Purchase Price Allocations in
Deemed & Actual Asset Acquisitions
DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8940] RIN 1545-
AY73
TITLE: Purchase Price Allocations in Deemed and Actual Asset
Acquisitions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
SUMMARY: This document contains final regulations relating to deemed
and actual asset acquisitions under sections 338 and 1060. The final
regulations affect sellers and buyers of corporate stock that are
eligible to elect to treat the transaction as a deemed asset
acquisition. The final regulations also affect sellers and buyers of
assets that constitute a trade or business.
DATES: Effective Date These regulations are effective March 16,
2001. Applicability Dates For dates of applicability of these
regulations, see §§1.338(i)-1 and 1.1060-1(a)(2).
FOR FURTHER INFORMATION CONTACT: Richard Starke of the Office of
Associate Chief Counsel (Corporate), (202) 622-7790 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final
regulations have been reviewed and approved by the Office of
Management and Budget in accordance with the Paperwork Reduction Act
of 1995 (44 U.S.C. 3507(d)) under the control number 1545-1658.
An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it
displays a valid control number assigned by the Office of Management
and Budget.
The collections of information in these regulations are in
§§1.338-2(d), 1.338-2(e)(4), 1.338-5(d)(3), 1.338-10(a)
(4), 1.338(h)(10)-1(d)(2), and 1.1060- 1(e)(ii)(A) and (B). The
collections of information are necessary to make an election to
treat a sale of stock as a sale of assets, to calculate and collect
the appropriate amount of tax in a deemed or actual asset
acquisition, and to determine the bases of assets acquired in a
deemed or actual asset acquisition.
These collections of information are required to obtain a
benefit. The likely respondents and/or recordkeepers are small
businesses or organizations, businesses, or other for-profit
institutions, and farms.
The regulations provide that a section 338 election is made by
filing Form 8023. The burden for this requirement is reflected in
the burden of Form 8023. The regulations also provide that both a
seller and a purchaser must each file an asset acquisition statement
on Form 8594. The burden for this requirement is reflected in the
burden of Form 8594. With respect to Form 8023, the IRS estimated
that 201 forms would be filed each year and that each taxpayer would
require 12.98 hours to comply. With respect to Form 8594, the IRS
estimated that 20,000 forms would be filed each year and that each
taxpayer would require 12.25 hours to comply. These estimates have
been made available for public comment and no public comments have
been received.
The burden for the collection of information in §1.338-2(e)(4)
is as follows:
Estimated total annual reporting/recordkeeping burden: 25 hours
Estimated average annual burden per respondent/recordkeeper: 0.56
hours
Estimated number of respondents/recordkeepers: 45
Estimated annual frequency of responses: On occasion
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Reven e Service , Attn: IRS Reports Clearance Officer,
W:CAR:MP:FP:S:O, Washington, DC 20224, and to the Office of
Management and B dget , Attn: Desk Officer for the DEPARTMENT OF THE
TREASURY, Office of Information and Regulatory Affairs, Washington,
DC 20503.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.
Background
On August 10, 1999, the IRS and the Department of Treasury
(Treasury) published a notice of proposed rulemaking in the Federal
Register (REG- 107069-97, 64 FR 43462 (1999-36 I.R.B. 346))
containing proposed regulations under sections 338 and 1060 of the
Internal Revenue Code of 1986. On January 7, 2000, the IRS and
Treasury published temporary regulations in the Federal Register
(REG-107069-97, 65 FR 1236 (2000-4 I.R.B. 332)) that are virtually
the same as the proposed regulations published on August 10, 1999.
The preamble to the temporary regulations notes that the proposed
regulations generally were favorably received and that the IRS and
Treasury believe that the proposed regulations provided clearer
guidance and better rules than the prior regulations under sections
338 and 1060. However, the preamble also notes that the comments
received warranted further consideration.
Explanation of Provisions
In general, the final regulations adopted herein are very similar
to the proposed and temporary regulations in their organization and
substance. However, changes have been made in several areas, largely
in response to the comments received. The principal changes are
discussed below, in the order in which they appear in the
regulations.
