Section

[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: 26CFR1.381(c)(2)-1]

[Page 375-381]

TITLE 26--INTERNAL REVENUE

CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)

PART 1_INCOME TAXES--Table of Contents

Sec. 1.381(c)(2)-1 Earnings and profits.

(a) In general. (1) Section 381(c)(2) requires the acquiring
corporation in a transaction to which section 381(a) applies to succeed
to, and take into account, the earnings and profits, or deficit in
earnings and profits, of the distributor or transferor corporation as of
the close of the date of distribution or transfer. In determining the
amount of such earnings and profits, or deficit, to be carried over, and
the manner in which they are to be used by the acquiring corporation
after such date, the provisions of section 381(c)(2) and this section
shall apply. For purposes of section 381(c)(2) and this section, if

[[Page 376]]

the distributor or transferor corporation accumulates earnings and
profits, or incurs a deficit in earnings and profits, after the date of
distribution or transfer and before the completion of the reorganization
or liquidation, such earnings and profits, or deficit, shall be deemed
to have been accumulated or incurred as of the close of the date of
distribution or transfer.
(2) If the distributor or transferor corporation has accumulated
earnings and profits as of the close of the date of distribution or
transfer, such earnings and profits shall (except as hereinafter
provided in this section) be deemed to be received by, and to become a
part of the accumulated earnings and profits of, the acquiring
corporation as of such time. Similarly, if the distributor or transferor
corporation has a deficit in accumulated earnings and profits as of the
close of the date of distribution or transfer, such deficit shall
(except as hereinafter provided in this section) be deemed to be
incurred by the acquiring corporation as of such time. In no event,
however, shall the accumulated earnings and profits, or deficit, of the
distribution or transferor corporation be taken into account in
determining earnings and profits of the acquiring corporation for the
taxable year during which occurs the date of distribution or transfer.
(3) Any part of the accumulated earnings and profits, or deficit in
accumulated earnings and profits, of the distributor or transferor
corporation which consists of earnings and profits, or deficits,
accumulated before March 1, 1913, shall be deemed to become earnings and
profits, or deficits, of the acquiring corporation accumulated before
March 1, 1913, and any part of the accumulated earnings and profits of
the distributor or transferor corporation which consists of increase in
value of property accrued before March 1, 1913, shall be deemed to
become earnings and profits of the acquiring corporation consisting of
increase in value of property accrued before March 1, 1913.
(4) If the acquiring corporation and each distributor or transferor
corporation has accumulated earnings and profits as of the close of the
date of distribution or transfer, or if each of such corporations has a
deficit in accumulated earnings and profits as of such time, then the
accumulated earnings and profits (or deficit) of each such corporation
shall be consolidated as of the close of the date of distribution or
transfer in the accumulated earnings and profits account of the
acquiring corporation. See subparagraph (6) of this paragraph for
determination of the accumulated earnings and profits (or deficit) of
the acquiring corporation as of the close of the date of distribution or
transfer.
(5) If (i) one or more corporations a party to a distribution or
transfer has accumulated earnings and profits as of the close of the
date of distribution or transfer, and (ii) one or more of such
corporations has a deficit in accumulated earnings and profits as of
such time, the total of any such deficits shall be used only to offset
earnings and profits accumulated, or deemed to have been accumulated
under subparagraph (6) of this paragraph, by the acquiring corporation
after the date of distribution or transfer. In such instance, the
acquiring corporation will be considered as maintaining two separate
earnings and profits accounts after the date of distribution or
transfer. The first such account shall contain the total of the
accumulated earnings and profits as of the close of the date of
distribution or transfer of each corporation which has accumulated
earnings and profits as of such time, and the second such account shall
contain the total of the deficits in accumulated earnings and profits of
each corporation which has a deficit as of such time. The total deficit
in the second account may not be used to reduce the accumulated earnings
and profits in the first account (although such earnings and profits may
be offset by deficits incurred, or deemed to have been incurred, after
the date of distribution or transfer) but shall be used only to offset
earnings and profits accumulated, or deemed to have been accumulated
under subparagraph (6) of this paragraph, by the acquiring corporation
after the date of distribution or transfer.
(6) In any case in which it is necessary to compute the accumulated
earnings and profits, or the deficit in

