Tax Attribute Survival
Tax attribute survival is often a critical consideration in assessing a proposed corporate reorganization. Beneficial tax attributes, such as net operating losses, earnings and profits, and capital losses, are often involved, and the speed at which reorganizations tend to move makes a good foundational understanding of the relevant rules crucial for practitioners assisting taxpayers with reorganizations.
Under IRC § 381(a), the tax attribute carryover rules apply to any transaction to which IRC § 361 applies. Section 361(a) states that no gain or loss to a corporation will be recognized if that corporation is a party to a reorganization and exchanges property solely for stock of another corporation involved in the reorganization. Section 381(a)(2) states that five of the seven types of reorganization are potentially eligible to use the attribute carryover rules. However, divisive type D reorganizations and type G reorganizations that are not acquisitive, as well as nondivisive reorganizations, are not eligible to use the carryover rules.
Section 381(a) states that the attributes specifically enumerated in section 381(c) will survive the eligible reorganizations discussed. Section 381(c) lists most of the traditional attributes considered, such as net operating losses and credits. But what about those attributes not listed? For example, like-kind exchanges under section 1031 are noticeably absent from the list. Treas. Reg. § 1.381(a)-1(b)(3)(i) states, “In a case where section 381 does not apply to a transaction, item, or tax attribute by reason of [the preceding sentence], no inference is to be drawn from the provision of section 381 as to whether any item or tax attribute shall be taken into account by the successor corporation.” In other words, just because section 381(c) does not list an attribute (such as a section 1031 exchange) as a transferable tax attribute does not mean it is not transferred.
Further supporting this conclusion, the IRS has ruled in Letter Rulings 9252001 and 200151017 that the nonrecognition treatment for a like-kind exchange may be carried over to a successor corporation. Under Letter Ruling 9252001, like-kind treatment survived both a type A reorganization and a divisive type D reorganization. In Letter Ruling 200151017, a section 1031 exchange survived a type A reorganization. In both rulings, the IRS cited the application of section 381 to reorganization transactions to which section 361 applies. It then cited Treas. Reg. § 1.381(a)-1(b)(3)(i) to conclude that attribute carryovers were not intended to apply only to those specifically listed in section 381(c).
While both these letter rulings discuss the addition of section 1031 as an attribute that will survive eligible reorganization, the law and analysis certainly support the idea that other nonlisted attributes will likely survive as well. Thus, except in the case of nondivisive type D reorganizations and certain type G reorganizations, attributes not listed in section 381(c) should survive a reorganization.
For a detailed discussion of the issues in this area, see “Reorganizations and Tax Attribute Survival,” by Ryan M. Svoboda, CPA, in the December 2010 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
Also look for articles on the following subjects in the December 2010 issue of The Tax Adviser:
- An analysis of statutory employee classification issues.
- An update on qualified retirement plan developments.
- A look at the HIRE Act of 2010.
The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or e-mail taxsection@aicpa.org for a subscription to the magazine or to become a member of the Tax Section.
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