Combining Tax Attributes

• Pages: 367-392
• Author: Howard E. Abrams,Don A. Leatherman,Thomas J. Brennan

367

Chapter 11

COMBINING TAX ATTRIBUTES

11.01 Introduction

In transactions covered by §§ 332, 351, 355, and 368, the Code

has specific provisions that generally preserve built-in gain or loss

through a carryover of basis in assets transferred or a substitution of

basis in stock received in exchange. For example, § 358 provides,

generally speaking, for a transfer of the adjusted basis of exchanging

shareholders to the new stock or securities acquired by them.

Similarly, § 362 provides that property acquired by a corporation in

connection with a § 351 transaction or in connection with a

reorganization typically will have the same basis as the property had

in the hands of the transferor. See also § 1223 relating to the holding

period of property received in connection with such transactions and

§ 168(i)(7) for a step-in-the-shoes rule applicable to depreciation.

However, corporations have a great many more tax attributes

than basis and holding periods of assets. Different corporations may

have different accounting methods, methods of depreciation with

respect to property, earnings and profits accounts, foreign tax credits,

and net operating loss (“NOL”) carryovers. Consistent with the

philosophy of the non-recognition provisions such as § 351, § 355, and

the operative provisions for § 368 reorganizations, those tax

attributes should remain undisturbed after such transactions. One

would also expect similar rules to apply for liquidations of controlled

subsidiaries into their parents to which §§ 332, 337, and 334(b)

apply.

For example, if two corporations merge in a § 368

reorganization, one would expect that after the merger, in calculating

whether distributions were made out of earnings and profits, one

would look to the combined earnings and profits of the two

corporations. Generally speaking, § 381 (providing for carryover of

tax attributes in certain tax -free exchanges) and other provisions of

the Code carry out such expected results.

On the other hand, where a corporation sells all of its assets in

a taxable transaction, the purchaser does not succeed to the selling

corporation’s tax attributes, because the selling corporation remains

in existence. If a selling corporation liquidates and § 332 does not

apply to the liquidation, the selling corporation’s tax attributes

simply disappear. Similarly, if a target corporation is deemed to sell

its assets to itself when an election unde r § 338 is made, the

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COMBINING TAX ATTRIBUTES

Ch. 11

corporation’s tax attributes disappear (at least if a regular § 338

election is made).

1

This simplified discussion ignores the problems created over

many decades by what some call the “trafficking” in corporations

having substantial NOL carryovers and other desirable tax

attributes (for example, high-basis low-value assets). Individuals

having business deductions in excess of income can carry those losses

forward as prescribed by § 172 but cannot readily sell these tax

benefits to others.

2

When NOL carryovers are lodged in a corporate

entity, however, sale of the loss is no more difficult than the sale of

the stock of the corporation—provided that the tax attributes are not

reduced or eliminated by the transfer of the stock. As described

below, Congress and the Treasury have actively resisted perceived

“trafficking” in loss corporations.

11.02 Section 381

Section 381 provides for the carryover of tax attributes from a

transferor corporation to an acquiring corporation in certain

transactions. The transactions covered are (1) a liquidation of a

controlled subsidiary and (2) type A, C, or F tax-free reorganizations

as well as acquisitive D or G reorganizations. Note that in a

§ 368(a)(1)(B) stock-for-stock reorganization, there is no need for the

rules of § 381 since the corporate existence of the acquired company

continues even though there is an exchange at the shareholder level.

The same holds true for § 368(a)(1)(E) recapitalizations. In other

words, § 381 deals, as its opening sentence states, with “the

acquisition of assets of a corporation by another corporation.”

The inherited attributes in a qualified transaction are subject to

the operating rules of § 381(b). Section 381(b)(3) provides that the

acquiring corporation may not carry back a po st-acquisition NOL or

net capital loss to a pre-acquisition year of the transferor. Here the

rules impinge not on the carryover of the transferor’s attributes to

the transferee but instead block the use by the transferee of its own

losses against income of a transferor corporation for a year before the

combination.

Section 381(c) lists numerous tax attributes of the transferor

that the transferee inherits. Of these, the most prominent one that

will be discussed in greater detail below is the NOL carryover of

§ 381(c)(1). Note that while loss carryovers are transferred to the

acquiring company, they can be used only against future income of

1

For a discussion of § 338, see Section 9.03 supra.

2

NOLs arising in taxable years before 2018 generally can be carried back two

years and forward 20 years. NOLs arising in later years generally cannot be carried

back but can be carried forward indefinitely. § 172(b)(1).