[[Page 377]]

accumulated earnings and profits, of the acquiring corporation as of the
close of the date of distribution or transfer and such date is a day
other than the last day of a taxable year of the acquiring corporation--
(i) If the acquiring corporation has earnings and profits for its
taxable year during which occurs the date of distribution or transfer,
such earnings and profits (a) shall be deemed to have accumulated as of
the close of such date in an amount which bears the same ratio to the
undistributed earnings and profits of such corporation for such year as
the number of days in the taxable year preceding the date following the
date of distribution or transfer bears to the total number of days in
the taxable year, and (b) shall be deemed to have accumulated after the
date of distribution or transfer in an amount which bears the same ratio
to the undistributed earnings and profits of such corporation for such
year as the number of days in the taxable year following such date bears
to the total number of days in such taxable year. For purposes of the
preceding sentence, the undistributed earnings and profits of the
acquiring corporation for such taxable year shall be the earnings and
profits for such taxable year reduced by any distributions made
therefrom during such taxable year.
(ii) If the acquiring corporation has an operating deficit for its
taxable year during which occurs the date of distribution or transfer,
then, unless the actual accumulated earnings and profits, or deficit, as
of such date can be shown, such operating deficit shall be deemed to
have accumulated in a manner similar to that described in subdivision
(i) of this subparagraph.
(7) This paragraph may be illustrated by the following examples, in
which it is assumed that none of the accumulated earnings and profits,
or deficits, consist of earnings and profits or deficits accumulated, or
increase in value of property accrued, before March 1, 1913.

Example (1). (i) M and N Corporations make their returns on the
basis of the calendar year. On June 30, 1959, M Corporation transfers
all its assets to N Corporation in a statutory merger to which section
361 applies. The books of the two corporations reveal the following
information:

------------------------------------------------------------------------
M N
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits at close of $100,000 $150,000
calendar year 1958..........................
Earnings and profits of taxable year ending 15,000 ...........
June 30, 1959...............................
Earnings and profits of calendar year 1959... ............ 36,500
Distributions during calendar year 1959...... 0 0
------------------------------------------------------------------------

(ii) As of the close of June 30, 1959, N acquires from M accumulated
earnings and profits of $115,000. Since M and N each has accumulated
earnings and profits as of the close of the date of transfer, M's
accumulated earnings and profits are added to N's accumulated earnings
and profits as of such time. However, no part of M's accumulated
earnings and profits is taken into account in determining N's earnings
and profits for the calendar year 1959. Therefore, N's earnings and
profits for the calendar year 1959 are $36,500.
Example (2). (i) X and Y Corporations make their returns on the
basis of the calendar year. On June 30, 1959, X Corporation transfers
all its assets to Y Corporation in a statutory merger to which section
361 applies. The books of the two corporations reveal the following
information:

(ii) As of the close of June 30, 1959, Y acquires from X a deficit
in accumulated earnings and profits in the amount of $60,000. This
deficit may be used only to reduce those earnings and profits of Y which
are accumulated, or deemed to have accumulated, after June 30, 1959.
Accordingly, as of December 31, 1959, the accumulated earnings and
profits of Y amount to $118,100; at such time Y also has a separate
deficit in accumulated earnings and profits in the amount of $41,600.
These amounts are determined as follows:

Accumulated earnings and profits of Y as of the close of $100,000
1958.......................................................
Add:
Portion of undistributed earnings and profits of Y for 18,100
1959 deemed to have accumulated as of close of June 30,
1959 ($36,500x181/365)...................................
-----------

[[Page 378]]

Accumulated earnings and profits of Y as of close of 118,100
June 30, 1959, and also as of Dec. 31, 1959............
===========
Portion of undistributed earnings and profits of Y for 18,400
1959 deemed to have accumulated after June 30, 1959
($36,500x184/365)........................................
Less:
Deficit in accumulated earnings and profits acquired by Y 60,000
from X Corporation as of close of June 30, 1959..........
-----------
Separate deficit in accumulated earnings and profits of 41,600
Y as of Dec. 31, 1959..................................