Insurance Transactions
Although section 338 treats a target as having sold all its assets
in the deemed asset sale, proposed §1.338-1(a)(2) provides that
other rules of law may characterize the transaction as something
other than or in addition to a sale and purchase of assets. Proposed
§1.338-1(a)(2) states: "[f]or example, if target is an
insurance company for which a section 338 election is made, the
deemed asset sale would be characterized and taxed as an assumption-
reinsurance transaction under applicable Federal income tax law."
Several comments urged removal of the quoted sentence in the final
regulations and recommended that the treatment of transactions
involving insurance companies under section 338 be reserved pending
more complete analysis and guidance. The IRS and Treasury believe
that generally it is appropriate to view the deemed asset sale by an
insurance company as involving an assumption-reinsurance transaction
and, therefore, have retained the sentence in the final regulations.
The IRS and Treasury, however, intend to provide additional guidance
in a separate project.
Residual Method Anti-abuse Rule
The proposed regulations include a new anti-abuse rule intended to
prevent taxpayers from changing the results of applying the residual
method by engaging in transactions that have a transitory economic
effect with respect to the ownership or use of assets. The anti-
abuse rule is intended to apply only to an asset transfer exhibiting
objective characteristics suggesting the transfer was engaged in to
manipulate the operation of the residual method. Notwithstanding the
limited scope of the anti-abuse rule, several commentators suggested
further limiting or eliminating the rule. After studying the
comments, the IRS and Treasury continue to believe that the anti-
abuse rule serves a useful purpose in protecting the operation of
the residual method. Several changes have been made, however, to
clarify the intended scope of the rule. Thus, the phrase "to more
than an insignificant extent" is changed in the final regulation to
"primarily." This change is meant to clarify that some continuing
use in its original location of an asset transferred to or from the
target is permitted.
A comment requested that the final regulations elaborate further
on the statement that the Commissioner has the authority to make
appropriate correlative adjustments and that the final regulations
include an example. The final regulations do not do so, because the
nature of any correlative adjustments would depend on the particular
factual circumstances in which the rule is applied. Thus, any
additional guidance would provide only limited assistance. However,
the final regulations state that correlative adjustments should
avoid duplication or omission of any item of income, gain, loss,
deduction, or basis. See §1.338-1(c).
Closing Date Issues
Concerns have been raised about the possibility that buyers can
effectuate transactions outside the ordinary course of business
after acquiring target stock that, to the detriment of an
unsuspecting seller, must be reported by the seller on its return,
which normally covers the entire day on which the acquisition
occurs. Some of these concerns derive from a reading of
§1.1502- 76(b) to preclude operation of the "next day rule"
whenever a section 338 election is made for a target. The "next day
rule" of §1.1502-76(b) provides that if, on the day of a group
member's change in status as a member, a transaction occurs that is
properly allocable to the portion of the member's day after the
event resulting in the change, the member and all related persons
must treat the transaction as occurring at the beginning of the
following day.
Commentators have suggested that a purchaser acquiring stock of a
subsidiary member of a consolidated group could, after acquiring the
target stock, cause the target to sell all of its assets to another
person later on the closing date and then make a unilateral section
338(g) election. It is suggested that the effect of the election is
to preclude the operation of the next day rule, causing the results
of the actual asset sale to fall onto the selling consolidated
group's tax return. The IRS and Treasury do not believe that
§1.1502-76(b), as written, automatically precludes the
operation of the next day rule in a section 338 context, but
nevertheless have provided a new rule in these final regulations
that requires the application of the next day rule in a section 338
context where the target engages in a transaction outside the
ordinary course of business on the acquisition date after the event
resulting in the qualified stock purchase (QSP). See
§1.338-1(d).
