[Federal Register Volume 79, Number 88 (Wednesday, May 7, 2014)]
[Proposed Rules]
[Pages 26190-26192]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10500]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 79, No. 88 / Wednesday, May 7, 2014 / 
Proposed Rules

[[Page 26190]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-131239-13]
RIN 1545-BL80


Acquiring Corporation for Purposes of Section 381

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under section 381 
of the Internal Revenue Code (Code). The proposed regulations modify 
the definition of an acquiring corporation for purposes of section 381 
with regard to certain acquisitions of assets. The proposed regulations 
affect corporations that acquire the assets of other corporations in 
corporate reorganizations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by August 5, 2014.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-131239-13), 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-
131239-13), 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-131239-13).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Stephanie D. Floyd at (202) 317-6065 or Isaac W. Zimbalist at (202) 
317-5363; concerning submissions of comments and/or requests for a 
public hearing, Oluwafunmilayo (Funmi) Taylor at (202) 317-6901 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to 26 CFR part 1 under 
section 381 of the Code. Section 381(a) generally provides that in 
certain acquisitions of the assets of a distributor or transferor 
corporation by another corporation, the acquiring corporation succeeds 
to the tax attributes, including the earnings and profits, of the 
distributor or transferor corporation. For this purpose, Sec.  
1.381(a)-1(b)(2) defines the acquiring corporation with regard to 
transactions described in section 381(a)(2) (relating to certain 
reorganizations under section 368), as either the corporation that 
ultimately acquires all of the assets transferred by the transferor 
corporation, or the corporation that directly acquires the assets 
transferred by the transferor corporation if no single corporation 
ultimately acquires all of the assets so transferred.

1. Proposed Section 312 Regulations

    A notice of proposed rulemaking containing proposed regulations 
(REG-141268-11) under section 312 was published in the Federal Register 
on April 16, 2012 (77 FR 22515) (proposed section 312 regulations) to 
clarify the regulations under 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 
provide that, in a transfer described in section 381(a), the acquiring 
corporation, as defined in Sec.  1.381(a)-1(b)(2), succeeds to the 
earnings and profits of the distributor or transferor corporation. For 
example, if in a reorganization under section 368(a)(1) by reason of 
section 368(a)(2)(C), the transferee corporation that directly acquires 
a transferor corporation's assets transfers 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)) retains the 
earnings and profits. However, if the transferee corporation instead 
transfers all of the transferor corporation's assets to a controlled 
subsidiary, then that 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 notice 
of proposed rulemaking were received. No public hearing was requested 
or held.

2. Summary of Comments Received With Respect to the Proposed Section 
312 Regulations

    Some commenters recommended that the definition of acquiring 
corporation under Sec.  1.381(a)-1(b)(2) be changed for purposes of 
determining the location of the transferor corporation's earnings and 
profits. These commenters believed that the rule in the proposed 
section 312 regulations allowing the section 381 acquiring corporation 
to succeed to the earnings and profits of the transferor 
inappropriately allows electivity of the location of the transferor 
corporation's earnings and profits in connection with section 381(a)(2) 
transactions based on whether the transferee corporation that directly 
acquires the transferor corporation's assets retains a single asset. 
These commenters also expressed concern that this rule raises difficult 
practical issues in determining whether all of the acquired assets have 
been transferred to a controlled subsidiary.
    As an alternative to the proposed section 312 regulations, some 
commenters recommended adopting a rule that provides that the 
corporation that acquires substantially all of the assets transferred 
by a transferor corporation in a section 381(a)(2) transfer succeeds to 
the transferor's earnings and profits. One commenter recommended that 
earnings and profits remain with the direct acquiring corporation even 
if all of the acquired assets are transferred to another corporation 
pursuant to the plan of reorganization. Another commenter suggested 
that there should not be disparate treatment of earnings and profits in 
nonrecognition transfers to controlled subsidiaries merely because a 
reorganization has occurred, and therefore the rule for determining the 
location of earnings and profits in connection with section 381(a)(2) 
transfers should be consistent with rules that govern nonrecognition 
transfers to controlled subsidiaries.
    The IRS and the Treasury Department believe that adopting a 
substantially all approach would introduce unnecessary uncertainty 
surrounding the measurement of ``substantially all.'' The IRS and the 
Treasury Department, however, agree with the recommendation that the 
direct