Example (3). Assume the same facts as in Example (2), except that on
September 15, 1959, Y Corporation makes a cash distribution of $96,500.
The entire distribution is a dividend: $36,500 from earnings and profits
for the taxable year 1959 and $60,000 from earnings and profits
accumulated as of December 31, 1958. Accordingly, as of December 31,
1959, Y has accumulated earnings and profits of $40,000, and also has a
separate deficit in accumulated earnings and profits of $60,000. These
amounts are determined as follows:

Earnings and profits of Y for calendar year 1959............. $36,500
Accumulated earnings and profits of Y as of close of 1958.... 100,000
----------
Total....................................................... 136,500
Less:
Distributions during 1959.................................. 96,500
----------
Accumulated earnings and profits of Y as of Dec. 31, 1959 40,000
==========
Deficit in accumulated earnings and profits acquired from X $60,000
as of close of June 30, 1959................................
Less:
Portion of Y's undistributed earnings and profits for 1959 0
deemed to have accumulated after June 30, 1959............
----------
Separate deficit in accumulated earnings and profits of Y 60,000
as of Dec. 31, 1959.....................................

Example (4). (i) M and N Corporations make their returns on the
basis of the calendar year. On June 30, 1959, M Corporation transfers
all its assets to N Corporation in a statutory merger to which section
361 applies. The books of the two corporations reveal the following
information:

------------------------------------------------------------------------
M N
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits at close of $100,000 $50,000
calendar year 1958..........................
Earnings and profits for taxable year ending 10,000 ...........
June 30, 1959...............................
Deficit in earnings and profits for calendar ............ 146,000
year 1959...................................
Distributions during calendar year 1959...... 0 0
------------------------------------------------------------------------

(ii) Assuming that N has not shown its actual accumulated earnings
and profits, or deficit, as of the close of June 30, 1959, N has a
deficit in accumulated earnings and profits at such time which amounts
to $22,400, determined as follows:

Accumulated earnings and profits of N as of close of 1958.... $50,000
Less:
Portion of deficit in earnings and profits of N for 1959 72,400
deemed to have accumulated as of close of June 30, 1959
($146,000x181/365)........................................
----------
Deficit in accumulated earnings and profits of N as of 22,400
close of June 30, 1959, and also as of Dec. 31, 1959....
------------------------------------------------------------------------

As of the close of June 30, 1959, N acquires from M accumulated earnings
and profits in the amount of $110,000, no part of which may be offset by
N's own deficit of $22,400; however, such earnings and profits may be
offset by deficits incurred, or deemed incurred, by N after June 30,
1959. Thus, as of December 31, 1959, N has the above-mentioned deficit
of $22,400; at such time N also has accumulated earnings and profits in
the amount of $36,400, determined as follows:

Accumulated earnings and profits acquired from M as of close $110,000
of June 30, 1959...........................................
Less:
Portion of deficit in earnings and profits of N for 1959 73,600
deemed to have accumulated after June 30, 1959
($146,000x184/365).......................................
-----------
Accumulated earnings and profits of N as of Dec. 31, 36,400
1959...................................................

Example (5). Assume the same facts as in Example (4), except that on
September 9, 1959, N Corporation makes a cash distribution of $100,000.
The amount of $82,000 is a dividend from accumulated earnings and
profits, computed as follows:

Accumulated earnings and profits acquired from M as of close $110,000
of June 30, 1959...........................................
Less:
Deficit in earnings and profits of N for 1959 deemed to 28,000
have accumulated from June 30 through Sept. 8, 1959
($146,000x70/365)........................................
-----------
Accumulated earnings and profits as of close of Sept. 8, 82,000
1959...................................................

As of December 31, 1959, N Corporation has a deficit in accumulated
earnings and profits of $68,000, computed as follows:

Deficit in accumulated earnings and profits of N as of close $22,400
of June 30, 1959............................................
Add:
Portion of N's deficit in earnings and profits for 1959 45,600
deemed to have accumulated after Sept. 8, 1959
($146,000x114/365)........................................
----------
Deficit in accumulated earnings and profits of N as of 68,000
Dec. 31, 1959...........................................

