[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.312-10]

[Page 54-55]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.312-10  Allocation of earnings in certain corporate separations.

    (a) If one corporation transfers part of its assets constituting an 
active trade or business to another corporation in a transaction to 
which section 368(a)(1)(4) applies and immediately thereafter the stock 
and securities of the controlled corporation are distributed in a 
distribution or exchange to which section 355 (or so much of section 356 
as relates to section 355) applies, the earnings and profits of the 
distributing corporation immediately before the transaction shall be 
allocated between the distributing corporation and the controlled 
corporation. In the case of a newly created controlled corporation, such 
allocation generally shall be made in proportion to the fair market 
value of the business or businesses (and interests in any other 
properties) retained by the distributing corporation and the business or 
businesses (and interests in any other properties) of the controlled 
corporation immediately after the transaction. In a proper case, 
allocation shall be made between the distributing corporation and the 
controlled corporation in proportion to the net basis of the assets 
transferred and of the assets retained or by such other method as may be 
appropriate under the facts and circumstances of the case. The term net 
basis means the basis of the assets less liabilities assumed or 
liabilities to which such assets are subject. The part

[[Page 55]]

of the earnings and profits of the taxable year of the distributing 
corporation in which the transaction occurs allocable to the controlled 
corporation shall be included in the computation of the earnings and 
profits of the first taxable year of the controlled corporation ending 
after the date of the transaction.
    (b) If a distribution or exchange to which section 355 applies (or 
so much of section 356 as relates to section 355) is not in pursuance of 
a plan meeting the requirements of a reorganization as defined in 
section 368(a)(1)(D), the earnings and profits of the distributing 
corporation shall be decreased by the lesser of the following amounts:
    (1) The amount by which the earnings and profits of the distributing 
corporation would have been decreased if it had transferred the stock of 
the controlled corporation to a new corporation in a reorganization to 
which section 368(a)(1)(D) applied and immediately thereafter 
distributed the stock of such new corporation or,
    (2) The net worth of the controlled corporation. (For this purpose 
the term net worth means the sum of the basis of all of the properties 
plus cash minus all liabilities.)

If the earnings and profits of the controlled corporation immediately 
before the transaction are less than the amount of the decrease in 
earnings and profits of the distributing corporation (including a case 
in which the controlled corporation has a deficit) the earnings and 
profits of the controlled corporation, after the transaction, shall be 
equal to the amount of such decrease. If the earnings and profits of the 
controlled corporation immediately before the transaction are more than 
the amount of the decrease in the earnings and profits of the 
distributing corporation, they shall remain unchanged.
    (c) In no case shall any part of a deficit of a distributing 
corporation within the meaning of section 355 be allocated to a 
controlled corporation.