On April 13, 2012, Treasury and the Internal Revenue Service (the IRS) issued proposed regulations that aim to clarify the rule of Treas. Reg. § 1.312-11(a), which concerns the allocation of earnings and profits in tax-free transfers between corporations (the Proposed Regulations). In brief, the Proposed Regulations clarify that, except as provided in Treas. Reg. § 1.312-10, which concerns the allocation of earnings and profits in corporate separations under section 355, 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 Treas. Reg. § 1.381(a)-1(b)(2), succeeds to the earnings and profits of the distributor or transferor corporation (within the meaning of Treas. Reg. § 1.381(a)-1(a)). In this regard, the Proposed Regulations remove Treas. Reg. § 1.381(c)(2)-1(d).
Section 381(a) generally provides that, in the case of the acquisition of the assets of a corporation in a distribution to which section 332 applies or in an acquisitive asset reorganization to which section 361 (relating to nonrecognition of gain or loss to corporations) applies, the acquiring corporation succeeds to and takes into account, as of the close of the day of transfer, the items of the transferor corporation described in section 381(c). See also Treas. Reg. §§ 1.381(a)-1(a), 1.381(a)-1(b)(1). The items described in section 381(c) include earnings and profits. See § 381(c)(2).
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