Example (6). (i) X, Y, and Z Corporations make their returns on the
basis of the calendar year. On June 30, 1959, X Corporation and Y
Corporation transfer all their assets to

[[Page 379]]

Z Corporation in a statutory merger to which section 361 applies. The
books of the three corporations reveal the following information:

----------------------------------------------------------------------------------------------------------------
X Y Z
Description Corporation Corporation Corporation
(transferor) (transferor) (acquirer)
----------------------------------------------------------------------------------------------------------------
Accumulated earnings and profits (or deficit) at close of calendar year $35,000 ($25,000) ($20,000)
1958..................................................................
Earnings and profits (or deficit) for taxable year ended June 30, 1959. 5,000 (5,000) ...........
Earnings and profits for calendar year 1959............................ ............ ............ 36,500
Distributions during 1959.............................................. 0 0 0
----------------------------------------------------------------------------------------------------------------

(ii) As of the close of June 30, 1959, Z acquires from Y a deficit
in accumulated earnings and profits of $30,000. As of such time, Z's own
deficit in accumulated earnings and profits amounts to $1,900,
determined as follows:

Deficit in accumulated earnings and profits of Z as of close $20,000
of 1958....................................................
Less:
Portion of undistributed earnings and profits of Z for 18,100
1959 deemed to have accumulated as of close of June 30,
1959 ($36,500x181/365)...................................
-----------
Deficit in accumulated earnings and profits as of close 1,900
of June 30, 1959.......................................

The total deficit of $31,900 may be used only to offset earnings and
profits of Z accumulated, or deemed to have accumulated, after June 30,
1959; such deficit may not be used to reduce the accumulated earnings
and profits of $40,000 acquired from X as of the close of June 30, 1959.
Thus, as of December 31, 1959, the accumulated earnings and profits of Z
amount to $40,000; at such time Z Corporation also has a separate
deficit in accumulated earnings and profits in the amount of $13,500,
determined as follows:

Deficit in accumulated earnings and profits as of close of $31,900
June 30, 1959..............................................
Less:
Portion of undistributed earnings and profits of Z for 18,400
1959 deemed to have accumulated after June 30, 1959
($36,500x184/365)........................................
-----------
Separate deficit in accumulated earnings and profits as 13,500
of Dec. 31, 1959.......................................

Example (7). X and Y Corporations make their returns on the basis of
the calendar year. On December 31, 1954, X transfers all its assets to Y
in a statutory merger to which section 361 applies. The books of the two
corporations reveal the following information:

------------------------------------------------------------------------
X Y
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits (or deficit) ($50,000) $210,000
at close of calendar year 1954..............
Earnings and profits (or deficit) for
calendar year:
1955....................................... ............ 5,000
1956....................................... ............ (20,000)
1957....................................... ............ 70,000
1958....................................... ............ 60,000
1959....................................... ............ 55,000
Cash distributions on:
Sept. 1, 1957.............................. ............ 80,000
Sept. 1, 1958.............................. ............ 40,000
Sept. 1, 1959.............................. ............ 30,000
------------------------------------------------------------------------

The balances in the accumulated earnings and profits account and the
separate deficit account of Y Corporation at the close of the taxable
year involved are as follows:

------------------------------------------------------------------------
Accumulated
Deficit earnings
Year acquired and profits
from X of Y
Corporation Corporation
------------------------------------------------------------------------
1954.......................................... $50,000 $210,000
1955.......................................... 45,000 210,000
1956.......................................... 45,000 190,000
1957.......................................... 45,000 180,000
1958.......................................... 25,000 180,000
1959.......................................... None 180,000
------------------------------------------------------------------------

