26 U.S.C. § 381 — Carryovers in certain corporate acquisitions

submitted 72 years ago by ch. 736 to r/title-26-INTERNAL-REVENUE-CODE · 2,504 words · no verdicts yet

in plain englishAI-generated · not legal advice

When one corporation absorbs another in certain liquidations or reorganizations, it inherits the old corporation's tax attributes. This includes things like net operating losses, earnings and profits, and accounting methods, subject to specific limits.

(a) General rule. If one corporation (the "acquiring corporation") acquires another corporation's (the "distributor or transferor corporation's") assets — either (1) through a liquidation of a subsidiary covered by section 332, or (2) through a transfer covered by section 361 that is part of a reorganization described in section 368(a)(1)(A), (C), (D), (F), or (G) — the acquiring corporation takes over the tax items listed in subsection (c), as of the close of the day of the distribution or transfer, subject to the conditions and limits in subsections (b) and (c). A (D) or (G) reorganization only counts here if it also meets the extra requirements in section 354(b)(1)(A) and (B). (b) Operating rules. Except for an (F) reorganization: (1) the old corporation's tax year ends on the date of the distribution or transfer; (2) that date is normally when the distribution or transfer is fully completed, though Secretary's regulations may allow an earlier date — when "substantially all" the property has moved — if the old corporation stops all operations besides winding down after that point; and (3) the acquiring corporation cannot carry back a net operating loss or capital loss from a year ending after the transfer date into any of the old corporation's earlier tax years. (c) Items of the old corporation. The acquiring corporation inherits the following items from the old corporation, each subject to its own conditions: (1) Net operating loss carryovers, figured under section 172. The acquiring corporation first uses these carryovers in its first tax year ending after the transfer date, but that year's deduction is capped at a share proportional to how many days are left in the year after the transfer date. If the transfer happens mid-year, the acquiring corporation's tax year is split into a "pre-acquisition" and "post-acquisition" part for counting purposes, with income divided between them by number of days. (2) Earnings and profits. The old corporation's earnings and profits, or deficit, transfer to the acquiring corporation as of the transfer date. However, a deficit can only offset earnings and profits built up after the transfer date, not before it; the acquiring corporation's own earnings for that year are treated, proportionally by days, as built up after the transfer. (3) Capital loss carryover, figured under section 1212. Like net operating losses, it is first usable in the acquiring corporation's first tax year ending after the transfer, capped at a share of that year's capital gains proportional to the days remaining after the transfer, and that same amount then carries forward to later years. (4) Method of accounting. The acquiring corporation must use the old corporation's accounting method, unless multiple old corporations used different methods, in which case Secretary's regulations decide which method to use. (5) Inventories. The acquiring corporation must value inherited inventory the same way the old corporation did, unless multiple old corporations used different methods, in which case Secretary's regulations decide. (6) Method of computing depreciation allowance. The acquiring corporation is treated as the old corporation for calculating depreciation, under sections 167 and 168, on transferred property — up to the amount of the old corporation's basis in that property. (7) Repealed. (8) Installment method. If the acquiring corporation receives installment obligations that the old corporation was reporting income from under the installment method (section 453), the acquiring corporation is treated as the old corporation for that purpose. (9) Amortization of bond discount or premium. If the acquiring corporation assumes the old corporation's bonds that were issued at a discount or premium, it is treated as the old corporation, after the transfer date, for figuring the amortization on that discount or premium. (10) Mining development and exploration expenses. If the old corporation elected to defer certain mining development expenses under section 616, the acquiring corporation can deduct them as if it were the old corporation. (11) Contributions to pension plans, employees' annuity plans, and stock bonus and profit-sharing plans. The acquiring corporation is treated as the old corporation, after the transfer date, when figuring deductions under section 404 for these plans. (12) Recovery of tax benefit items. If the acquiring corporation later recovers amounts the old corporation previously deducted or claimed as credits, it gets the same tax treatment under section 111 that the old corporation would have gotten. (13) Involuntary conversions under section 1033. The acquiring corporation is treated as the old corporation, after the transfer date, for applying section 1033 to property that is destroyed, stolen, or condemned and then replaced. (14) Dividend carryover to personal holding company. The dividend carryover described in section 564 carries over to tax years ending after the transfer date. (15) Repealed. (16) Certain assumed obligations. If the acquiring corporation assumes an obligation of the old corporation that later, after the transfer date, becomes a deductible liability, the acquiring corporation may deduct it when paid or accrued, as if it were the old corporation. This does not apply if the obligation was already reflected in the value of what the acquiring corporation gave the old corporation for its property. (17) Deficiency dividend of personal holding company. If the acquiring corporation pays a "deficiency dividend" (as defined in section 547(d)) on behalf of the old corporation, the old corporation gets the deficiency dividend deduction under section 547 for that payment. (18) Percentage depletion on extraction of ores or minerals from waste or residue of prior mining. The acquiring corporation is treated as the old corporation for deciding whether section 613(c)(3) applies to extracting ores or minerals from mining waste or residue. (19) Charitable contributions in excess of prior years' limitations. If the old corporation made charitable contributions — in the tax year of the transfer and the four years before it — that exceeded the limit in section 170(b)(2), the acquiring corporation may deduct the excess in its own later tax years, subject to that same section 170(b)(2) limit. Each of the old corporation's years counts as a "prior taxable year" for this purpose. (20) Carryforward of disallowed business interest. The carryover of disallowed business interest described in section 163(j)(2) carries over to tax years ending after the transfer date. (21) Repealed. (22) Successor insurance company. If the acquiring corporation is an insurance company taxed under subchapter L, it takes into account the old corporation's relevant subchapter L items, as needed and under Secretary's regulations. (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)) on behalf of the old corporation, the old corporation gets the deficiency dividend deduction under section 860 for that payment. (24) Credit under section 38. The acquiring corporation takes into account the old corporation's section 38 general business credit items, as needed and under Secretary's regulations. (25) Credit under section 53. The acquiring corporation takes into account the old corporation's section 53 credit items, as needed and under Secretary's regulations. (26) Enterprise zone provisions. The acquiring corporation takes into account the old corporation's subchapter U items, as needed and under Secretary's regulations.

