[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.52-2]

[Page 424-426]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.52-2  Adjustments for acquisitions and dispositions.

    (a) General rule. The provisions in this section only apply to the 
computation of the new jobs credit. If, after December 31, 1975, an 
employer acquires the major portion of a trade or business or the major 
portion of a separate unit of a trade or business, then, for purposes of 
computing the new jobs credit for any calendar year ending

[[Page 425]]

after the acquisition, both the amount of unemployment insurance wages 
and the amount of total wages considered to have been paid by the 
acquiring employer, for both the year in which the acquisition occurred 
and the preceding year, must be increased, respectively, by the amount 
of unemployment insurance wages and the amount of total wages paid by 
the predecessor employer that are attributable to the acquired portion 
of the trade or business or separate unit. If the predecessor employer 
informs the acquiring employer in writing of the amount of unemployment 
insurance wages and the amount of total wages attributable to the 
acquired portion of the trade or business that have been paid during the 
periods preceding the acquisition, then, for purposes of computing the 
credit for any calendar year ending after the acquisition the amount of 
unemployment insurance wages and the amount of total wages considered 
paid by the predecessor employer shall be decreased by those amounts. 
Regardless of whether the predecessor employer so informs the acquiring 
employer, the predecessor employer shall not be allowed a credit for the 
amount of any increase in the employment insurance wages or the total 
wages in the calendar year of the acquisition attributable to the 
acquired portion of the trade or business over the amount of such wages 
in the calendar year preceding the acquisition.
    (b) Meaning of terms--(1) Acquisition. (i) For the purposes of this 
section, the term ``acquisition'' includes a lease agreement if the 
effect of the lease is to transfer the major portion of the trade or 
business or of a separate unit of the trade or business for the period 
of the lease. For instance, if one company leases a factory (including 
equipment) to another company for a 2-year period, the employees are 
retained by the second company, and the factory is used for the same 
general purposes as before, then for purposes of this section the lessee 
has acquired the lessor's trade or business for the period of the lease.
    (ii) Neither the major portion of a trade or business nor the major 
portion of a separate unit of a trade or business is acquired merely by 
acquiring physical assets. The acquisition must transfer a viable trade 
or business.
    (iii) Subdivision (ii) of this subparagraph may be illustrated by 
the following examples:

    Example 1. R Co., a restaurant, sells its building and all its 
restaurant equipment to S Co. and moves into a larger, more modern 
building across the street. R Co. purchases new equipment, retains its 
name and continues to operate as a restaurant. S Co. opens a new 
restaurant in the old R Co. building. S Co. has merely acquired the old 
R Co. assets; it has not acquired any portion of R Co.'s business.
    Example 2. The facts are the same as in Example 1, except that R Co. 
also sells its name and goodwill to S Co. and ceases to operate a 
restaurant business. S Co. operates its restaurant using the old R Co. 
name. In this situation, S Co. has acquired R Co.'s business.

    (2) Separate unit. (i) A separate unit is a segment of a trade or 
business capable of operating as a self-sustaining enterprise with minor 
adjustments. The allocation of a portion of the goodwill of a trade or 
business to one of its segments is a strong indication that that segment 
is a separate unit.
    (ii) The following examples are illustrations of the acquisition of 
a separate unit of a trade or business:

    Example 1. The M Corp., which has been engaged in the sale and 
repair of boats, leases the repair shop building and all the property 
used in its boat repair operations to the N Co. for four years and gives 
the N Co. a covenant not to compete in the boat repair business for the 
period of the lease. The N Co. is considered to have acquired a separate 
unit of M Corp.'s business for the period of the lease.
    Example 2. (a) The P Co. is engaged in the operation of a chain of 
department stores. There are eight divisions, each division is located 
in a different metropolitan area of the country, and each division 
operates under a different name. Although certain buying and 
merchandising functions are centralized, each division's day-to-day 
operations are independent of the others. The Q Corp. acquires all of 
the physical and intangible assets of one of the divisions, including 
the division's name. Other than making those minor adjustments necessary 
to give the division buying and merchandising departments, the Q Corp. 
allows the division to continue doing business in the same manner as it 
had been operating prior to the acquisition. The Q Corp. has acquired a 
separate unit of the P Co.'s business.
    (b) The facts are the same as in paragraph (a) of example 2, except 
that Q Corporation

[[Page 426]]

buys the division merely to obtain its store locations. Before the Q 
Corporation takes over, the division liquidates its inventory in a 
going-out-of-business sale. The Q Corporation has merely acquired assets 
in this transaction, not a separate unit of P Company's business.
    Example 3. The R Company processes and distributes meat products. 
Both the processing division and the distributorship are self-
sustaining, profitable operations. The acquisition of either the meat 
processing division or the distributorship would be an acquisition of a 
separate unit of the R Company's business.
    Example 4. The S Corporation is engaged in the manufacture and sale 
of steel and steel products. S Corporation also owns a coal mine, which 
it operates for the sole purpose of supplying its coal requirements for 
its steel manufacturing operations. The acquisition of the coal mine 
would be an acquisition of a separate unit of the S company's business.
    Example 5. The T Company, which is engaged in the business of 
operating a chain of drug stores, sells its only downtown drug store to 
the V Company and agrees not to open another T Company store in the 
downtown area for five years. Included in the purchase price is an 
amount that is charged for the goodwill of the store location. The V 
Company has acquired a separate unit of the T Company's business.
    Example 6. The W Company, which is engaged in the business of 
operating a chain of drug stores sells one of its stores to the X 
Company, but continues to operate another drug store three blocks away. 
The X Company opens the store doing business under its own name. The X 
Company has not acquired a separate unit of the W Company's business.
    Example 7. (a) The Y Corporation, which is engaged in the 
manufacture of mattresses, sells one of its three factories to the Z 
Company. At the time of the sale, the factory is capable of profitably 
manufacturing mattresses on its own. Z Company has acquired a separate 
unit of the Y Corporation.
    (b) The facts are the same as in (a) above, except that a profitable 
manufacturing operation cannot be conducted in the factory standing on 
its own. Z Company has not acquired a separate unit of the Y 
Corporation.
    Example 8. The O Construction Company is owned by A, B, and C, who 
are unrelated individuals. It owns equipment valued at 1.5 million 
dollars and construction contracts valued at 6 million dollars. A, 
wishing to start his own company, exchanges his interest in O Company 
for 2 million dollars of contracts and a sufficient amount of equipment 
to enable him to begin business immediately. A has acquired a separate 
unit of the O Company's business.

    (3) Major portion. All the facts and circumstances surrounding the 
transaction shall be taken into account in determining what constitutes 
a major portion of a trade or business (or separate unit). Factors to be 
considered include:
    (i) The fair market value of the assets in the portion relative to 
the fair market value of the other assets of the trade or business (or 
separate unit);
    (ii) The proportion of goodwill attributable to the portion of the 
trade or business (or separate unit);
    (iii) The proportion of the number of employees of the trade or 
business (or separate unit) attributable to the portion in the periods 
immediately preceding the transaction; and
    (iv) The proportion of the sales or gross receipts, net income, and 
budget of the trade or business (or separate unit) attributable to the 
portion.

(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat. 
2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917, 
26 U.S.C. 7805)

[T.D. 7553, 43 FR 31323, July 21, 1978, as amended by T.D. 7921, 48 FR 
52906, Nov. 23, 1983]