(a) Scope. ADSP and AGUB are redetermined at such time and in such amount as an increase or decrease would be required under general principles of tax law for the elements of ADSP or AGUB. This section provides rules for allocating redetermined ADSP or AGUB.
(b) Allocation of redetermined ADSP and AGUB. When ADSP or AGUB is redetermined, a new allocation of ADSP or AGUB is made by allocating the redetermined ADSP or AGUB amount under the rules of §1.338-6. If the allocation of the redetermined ADSP or AGUB amount under §1.338-6 to a given asset is different from the original allocation to it, the difference is added to or subtracted from the original allocation to the asset, as appropriate. (See paragraph (d) of this section for new target's treatment of the amount so allocated.) Amounts allocable to an acquisition date asset (or with respect to a disposed-of acquisition date asset) are subject to all the asset allocation rules (for example, the fair market value limitation in §1.338-6(c)(1) ) as if the redetermined ADSP or AGUB were the ADSP or AGUB on the acquisition date.
(c) Special rules for ADSP -
(1)
Increases or decreases in deemed
sale tax consequences taxable notwithstanding old target ceases to
exist. To the extent general principles of tax law would require a
seller in an actual asset sale to account for events relating to the sale that
occur after the sale date, target must make such an accounting. Target is not
precluded from realizing additional deemed sale tax consequences because the
target is treated as a new corporation after the acquisition date.
(2)
Procedure for transactions in
which section 338(h)(10) is not elected -
(i)
Deemed sale tax consequences
included in new target's return. If an election under section
338(h)(10) is not made, any additional deemed sale tax consequences of old
target resulting from an increase or decrease in the ADSP are included in new
target's income tax return for new target's taxable year in which the increase
or decrease is taken into account. For example, if after the acquisition date
there is an increase in the allocable ADSP of section 1245 property for which
the recomputed basis (but not the adjusted basis) exceeds the portion of the
ADSP allocable to that particular asset on the acquisition date, the additional
gain is treated as ordinary income to the extent it does not exceed such excess
amount. See paragraph (c)(2)(ii) of this section for the special treatment of
old target's carryovers and carrybacks. Although included in new target's
income tax return, the deemed sale tax consequences are separately accounted
for as an item of old target and may not be offset by income, gain, deduction
loss, credit, or other amount of new target. The amount of tax on income of old
target resulting from an increase or decrease in the ADSP is determined as if
such deemed sale tax consequences had been recognized in old target's taxable
year ending at the close of the acquisition date. However, because the income
resulting from the increase or decrease in ADSP is reportable in new target's
taxable year of the increase or decrease, not in old target's taxable year
ending at the close of the acquisition date, there is not a resulting
underpayment of tax in that past taxable year of old target for purposes of
calculation of interest due.
(ii)
Carryovers and carrybacks -
(A)
Loss carryovers to new target
taxable years. A net operating loss or net capital loss of old target
may be carried forward to a taxable year of new target, under the principles of
section 172 or 1212, as applicable, but is allowed as a deduction only to the
extent of any recognized income of old target for such taxable year, as
described in paragraph (c)(2)(i) of this section. For this purpose, however
taxable years of new target are not taken into account in applying the
limitations in section 172(b)(1) or 1212(a)(1)(B) (or other similar
limitations). In applying sections 172(b) and 1212(a)(1), only income, gain
loss, deduction, credit, and other amounts of old target are taken into
account. Thus, if old target has an unexpired net operating loss at the close
of its taxable year in which the deemed asset sale occurred that could be
carried forward to a subsequent taxable year, such loss may be carried forward
until it is absorbed by old target's income.
(B)
Loss carrybacks to taxable years
of old target. An ordinary loss or capital loss accounted for as a
separate item of old target under paragraph (c)(2)(i) of this section may be
carried back to a taxable year of old target under the principles of section
172 or 1212, as applicable. For this purpose, taxable years of new target are
not taken into account in applying the limitations in section 172(b) or 1212(a)
(or other similar limitations).
(C)
Credit carryovers and carrybacks. The principles described in
paragraphs (c)(2)(ii)(A) and (B) of this section apply to carryovers and
carrybacks of amounts for purposes of determining the amount of a credit
allowable under part IV, subchapter A, chapter 1 of the Internal Revenue Code
Thus, for example, credit carryovers of old target may offset only income tax
attributable to items described in paragraph (c)(2)(i) of this
section.
(3)
Procedure for transactions in which section 338(h)(10) is
elected. If an election under section 338(h)(10) is made, any changes
in the deemed sale tax consequences caused by an increase or decrease in the
ADSP are accounted for in determining the taxable income (or other amount) of
the member of the selling consolidated group, the selling affiliate, or the S
corporation shareholders to which such income, loss, or other amount is
attributable for the taxable year in which such increase or decrease is taken
into account.
(d) Special rules for AGUB -
(1)
Effect of disposition or depreciation of acquisition date
assets. If an acquisition date asset has been disposed of
depreciated, amortized, or depleted by new target before an amount is added to
the original allocation to the asset, the increased amount otherwise allocable
to such asset is taken into account under general principles of tax law that
apply when part of the cost of an asset not previously taken into account in
basis is paid or incurred after the asset has been disposed of, depreciated,
amortized, or depleted. A similar rule applies when an amount is subtracted
from the original allocation to the asset. For purposes of the preceding
sentence, an asset is considered to have been disposed of to the extent that
its allocable portion of the decrease in AGUB would reduce its basis below
zero.
(2)
Section 38
property. Section
1.47-2 applies to a reduction in
basis of section 38 property under this section.
(e) Examples. The following examples illustrate this section. Any amount described in the following examples is exclusive of interest. For rules characterizing deferred contingent payments as principal or interest, see §§1.483-4, 1.1274-2, and 1.1275-4. The examples are as follows:
Example 1.
(i)
(A) T's
assets other than...
