Frequently Asked Questions
Who is eligible for the Deduction of Assumed Liabilities in Reorganizations?
The obligation must not have been reflected in the purchase price (stock/property) at the time of the transfer.
How does the Deduction of Assumed Liabilities in Reorganizations work?
An acquiring corporation can deduct payments made on assumed obligations of a transferor corporation if those expenses would have been deductible by the transferor.
What law authorizes the Deduction of Assumed Liabilities in Reorganizations?
The Deduction of Assumed Liabilities in Reorganizations is authorized under IRC §381(c)(16) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §381
Source: Internal Revenue Code, Title 26, United States Code
§ 381. Carryovers in certain corporate acquisitions(a) General ruleIn the case of the acquisition of assets of a corporation by another corporation—(1) in a distribution to such other corporation to which section 332 (relating to liquidations of subsidiaries) applies; or
(2) in a transfer to which section 361 (relating to nonrecognition of gain or loss to corporations) applies, but only if the transfer is in connection with a reorganization described in subparagraph (A), (C), (D), (F), or (G) of section 368(a)(1),
the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation, subject to the conditions and limitations specified in subsections (b) and (c). For purposes of the preceding sentence, a reorganization shall be treated as meeting the requirements of subparagraph (D) or (G) of section 368(a)(1) only if the requirements of subparagraphs (A) and (B) of section 354(b)(1) are met.
(b) Operating rulesExcept in the case of an acquisition in connection with a reorganization described in subparagraph (F) of section 368(a)(1)—(1) The taxable year of the distributor or transferor corporation shall end on the date of distribution or transfer.
(2) For purposes of this section, the date of distribution or transfer shall be the day on which the distribution or transfer is completed; except that, under regulations prescribed by the Secretary, the date when substantially all of the property has been distributed or transferred may be used if the distributor or transferor corporation ceases all operations, other than liquidating activities, after such date.
(3) The corporation acquiring property in a distribution or transfer described in subsection (a) shall not be entitled to carry back a net operating loss or a net capital loss for a taxable year ending after the date of distribution or transfer to a taxable year of the distributor or transferor corporation.
(c) Items of the distributor or transferor corporationThe items referred to in subsection (a) are:(1) Net operating loss carryoversThe net operating loss carryovers determined under section 172, subject to the following conditions and limitations:(A) The taxable year of the acquiring corporation to which the net operating loss carryovers of the distributor or transferor corporation are first carried shall be the first taxable year ending after the date of distribution or transfer.
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