Maneuvering through the sec. 381 regulations' accounting method rules.

• Jurisdiction: United States
• Author: Duer, Linda A.
• Date: 01 May 1997

When a tax-free reorganization or liquidation is to occur and the corporate parties to the transaction use different accounting methods, there are a number of issues that must be considered. Regs. Sec. 1.381 (C)(4)-1 (a)(1)(i) requires the carryover of accounting methods to the acquiring corporation from the transferor corporation, unless different accounting methods were used on the transfer date. If different methods were used, the acquiring corporation must follow the regulations to determine the appropriate accounting method. This can prove to be a mine field for the unwary.

Principal Accounting Method

The first step in maneuvering through these regulations is to determine whether the component trades or businesses of the respective parties to the transaction may be treated as separate and distinct or must be integrated into one trade or business after the transaction. If the trades or businesses are operated as separate and distinct within the meaning of Regs. Sec. 1.446-1 (d), each separate trade or business will continue to use the accounting method used before the transaction, unless the acquiring corporation requests an accounting method change from the IRS or the Service prescribes a different accounting method under Regs. Sec. 1.446-1(b)(1).

An exception to this rule exists when a corporation may have only one accounting method for a particular...