Purchase Definition
Proposed §1.338-3(b)(2) provides rules concerning the
definition of a "purchase" that require more than a nominal amount
to be paid for the stock of the target. Several comments requested
reconsideration of the proposed rule. Accordingly, in the temporary
regulations, at §1.338-3T(b)(2), a definition is given for the
term purchase of target affiliate, while the definition of the term
purchase of target is reserved. The final regulations include a
single definition of purchase applicable to both targets and target
affiliates, which definition generally conforms to the definition of
purchase of target affiliate in the temporary regulations. Under
this definition, stock in a target (or target affiliate) may be
considered purchased if, under general principles of tax law, the
purchasing corporation is considered to own stock of the target (or
target affiliate) meeting the requirements of section 1504(a)(2),
notwithstanding that no amount may be paid for (or allocated to) the
stock. Transactions After QSPs
Since 1995, the regulations under section 338 have provided
special rules that apply, by virtue of section 338, to certain
transfers of target assets following a QSP of the target's stock if
a section 338 election is not made for the target. These provisions
modify the normal operation of the continuity of interest
requirement under section 368 and the interpretation of the term
shareholder for purposes of section 368(a)(1)(D), as applied to
certain taxpayers. These rules were adopted to effectuate
Congressional intent, in replacing former section 334(b)(2) with
section 338, that the deemed sale results provided by section 338
not be available through transactions within the purchasing group
after the acquisition. In the final regulations, these rules are
located at §1.338-3(d).
The 1995 amendments did not provide any special rule to modify the
application of the statutory requirements for reorganizations under
section 368(a)(1)(C). However, the considerations that justify the
modified application of the continuity of interest rule and the
shareholder definition for "D" reorganizations also justify an
analogous modification of the "solely for voting stock" requirement
for post-acquisition "C" reorganizations. Accordingly, the final
regulations provide that consideration other than voting stock
issued in connection with a QSP is ignored in determining whether a
subsequent transfer of assets by the target corporation to a member
of its new affiliated group satisfies the solely for voting stock
requirement of a "C" reorganization. See §1.338-3(d)(4).
Treatment of Liabilities
The proposed regulations eliminate the prior distinction between
"modified aggregate deemed sale price" (or MADSP) and "aggregate
deemed sale price" (or ADSP), a distinction that appeared to have
been based on the premise that the new target generally will not
bear the tax liability for the deemed sale where a section 338(h)
(10) election is made, but that it generally will bear the liability
where a section 338 (but not section 338(h)(10)) election is made.
However, these generalizations were not universally correct in
either situation. Proposed §§1.338-4 and 1.338-5 clarify
the treatment of taxes as liabilities in computing ADSP and
"adjusted grossed-up basis" (or AGUB). Commentators asked for
further clarification of the standards for taking certain taxes into
account. Rather than providing more specific guidance, which would
be inconsistent with the overall philosophy of deferring to general
tax principles governing actual transactions, the final regulations
further simplify the discussion of liabilities. Except for the fact
that new target remains liable for old target's tax liabilities (see
§1.338-1(b)(3)(i)) and that a buyer's assumption of a seller's
income tax liability with respect to the sale causes the
consideration to "gross up" or "pyramid," a tax liability is like
any other type of liability and the status of any particular type of
tax liability as a liability includible in ADSP or AGUB should be
determined under general principles as applied to the facts relating
to the incidence of the tax liability.
Valuation Rules
Proposed §1.338-6(a)(2)(iii) retains a statement from prior
versions of the regulations that "[i]n certain cases the IRS may
make an independent showing of the value of goodwill and going
concern value as a means of calling into question the validity of
the taxpayer's valuation of other assets." This authority was
intended to provide a means of ensuring that taxpayers do not
overvalue assets in higher classes that are allocated consideration
before the residual class. As a factual matter, the IRS and Treasury
understand that a low (or no) allocation to goodwill and going
concern value may result from causes other than a taxpayer's
overvaluation of assets in higher classes. Moreover, the IRS and
Treasury accept the soundness of the fundamental premise of the
residual method --- that goodwill and going concern value are the
most difficult assets to value independently and that their value
should be computed as the residue after all other assets are valued.
The final regulations delete the sentence about valuing goodwill and
going concern value. Under the final regulations, the IRS retains
the ability to challenge a taxpayer's valuation of assets in Classes
I through VI, but will do so on grounds consistent with the residual
method of allocation.