(b) Successive acquisitions. (1) If, as of the date of distribution
or transfer, either the acquiring corporation, or the distributor or
transferor corporation, or both, is considered under paragraph (a) of
this section to be maintaining separate earnings and profits accounts as
the result of a prior transaction or transactions to which section
381(a) applied, the accumulated earnings and profits, or deficit in
accumulated earnings and profits, of each such corporation shall be
combined with the appropriate earnings and profits account of the other
such corporation. For example, if, as of the date of transfer, the
acquiring corporation and the transferor corporation are each
maintaining separate accounts, one containing accumulated earnings and
profits and the other containing a deficit in accumulated earnings and
profits, the amounts in the two accumulated earnings and profits
accounts shall be combined into one account, and the amounts in the

[[Page 380]]

two deficit accounts shall be combined into a second account, and the
amount in one combined account may not be used to offset the amount in
the other combined account.
(2) This paragraph may be illustrated by the following examples, in
which it is assumed that none of the accumulated earnings and profits,
or deficits, consist of earnings and profits or deficits accumulated, or
increase in value of property accrued, before March 1, 1913.

Example (1). (i) X, Y, and Z Corporations make their returns on the
basis of the calendar year. On June 30, 1958, X Corporation transfers
all its assets to Z Corporation in a statutory merger to which section
361 applies, and on August 31, 1958, Y Corporation transfers all its
assets to Z Corporation in another statutory merger to which section 361
applies. The books of the three corporations reveal the following
information:

----------------------------------------------------------------------------------------------------------------
X Y Z
Description Corporation Corporation Corporation
(transferor) (transferor) (acquirer)
----------------------------------------------------------------------------------------------------------------
Accumulated earnings and profits (deficit) at close of calendar year ($40,000 $10,000 $60,000
1957..................................................................
Deficit in earnings and profits for taxable year ending June 30, 1958.. (5,000) ............ ...........
Earnings and profits for taxable year ending Aug. 31, 1958............. ............ 2,000 ...........
Earnings and profits of calendar year 1958............................. ............ ............ 36,500
Distributions during calendar year 1958................................ 0 0 0
----------------------------------------------------------------------------------------------------------------

(ii) As of the close of June 30, 1958, Z acquires from X a deficit
in accumulated earnings and profits in the amount of $45,000, which
deficit may be used only to reduce those earnings and profits of Z which
are accumulated, or deemed to have been accumulated, after June 30,
1958. As of the close of August 31, 1958, Z acquires from Y earnings and
profits of $12,000, no portion of which may be reduced by the deficit
acquired by Z from X. Accordingly, as of December 31, 1958, Z has
accumulated earnings and profits of $90,100, and also has a separate
deficit in accumulated earnings and profits of $26,600. These amounts
are determined as follows:

Accumulated earnings and profits of Z as of Dec. 31, 1957... $60,000
Add:
Portion of undistributed earnings and profits of Z for 18,100
1958 deemed to have accumulated as of close of June 30,
1958 ($36,500x181/365)...................................
-----------
Accumulated earnings and profits of Z as of June 30, 1958... 78,100
Add:
Accumulated earnings and profits acquired by Z from Y as 12,000
of close of Aug. 31, 1958................................
-----------
Accumulated earnings and profits of Z as of close of Aug. 90,100
31, 1958, and also as of Dec. 31, 1958.....................
===========
Deficit in accumulated earnings and profits acquired by Z 45,000
from X as of close of June 30, 1958........................
Less:
Portion of undistributed earnings and profits of Z for 6,200
1958 deemed to have accumulated from June 30 through Aug.
31, 1958 ($36,500x62/365)................................
-----------
Separate deficit in accumulated earnings and profits of 38,800
Z as of Aug. 31, 1958..................................
Less:
Portion of undistributed earnings and profits of Z for 12,200
1958 deemed to have accumulated after Aug. 31, 1958
($36,500x122/365)........................................
-----------
Separate deficit in accumulated earnings and profits of 26,600
Z as of Dec. 31, 1958..................................

