Accounting rules in corporate reorgs. simplified.

• Author: Nevius, Alistair M.

The IRS issued final regulations (T.D. .9534) intended to clarify and simplify rules concerning continuity of accounting methods and inventory methods in certain tax-free corporate reorganizations and liquidations.

The regulations revise regulations under Sees. 381(c)(4) and 381(c)(5) and adopt with nonsubstantive modifications proposed regulations issued in 2007 (REG-151884-03). They are intended to provide greater clarity and certainty to rules by which a corporation acquiring the assets of another corporation in a Sec. 381(a) transaction--a distribution under Sec. 332 (liquidation of a subsidiary) or transfer under Sec. 361 (reorganization solely for stock or securities)--determines the method of accounting and inventory it will use.

Under Sec. 381(a), the acquiring corporation succeeds to and takes into account specified items of the distributor or transferor corporation, including its method of accounting and inventory method. Under Regs. Sec. 1.381(c)(4)-1, if the trades or businesses of the parties to a Sec. 381(a) transaction are operated as separate trades or businesses after the transaction, an otherwise permissible accounting method used by the parties is carried over and used by each trade or business of the acquiring corporation (carryover method). If, on the other hand, an integrated trade or business results, the acquiring corporation must determine and use a principal method.

The principal method generally is that used by the acquiring corporation before the transaction. However, if the distributor or transferor corporation is larger than the...