Top-Down Allocation
Changes to the rules for allocating purchase price to the stock
and assets of lower tier subsidiaries were not proposed, although,
as noted in the preamble to the proposed regulations, considerable
study was given to alternative approaches. Comments were requested,
but none was received, and the IRS and Treasury to date have been
unable to develop a fully successful alternative. Accordingly, the
final regulations continue to apply the "top-down" allocation
system, under which the stock of a lower tier subsidiary is
allocated purchase price in the general asset category (now Class V)
and the deemed purchase price of its assets is in turn computed from
that stock price and then allocated within the subsidiary.
In the final regulations, the scope of Class II assets described
in §1.338- 6(b)(2)(ii) is modified to provide that Class II
assets do not include stock of target affiliates, other than
actively traded stock described in section 1504(a)(4) (certain
preferred stock). Instead, stock of target affiliates is included in
Class V. This would exclude target affiliate stock from Class II
where the target holds an 80 percent or greater interest in the
target affiliate but a minority interest in target affiliate stock
of the same class is actively traded. It is not clear that the
trading price for shares of a class of stock less than 20 percent of
which is in the hands of the public, and which consequently may
experience thinner trading volumes, necessarily is indicative of the
fair market value of the 80 percent or greater majority interest.
Class III Assets
Proposed §1.338-6(b)(2) provides that Class III assets
consist of "accounts receivable, mortgages, and credit card
receivables from customers which arise in the ordinary course of
business." Comments suggested that these categories were too
limited. Under the rationales expressed in the preamble to the
proposed regulations, the IRS and Treasury believe that other types
of debt instruments, and even other types of assets, should be
included in Class III. As revised in the final regulations, Class
III assets generally consist of assets that the taxpayer marks to
market at least annually and debt instruments (including
receivables). However, debt instruments issued by related parties,
and certain contingent payment and convertible debt instruments, are
not included in Class III.
First Year Price Adjustments
Proposed §1.338-7 provides rules for allocating the ADSP or
AGUB when increases or decreases are required after the close of new
target's first taxable year. For increases or decreases required
before the end of new target's first taxable year, proposed
§1.338-4(b)(2)(ii) provides that "[i]ncreases or decreases with
respect to the elements of ADSP that are taken into account before
the close of new target's first taxable year are taken into account
for purposes of determining ADSP and the deemed sale tax
consequences as if they had been taken into account at the beginning
of the day after the acquisition date." Proposed §1.338-5(b)(2)
(ii) contains a similar rule for redeterminations of AGUB. These
rules originated in predecessor versions of the regulations under
section 338.
Although no commentator requested removal of these rules, one
comment highlighted the difficulties posed for the seller in section
338(h)(10) transactions in applying a rule based on new target's
year-end, and requested relief. After reviewing this comment, the
final regulations remove the rules providing special treatment for
changes in ADSP or AGUB occurring before the close of new target's
first taxable year. Instead, the general rule in §1.338-7
governs the allocation of all changes in ADSP or AGUB after the
acquisition date. This change is consistent with the IRS's and
Treasury's expressed intent in drafting the proposed regulations to
eliminate, to the extent possible, any special accounting rules in
the section 338 regulations, as it should result in treatment more
consistent with that of an actual asset sale. Like-kind Exchanges
A commentator suggested that the final regulations should apply
section 1031 to old target in its deemed asset sale if the purchaser
pays for target stock with property of like kind to old target's
assets or with cash put in escrow for a successor to old target to
designate for purchase of assets of like kind. This rule would be an
exception to the requirement in §1.338-1(a)(2) that the
transaction between old target and new target must be a taxable
transaction, and inconsistent with the requirement of section 338(a)
(1) that target "shall be treated as having sold all of its assets
at the close of the acquisition date at fair market value . . . ."
