Reorganizations and tax attribute survival.

• Author: Svoboda, Ryan M.

Whether tax attributes will survive corporate tax reorganizations often becomes a critical consideration in assessing the ramifications of a proposed transaction. The many beneficial attributes that often exist and the speed at which reorganizations tend to move make a good foundational understanding of the relevant rules crucial for practitioners assisting taxpayers with reorganizations.

Issues surrounding corporate reorganizations begin with Sec. 368, with its seven types of reorganization (A-G). A full discussion of each is beyond the scope of this item, but it is important to note that type D sometimes appears as a divisive reorganization while at other times it is nondivisive.

Two other equally important factors are Secs. 381 and 361. Sec. 381 establishes the tax attribute carryover rules for two types of tax-free transactions: liquidations of controlled subsidiaries under Sec. 332 and various acquisitive and nondivisive reorganizations. This item ignores the former and explores the latter, so any further reference to the application of Sec. 381 is limited to its application to reorganizations.

Under Sec. 381(a), the tax attribute carryover rules apply to any transaction to which Sec. 361 applies. Sec. 361(a) states that no gain or loss to a corporation will be recognized if that corporation is a party to a reorganization and exchanges property solely for stock of another corporation involved in the reorganization. Sec. 381(a)(2) describes five of the seven types of reorganization as potentially eligible to use the attribute carryover rules. However, divisive type D reorganizations and G reorganizations that are not acquisitive and nondivisive reorganizations are not eligible to use the carryover rules.

Sec. 381(a) states that the attributes specifically enumerated in Sec. 381(c) will survive the eligible reorganizations discussed. Sec. 381(c) lists most of the traditional attributes considered, such as net operating losses and credits. But what about those attributes not listed? For example, like-kind exchanges under See. 1031 are noticeably absent from the list. Consider a situation in which a piece of property in California is exchanged for property in Nevada, and the taxpayer wants to use a type F reorganization to change from a California corporation to a Nevada corporation to escape California's minimum tax. A strict...