the actual law source: uscode.house.gov ↗public domain

(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

(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.

(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.

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),1 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).¹

(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

(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.

(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, § 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 or transferor corporation

The acquiring corporation shall be entitled to deduct, as 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, § 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. 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’ limitations

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) Carryforward of disallowed business interest

The carryover of disallowed business interest described in section 163(j)(2) to taxable years ending after the date of distribution or transfer.

[(21) Repealed. Pub. L. 94–455, title XIX, § 1901(b)(16), Oct. 4, 1976, 90 Stat. 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.

Source credit: (Aug. 16, 1954, ch. 736, 68A Stat. 124; June 15, 1955, ch. 143, § 2(1), 69 Stat. 134; Jan. 28, 1956, ch. 15, § 1, 70 Stat. 7; Pub. L. 85–866, title I, § 29(c), Sept. 2, 1958, 72 Stat. 1628; Pub. L. 86–69, § 3(c), June 25, 1959, 73 Stat. 139; Pub. L. 87–834, § 2(d), Oct. 16, 1962, 76 Stat. 971; Pub. L. 88–272, title II, §§ 209(d)(2), 225(i)(3), Feb. 26, 1964, 78 Stat. 46, 92; Pub. L. 90–240, § 5(d), Jan. 2, 1968, 81 Stat. 778; Pub. L. 91–172, title V, §§ 504(c)(2), 512(c), 521(f), Dec. 30, 1969, 83 Stat. 633, 639, 654; Pub. L. 92–178, title VI, § 601(c)(3), Dec. 10, 1971, 85 Stat. 557; Pub. L. 94–455, title XVI, § 1601(e), title XIX, §§ 1901(a)(54), (b)(16), (17), (21)(B), (33)(N), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1746, 1773, 1796, 1797, 1802, 1834; Pub. L. 95–30, title II, § 202(d)(3)(A), May 23, 1977, 91 Stat. 148; Pub. L. 95–600, title III, § 362(d)(2), Nov. 6, 1978, 92 Stat. 2851; Pub. L. 96–223, title II, § 232(b)(2)(B), Apr. 2, 1980, 94 Stat. 276; Pub. L. 96–471, § 2(b)(2), Oct. 19, 1980, 94 Stat. 2253; Pub. L. 96–589, § 4(g), Dec. 24, 1980, 94 Stat. 3404; Pub. L. 97–34, title II, §§ 208, 221(b)(1)(B), title III, § 331(d)(1)(B), Aug. 13, 1981, 95 Stat. 226, 246, 294; Pub. L. 97–248, title II, § 224(c)(7), Sept. 3, 1982, 96 Stat. 489; Pub. L. 97–448, title I, §§ 102(h)(3), 103(g)(2)(F), Jan. 12, 