After considering the policy concerns and the administrative
difficulties in creating and administering an exception for section
1031 exchanges, the IRS and Treasury have not adopted this
suggestion. S Corporations
A purchaser may agree to compensate the sellers of an S
corporation target for adverse tax consequences resulting from a
section 338(h)(10) election. When more than one shareholder in an S
corporation sells stock in the same transaction, the different
shareholders may negotiate different prices for their stock based on
varying Federal and state tax liabilities they will bear as a result
of the transaction. Some commentators have noted that, in other
cases, different prices may be paid for control premiums or other
reasons. Under section 1361(b)(1)(D), an S corporation is permitted
to have only one class of stock. A potential second class of stock
issue arises because the fiction of a section 338(h)(10) election is
that the target sells its assets to a new target and then
liquidates. Applying that fiction, if the shareholders are treated
as receiving differing amounts per share in the deemed liquidation,
a second class of stock could result.
Some commentators have recommended that the final regulations
clarify that the payment of varying amounts per share to S
corporation shareholders will not cause the S corporation to violate
the single class of stock requirement. The final regulations respond
to these comments by including a statement in §1.1361-1(l)(2)
(v) that the payment of varying amounts to S corporation
shareholders in a transaction for which a section 338(h)(10)
election is made will not cause the S corporation to violate the
single class of stock requirement of section 1361(b)(1)(D) and
§1.1361-1(l), provided that the varying amounts are negotiated
in arm's length negotiations with the purchaser.
One commentator requested clarification regarding the calculation
and allocation of the purchaser's AGUB for a target that was an S
corporation that owned a qualified subchapter S subsidiary (QSub),
where the QSub status does not continue after the acquisition date
and the QSub is treated as becoming a separate subsidiary of new
target. Although the regulations require allocation of the AGUB
among the target's assets held at the beginning of the day after the
acquisition date, they also require results consistent with those
that would occur if the parties had actually engaged in the
transactions deemed to occur because of section 338(h)(10), and
taking into account other transactions that actually occurred or are
deemed to occur. See §1.338(h)(10)-1(d)(9). An actual sale of
the assets of the S corporation target, including the stock of the
QSub, to a corporation would be treated as a sale by the S
corporation of all of its assets, including those of the QSub. If
the QSub status does not continue after the acquisition, the buyer
would be treated as forming a new subsidiary containing the assets
held by the former QSub. See §1.1361-5(b)(3) Example 9.
Accordingly, the AGUB for the former S corporation target would be
allocated among the assets of the former QSub as though they were
assets of the target, and then the target would be treated as having
formed a new subsidiary containing the assets of the former QSub.
Clarification was also requested regarding the possibility of
making a section 338(h)(10) election for the sale by an S
corporation of stock of a QSub. As noted above, Example 9 of
§1.1361-5(b)(3) indicates that the sale by an S corporation of
all of the stock of a QSub is treated as an asset sale by the S
corporation to the purchaser of the QSub stock. No further guidance
is provided in these regulations. The sale of an 80 percent or
greater (but less than 100 percent) interest in the stock of a QSub
is not expected to be a common transaction because it generally will
result in a taxable transaction with respect to all the assets of
the QSub.
Forms 8023 and 8594
The current temporary regulations provide that a section 338(h)
(10) election for an S corporation target must be made jointly by
the purchaser and the S corporation shareholders. These regulations
specifically require nonselling S corporation shareholders to
consent to the election. See §1.338(h)(10)-1T(c)(2). However,
the instructions for the election form (Form 8023) do not clearly
require the nonselling shareholders to sign the election form.
Moreover, the prior regulations were less clear in requiring
nonselling S corporation shareholders to consent to the election.
Commentators have requested that the IRS recognize the validity of
section 338(h)(10) elections for S corporation targets even if not
signed by nonselling shareholders. The IRS will revise Form 8023 to
make clear that nonselling S corporation shareholders must also
sign. The IRS will recognize the validity of otherwise valid
elections made on the current version of the form even if not signed
by the nonselling shareholders, provided that the S corporation and
all of its shareholders (including nonselling shareholders) report
the tax consequences consistently with the results under section
338(h)(10). See §1.338(i)-1(b). The preamble to the proposed
regulations indicates that the IRS and Treasury were considering
requiring that the information about the allocation of ADSP and AGUB
currently submitted on the election form (Form 8023) instead be
submitted by the purchaser and seller(s) separately on their income
tax returns. Such a change will be effectuated when Form 8023 is
revised. The information about ADSP and AGUB will be reported by
each party separately on Form 8594, which also will be revised. With
respect to a transaction subject to a section 338 election, Form
8594 will be filed with the income tax returns of the old and new
target for the tax periods including the deemed sale and purchase.