[[Page 26191]]

acquiring corporation should succeed to the earnings and profits. The 
IRS and the Treasury Department believe that this approach addresses 
the other comments received regarding consistency among nonrecognition 
transactions. Moreover, after considering all comments received with 
regard to the proposed section 312 regulations, the IRS and the 
Treasury Department have concluded that this recommended change is 
appropriate not merely with respect to the determination of the 
location of the transferor corporation's earnings and profits but also 
with respect to the other tax attributes governed by section 381. 
Accordingly, this notice of proposed rulemaking (proposed section 381 
regulations) revises the definition of acquiring corporation as 
described under the Explanation of Provisions. Because the proposed 
section 312 regulations merely cross-reference the section 381 
regulations, those proposed regulations will remain outstanding. It is 
anticipated that the proposed section 312 regulations and the proposed 
section 381 regulations will be concurrently published as final 
regulations in the Federal Register after the comment period for the 
proposed section 381 regulations has closed on August 5, 2014 and the 
IRS and the Treasury Department have had an opportunity to consider the 
comments received.

Explanation of Provisions

1. Direct Transferee Corporation Is the Acquiring Corporation

    The proposed section 381 regulations provide that, in a transaction 
described in section 381(a)(2), the acquiring corporation is the 
corporation that directly acquires the assets transferred by the 
transferor corporation, even if the transferee corporation ultimately 
retains none of the assets so transferred. The current regulations 
under section 381 yield an identical result, except when a single 
controlled subsidiary of the direct transferee corporation acquires all 
of the assets transferred by the transferor corporation pursuant to a 
plan of reorganization. In that case, the current regulations treat the 
subsidiary as the acquiring corporation, a result that effectively 
permits a taxpayer to choose the location of a transferor corporation's 
attributes by causing the direct transferee corporation either to 
retain or not to retain a single asset. The IRS and the Treasury 
Department believe the proposed rule produces more appropriate results 
because it would eliminate this electivity. The proposed rule also 
eliminates the administrative burden under the current regulations 
associated with determining whether a particular corporation in fact 
has acquired all of the assets transferred by the transferor 
corporation pursuant to a plan of reorganization. In addition, it 
eliminates the disparate effect of the presence or absence of a plan of 
reorganization and produces results consistent with those obtained if a 
corporation that has not engaged in a reorganization transfers assets 
to a controlled subsidiary in a nonrecognition transaction.
    Finally, the IRS and the Treasury Department believe the proposed 
rule is appropriate with respect to determining the location of the 
earnings and profits of a transferor corporation because the proposed 
rule generally maintains such earnings and profits at the corporation 
closest to the transferor corporation's former shareholders, except in 
the case of triangular reorganizations. The IRS and the Treasury 
Department considered an alternative approach that would achieve this 
result in all cases by treating the corporation that issues stock 
pursuant to a plan of reorganization (the ``issuing corporation'') as 
the acquiring corporation. An issuing corporation approach would, 
however, present complex considerations in the context of cross-border 
transactions, potentially requiring a number of special rules to 
preclude opportunities for the avoidance of tax. Accordingly, the IRS 
and the Treasury Department believe that the proposed rule produces 
more appropriate results than the current regulations (including in the 
context of cross-border transactions) while preserving simplicity and 
administrability.

2. Removal of Sec.  1.381(a)-1(b)(3)(ii)

    The proposed section 381 regulations also remove Sec.  1.381(a)-
1(b)(3)(ii) relating to a transfer by the acquiring corporation of the 
acquired assets to a controlled subsidiary. Section 1.381(a)-
1(b)(3)(ii) provides that if the corporation that directly acquires the 
assets transferred by the transferor corporation is the acquiring 
corporation, and it transfers any acquired assets to one or more 
controlled subsidiaries, then the carryover of items described in 
section 381(c) to any controlled subsidiary is not governed by section 
381. Although that rule is correct, it is unnecessary in light of the 
proposed section 381 regulations. Accordingly, the paragraph is 
removed.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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 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 will 
be 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. The IRS and the Treasury Department request comments on all 
aspects of the proposed regulations. 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 the 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

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 1.381(a)-1 is amended by:
0
1. Removing the third, fourth, and fifth sentences of paragraph 
(b)(2)(i) and adding one sentence in its place.

[[Page 26192]]

0
2. Removing from the last sentence of paragraph (b)(2)(ii) Example 2 
``Y'' and adding ``X'' in its place.
0
3. Redesignating paragraph (b)(3)(i) as paragraph (b)(3).
0
4. Removing paragraph (b)(3)(ii).
0
5. Adding a sentence at the end of paragraph (e).
    The revisions and 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) * * * Paragraph (b)(2) 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.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2014-10500 Filed 5-6-14; 8:45 am]
BILLING CODE 4830-01-P