFORMATION CONTACT: Stephanie D. Floyd at (202) 317-6848 
or Isaac W. Zimbalist at (202) 317-6847 (not toll-free numbers).

SUPPLEMENTARY INFORMATON:

Background

    This document contains amendments to 26 CFR part 1 under section 
312 and section 381 of the Code. On April 16, 2012, the IRS and the 
Treasury Department published a notice of proposed rulemaking (REG-
141268-11) in the Federal Register (77 FR 22515) containing proposed 
regulations under section 312 (proposed section 312 regulations) to 
clarify Sec.  1.312-11 regarding the allocation of earnings and profits 
in nonrecognition transfers of property from one corporation to 
another. The proposed section 312 regulations provided that, in a 
transfer described in section 381(a) (section 381 transaction), the 
acquiring corporation, as defined in Sec.  1.381(a)-1(b)(2), would 
succeed to the earnings and profits of the distributor or transferor 
corporation. For example, in a reorganization under section 368(a)(1) 
by reason of section 368(a)(2)(C), if the transferee corporation that 
directly acquires a transferor corporation's assets transferred some, 
but not all, of the acquired assets to a controlled subsidiary, the 
transferee corporation (the acquiring corporation under Sec.  1.381(a)-
1(b)(2)) would succeed to the transferor corporation's earnings and 
profits. However, if the transferee corporation instead transferred all 
of the acquired assets to a controlled subsidiary, then the controlled 
subsidiary (the acquiring corporation under Sec.  1.381(a)-1(b)(2)) 
would succeed to the transferor corporation's earnings and profits.
    Comments responding to the proposed section 312 regulations were 
received, but no public hearing was requested or held. In response to 
the comments received on the proposed section 312 regulations, on May 
7, 2014, the IRS and the Treasury Department published a notice of 
proposed rulemaking (REG-131239-13) in the Federal Register (79 FR 
26190) containing proposed regulations under section 381 (proposed 
section 381 regulations) to modify the definition of an acquiring 
corporation for purposes of section 381 with regard to certain 
acquisitions of assets. As discussed in the preamble to the proposed 
section 381 regulations, commenters generally welcomed the apparent 
certainty provided by the proposed section 312 regulations regarding 
the location of the transferor corporation's earnings and profits. 
However, commenters suggested that this certainty was illusory because 
the existing definition of ``acquiring corporation'' under Sec.  
1.381(a)-1(b)(2) focused on whether the direct transferee corporation 
in a reorganization further transferred all of the assets it received 
in the section 381 transaction. Thus, commenters suggested that the 
existing regulations under section 381 should be revised to limit the 
degree of electivity regarding the identity of the acquiring 
corporation, as well as the uncertainty regarding whether all of the 
assets transferred in the section 381 transaction were further 
transferred to a single controlled corporation.
    The proposed section 381 regulations provided greater certainty 
regarding the identity of the acquiring corporation by providing that, 
in a transaction described in section 381(a)(2), the term acquiring 
corporation means the corporation that directly acquired the assets 
transferred by the transferor corporation, even if the direct 
transferee corporation ultimately retained none of the assets so 
transferred. As discussed in the preamble to the proposed section 381 
regulations, the IRS and the Treasury Department believe that this rule 
is appropriate with respect to determining the location of the earnings 
and profits (as well as other tax attributes) of a transferor 
corporation because it generally maintains such earnings and profits at 
the corporation closest to the transferor corporation's former 
shareholders in a manner that minimizes electivity and administrative 
burden. No comments were received in response to the proposed section 
381 regulations, and no public hearing was requested or held.

Explanation of Provisions

    The proposed section 381 regulations are adopted without 
substantive change by this Treasury decision. Because the proposed 
section 312 regulations merely cross-reference the section 381 
regulations, this Treasury decision also adopts the proposed section 
312 regulations without substantive change.
    However, these final regulations make a clarifying, non-substantive 
change to the proposed section 312 regulations. The proposed section 
312 regulations provided that ``[e]xcept as provided in Sec.  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.'' These final regulations remove the language ``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).'' The IRS and the Treasury Department believe 
this language may inappropriately imply that allocation of earnings and 
profits may be permitted in cases in which gain not expressly described 
is recognized on the transfer

[[Page 66617]]

of property between corporations (for example, gain required to be 
recognized under section 367 or 1001). This clarifying, non-substantive 
change confirms that except as provided in Sec.  1.312-10, in all other 
cases in which property is transferred from one corporation to another, 
no allocation of earnings and profits is made.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. 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 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, the notices of proposed rulemaking that 
preceded these regulations were submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business, and no comments were received.

Drafting Information

    The principal author of these regulations is Stephanie D. Floyd of 
the Office of Associate Chief Counsel (Corporate). Other personnel from 
the IRS and the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.312-11 is amended by revising paragraph (a) and 
adding paragraph (e) to read as follows:


Sec.  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 Sec.  1.381(a)-1(b)(2), and only that 
corporation, succeeds to the earnings and profits of the distributor or 
transferor corporation (within the meaning of Sec.  1.381(a)-1(a)). 
Except as provided in Sec.  1.312-10, in all other cases in which 
property is transferred from one corporation to another, 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 November 10, 2014.

0
Par. 3. Section 1.381(a)-1 is amended by:
0
a. Removing the third, fourth, and fifth sentences of paragraph 
(b)(2)(i) and adding one sentence in their place.
0
b. Removing from the last sentence of paragraph (b)(2)(ii) Example 2 
``Y'' and adding ``X'' in its place.
0
c. Redesignating paragraph (b)(3)(i) as paragraph (b)(3).
0
d. Removing paragraph (b)(3)(ii).
0
e. Adding a sentence at the end of paragraph (e).
    The additions read as follows:


Sec.  1.381(a)-1  General rule relating to carryovers in certain 
corporate acquisitions.

* * * * *
    (b) * * *
    (2) * * * (i) * * * In a transaction to which section 381(a)(2) 
applies, the acquiring corporation is the corporation that, pursuant to 
the plan of reorganization, directly acquires the assets transferred by 
the transferor corporation, even if that corporation ultimately retains 
none of the assets so transferred.
* * * * *
    (e) * * * The last sentence of paragraph (b)(2)(i) of this section 
and Example 2 of paragraph (b)(2)(ii) of this section apply to 
transactions occurring on or after November 10, 2014.


Sec.  1.381(c)(2)-1  [Amended]

0
Par. 4. Section 1.381(c)(2)-1 is amended by removing paragraph (d).

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: October 17, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-26546 Filed 11-7-14; 8:45 am]
BILLING CODE 4830-01-P