1983, 96 Stat. 2372, 2379; Pub. L. 98–369, div. A, title II, § 211(b)(4), title IV, § 474(r)(11), July 18, 1984, 98 Stat. 754, 841; Pub. L. 99–514, title II, § 231(d)(3)(F), title IV, § 411(b)(2)(C)(iii), title VII, § 701(e)(1), title XVIII, § 1812(a)(3), Oct. 22, 1986, 100 Stat. 2179, 2227, 2342, 2833; Pub. L. 100–203, title X, § 10202(c)(3), Dec. 22, 1987, 101 Stat. 1330–392; Pub. L. 100–647, title I, § 1002(a)(13), Nov. 10, 1988, 102 Stat. 3355; Pub. L. 101–239, title VII, § 7841(d)(10), Dec. 19, 1989, 103 Stat. 2428; Pub. L. 101–508, title XI, §§ 11801(c)(10)(A), 11812(b)(6), Nov. 5, 1990, 104 Stat. 1388–526, 1388–535; Pub. L. 103–66, title XIII, § 13302(e), Aug. 10, 1993, 107 Stat. 556; Pub. L. 104–188, title I, § 1704(t)(26), Aug. 20, 1996, 110 Stat. 1888; Pub. L. 115–97, title I, §§ 13301(b)(1), 13511(b)(3), Dec. 22, 2017, 131 Stat. 2121, 2142; Pub. L. 115–141, div. U, title IV, § 401(b)(18), Mar. 23, 2018, 132 Stat. 1202.)

history & why it existsrecord from the source credit

1954Enacted · Act of Aug. 16, 1954, ch. 736
1955Amended · Act of June 15, 1955, ch. 143 · 69 Stat. 134
1956Amended · Act of Jan. 28, 1956, ch. 15 · 70 Stat. 7
1958Amended · Pub. L. 85-866 · 72 Stat. 1628
1959Amended · Pub. L. 86-69 · 73 Stat. 139
1962Amended · Pub. L. 87-834 · 76 Stat. 971
1964Amended · Pub. L. 88-272 · 78 Stat. 46, 92
1968Amended · Pub. L. 90-240 · 81 Stat. 778
1969Amended · Pub. L. 91-172 · 83 Stat. 633, 639, 654
1971Amended · Pub. L. 92-178 · 85 Stat. 557
1976Amended · Pub. L. 94-455 · 90 Stat. 1746, 1773, 1796, 1797, 1802, 1834
1977Amended · Pub. L. 95-30 · 91 Stat. 148
1978Amended · Pub. L. 95-600 · 92 Stat. 2851
1980Amended · Pub. L. 96-223 · 94 Stat. 276
1980Amended · Pub. L. 96-471 · 94 Stat. 2253
1980Amended · Pub. L. 96-589 · 94 Stat. 3404
1981Amended · Pub. L. 97-34 · 95 Stat. 226, 246, 294
1982Amended · Pub. L. 97-248 · 96 Stat. 489
1983Amended · Pub. L. 97-448 · 96 Stat. 2372, 2379
1984Amended · Pub. L. 98-369 · 98 Stat. 754, 841
1986Amended · Pub. L. 99-514 · 100 Stat. 2179, 2227, 2342, 2833
1987Amended · Pub. L. 100-203 · 101 Stat. 1330
1988Amended · Pub. L. 100-647 · 102 Stat. 3355
1989Amended · Pub. L. 101-239 · 103 Stat. 2428
1990Amended · Pub. L. 101-508 · 104 Stat. 1388
1993Amended · Pub. L. 103-66 · 107 Stat. 556
1996Amended · Pub. L. 104-188 · 110 Stat. 1888
2017Amended · Pub. L. 115-97 · 131 Stat. 2121, 2142
2018Amended · Pub. L. 115-141 · 132 Stat. 1202

A history note hasn’t been published yet. The record shows enactment by ch. 736 on 1954-08-16.

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