Example (2). (i) Assume the same facts as in Example (1), plus the
additional fact that on June 30, 1959, Z Corporation transfers all its
assets to M Corporation (which makes its return on the basis of the
calendar year) in a statutory merger to which section 361 applies, and
that as of such time M Corporation is considered to be maintaining
separate earnings and profits accounts as the result of a previous
transaction to which section 381(a) applied. The books of the two
corporations reveal the following information:

------------------------------------------------------------------------
Z M
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits as of Dec. $90,100 $50,000
31, 1958....................................
Separate deficit in accumulated earnings and 26,600 30,000
profits as of Dec. 31, 1958.................
Earnings and profits for taxable year ending 5,000 ...........
June 30, 1959...............................
Earnings and profits of calendar year 1959... ............ 36,500
Distributions during 1959.................... 0 0
------------------------------------------------------------------------

(ii) As of June 30, 1959, M acquires from Z accumulated earnings and
profits of $90,100, which amount is combined with M's own accumulated
earnings and profits of $50,000; M also acquires from Z a deficit in
accumulated earnings and profits of $21,600 ($26,600 minus $5,000),
which amount is combined with M's own deficit of $11,900. The total
deficit of

[[Page 381]]

$33,500 may be used only to reduce earnings and profits of M which are
accumulated, or deemed to have accumulated, after June 30, 1959.
Accordingly, as of December 31, 1959, M has accumulated earnings and
profits of $140,100, and also has a separate deficit in accumulated
earnings and profits in the amount of $15,100. These amounts are
determined as follows:

Deficit of M as of Dec. 31, 1958............................ $30,000
Less:
Portion of M's undistributed earnings and profits for 1959 18,100
deemed to have accumulated as of close of June 30, 1959
($36,500x181/365)........................................
-----------
Deficit of M as of June 30, 1959........................ 11,900
Plus:
Deficit of Z as of June 30, 1959.......................... 21,600
-----------
Combined deficit of M as of close of June 30, 1959...... 33,500
Less:
Portion of M's undistributed earnings and profits for 1959 18,400
deemed to have accumulated after June 30, 1959
($36,500x184/365)........................................
-----------
Separate deficit of M as of Dec. 31, 1959............... 15,100
===========
Accumulated earnings and profits of M as of Dec. 31, 1958, 50,000
and also as of June 30, 1959...............................
Accumulated earnings and profits of Z as of Dec. 31, 1958, 90,100
and also as of June 30, 1959...............................
-----------
Combined accumulated earnings and profits of M as of 140,100
close of June 30, 1959, and also as of Dec. 31, 1959...

(c) Distribution of earnings and profits pursuant to reorganization
or liquidation. (1) If, in a reorganization to which section 381(a)(2)
applies, the transferor corporation pursuant to the plan of
reorganization distributes to its stockholders property consisting not
only of property permitted by section 354 to be received without
recognition of gain, but also of other property or money, then the
accumulated earnings and profits of the transferor corporation as of the
close of the date of transfer shall be computed by taking into account
the amount of earnings and profits properly applicable to the
distribution, regardless of whether such distribution occurs before or
after the close of the date of transfer.
(2) If, in a distribution to which section 381(a)(1) (relating to
certain liquidations of subsidiaries) applies, the acquiring corporation
receives less than 100 percent of the assets distributed by the
distributor corporation, then the accumulated earnings and profits of
the distributor corporation as of the close of the date of distribution
shall be computed by taking into account the amount of earnings and
profits properly applicable to the distributions to minority
stockholders, regardless of whether such distributions occur before or
after the close of the date of distribution.
(d) Treatment of earnings and profits where assets are transferred
to a corporation controlled by the acquiring corporation. If, pursuant
to the provisions of paragraph (b)(2) of Sec. 1.381(a)-1, a corporation
is considered to be the acquiring corporation even though a part of the
acquired assets is transferred to one or more corporations controlled by
the acquiring corporation, or all the acquired assets are transferred to
two or more corporations controlled by the acquiring corporation, then
whether any portion of the earnings and profits received by the
acquiring corporation under section 381(c)(2) is allocable to such
controlled corporation or corporations shall be determined without
regard to section 381. See paragraph (a) of Sec. 1.312-11.

[T.D. 6586, 26 FR 12550, Dec. 28, 1961, as amended by T.D. 6692, 28 FR
12817, Dec. 3, 1963]