26 USC 381 - Carryovers in certain corporate acquisitions

U.S Code last checked for updates: Nov 22, 2024

§ 381.

Carryovers in certain corporate acquisitions

(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.

(c)

Items 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

 See References in Text note below.

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

(5)

Inventories

(6)

Method of computing depreciation allowance

[(7)

Repealed. June 15, 1955, ch. 143, § 2(1), 69 Stat. 134]

(8)

Installment method

(9)

Amortization of bond discount or premium

(10)

Treatment of certain mining development and exploration expenses of distributor or transferor corporation

(11)

Contributions to pension plans, employees’ annuity plans, and stock bonus and profit-sharing plans

(12)

Recovery of tax benefit items

(13)

Involuntary conversions under section 1033

(14)

Dividend carryover to personal holding company

[(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

(18)

Percentage depletion on extraction of ores or minerals from the waste or residue of prior mining

(19)

Charitable contributions in excess of prior years’ limitations

(20)

Carryforward of disallowed business interest

[(21)

Repealed. Pub. L. 94–455, title XIX, § 1901(b)(16), Oct. 4, 1976, 90 Stat. 1796]

(22)

Successor insurance company

(23)

Deficiency dividend of regulated investment company or real estate investment trust

(24)

Credit under section 38

(25)

Credit under section 53

(26)

Enterprise zone provisions

(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),

cite as: 26 USC 381