[Federal Register Volume 77, Number 73 (Monday, April 16, 2012)]
[Proposed Rules]
[Pages 22515-22516]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-9003]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-141268-11]
RIN 1545-BK73


Allocation of Earnings and Profits in Tax-Free Transfers From One 
Corporation to Another

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under section 312 
of the Internal Revenue Code (Code). The proposed regulations clarify 
the regulations under section 312 regarding the allocation of earnings 
and profits in tax-free transfers from one corporation to another. The 
proposed regulations affect corporations involved in these transfers 
and their shareholders.

DATES: Written or electronic comments and requests for a public hearing 
must be received by July 16, 2012.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-141268-11), 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-
141268-11), 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-141268-11).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Stephanie D. Floyd at (202) 622-7930 or Isaac W. Zimbalist at (202) 
622-7550 (not toll-free numbers); concerning submissions of comments 
and/or requests for a public hearing, Oluwafunmilayo (Fumni) Taylor, at 
202-622-7180.

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    This document contains proposed amendments to 26 CFR part 1 
concerning the allocation of earnings and profits in tax-free transfers 
from one corporation to another. The IRS has historically interpreted 
the regulations under section 312 as providing that the earnings and 
profits of the transferor corporation do not move to the transferee in 
whole or in part other than in a transfer described in section 381 or, 
to the extent provided under Sec.  1.312-10, in a divisive 
reorganization. Furthermore, the IRS has interpreted the regulations to 
provide that in a corporate reorganization described in section 381, 
the acquiring corporation, as defined in Sec.  1.381(a)-1(b)(2), 
succeeds to the full earnings and profits account of the transferor 
corporation. Thus, the earnings and profits account is not divided if 
the acquiring corporation in an acquisitive asset reorganization 
subsequently transfers target assets to one or more controlled 
subsidiaries. Practitioners have suggested that this result may be 
unclear under current law. See Sec.  1.381(c)(2)-1(d) (providing that 
where part of the acquired assets is transferred to one or more 
controlled corporations, or all of the acquired assets are transferred 
to two or more controlled corporations, the allocation of earnings and 
profits is made without regard to section 381); Sec.  1.312-11(a) 
(providing for proper adjustment and allocation of earnings and profits 
with respect to asset transfers in connection with reorganizations, and 
cross-referencing the section 381 regulations for specific rules).
    Consistent with the longstanding administrative position, the 
proposed regulations clarify that, except as provided in Sec.  1.312-
10, 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 Sec.  1.381(a)-1(b)(2), succeeds to the 
earnings and profits of the distributor or transferor corporation 
(within the meaning of Sec.  1.381(a)-1(a)).
    The IRS and Treasury Department believe the proposed rule is 
appropriate because earnings and profits measures the capacity of a 
corporation to pay dividends to its shareholders and the corporation 
that has an interest, directly or indirectly, in all of the target's 
assets has the dividend-paying capacity that is most comparable to that 
of the target. Further, the IRS and Treasury Department believe the 
rules for the allocation of earnings and profits should conform to the 
rules for the allocation of other tax attributes under section 381.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. 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 were 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. 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 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

    Paragraph 1. The authority citation for part 1 continues to read, 
in part, as follows:

    Authority:  26 U.S.C. 7805 * * *

    Par. 2. Section 1.312-11 is amended by revising paragraph (a) and 
adding paragraph (e) to read as follows:


Sec.  1.312-11  Effect on earnings and profits of certain other tax-
free exchanges, tax-free distributions, and tax-free transfers from one 
corporation to another.

    (a) In a transfer described in section 381(a), the acquiring 
corporation, as defined in Sec.  1.381(a)-1(b)(2), and only that 
corporation, succeeds to the earnings and profits of the distributor or 
transferor corporation (within the

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meaning of Sec.  1.381(a)-1(a)). Except as provided in Sec.  1.312-10, 
in all other cases in which property is transferred from one 
corporation to another and no gain or loss is recognized (or is 
recognized only to the extent of the property received other than that 
permitted to be received without the recognition of gain), no 
allocation of the earnings and profits of the transferor is made to the 
transferee.
* * * * *
    (e) Effective/Applicability date. Paragraph (a) 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.


Sec.  1.381(c)(2)-1(d)  [Removed]

    Par. 3. Section 1.381(c)(2)-1(d) is removed.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-9003 Filed 4-13-12; 8:45 am]
BILLING CODE 4830-01-P