Where an election under section 338(g) is made for a controlled
foreign corporation (CFC), the purchaser and seller (or their U.S.
shareholder(s)) will be required to submit separately, on Form 8594,
information about ADSP and AGUB. The Form 8594 will be required to
be attached to the last Form 5471 filed by the seller for old
target, and to the first Form 5471 filed by the purchaser for new
target.
Special Analyses
It has been determined that these final regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has been
determined that a final regulatory flexibility analysis is required
for the collection of information in this Treasury decision under 5
U.S.C. 604. This analysis is set forth below under the heading
"Final Regulatory Flexibility Act Analysis." Pursuant to section
7805(f) of the Internal Revenue Code, these final regulations will
be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.
Final Reg latory Flexibility Act Analysis
This analysis is required under the Regulatory Flexibility Act (5
U.S.C. chapter 6). This regulatory action is intended to simplify
and clarify the current rules relating to both deemed and actual
asset acquisitions. The current rules were developed over a long
period of time and have been repeatedly amended. The IRS and
Treasury believe these final regulations will significantly improve
the clarity of the rules relating to both deemed and actual asset
acquisitions.
The major objective of these final regulations is to modify the
rules for allocating purchase price in both deemed and actual asset
acquisitions. In addition, these final regulations replace the
general rules for electing to treat a stock sale as an asset sale.
These collections of information may affect small businesses if
the stock of a corporation which is a small entity is acquired in a
qualified stock purchase or if a trade or business which is also a
small business is transferred in a taxable transaction. Form 8023
(on which an election to treat a stock sale as an asset sale is
filed) has been submitted to and approved by the Office of
Management and Budget. With respect to Form 8023, the IRS estimated
that 201 forms would be filed each year and that each taxpayer would
require 12.98 hours to comply. Form 8594 (on which a sale or
acquisition of assets constituting a trade or business is reported)
has also been submitted to and approved by the Office of Management
and Budget. With respect to Form 8594, the IRS estimated that 20,000
forms would be filed each year and that each taxpayer would require
12.25 hours to comply. These estimates have been made available for
public comment and no public comments have been received. The
regulations do not impose new requirements on small businesses and,
in fact, should lessen any difficulties associated with the existing
reporting requirements by clarifying the rules associated with
deemed and actual asset acquisitions.
The collections of information require taxpayers to file an
election in order to treat a stock sale as an asset sale. In
addition, taxpayers must file a statement regarding the amount of
consideration allocated to each class of assets under the residual
method. The professional skills that would be necessary to make the
election or allocate the consideration would be the same as those
required to prepare a return for the small business. Drafting
Information
The principal author of these regulations is Richard Starke,
Office of the Associate Chief Counsel (Corporate). However, other
personnel from the IRS and Treasury Department participated
extensively in their development. List of S bjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements. Adoption of Amendments to
the Regulations Accordingly, 26 CFR parts 1 and 602 are amended as
follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entries for Sections 1.338-6T, 1.338-7T, 1.338-10T and
1.1060-1T and by adding entries in numerical order to read in part
as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.338-6 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-7 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-10 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.1060-1 also issued under 26 U.S.C. 1060.* * *
Par. 2. In the list below, for each section indicated in the left
column, remove the language in the middle column and add the
language in the right column:
Section Remove Add 1.56(g)-1(k)(1), of §1.338-6T(b), if of
§1.338-6(b), if second sentence otherwise otherwise
1.56(g)-1(k)(1), of §1.338-6T(c)(1) and of §1.338-6(c)(1)
and (2) last sentence (2) also also 1.197-2(e)(1), See
§1.1060-1T(b)(2) See §1.1060-1(b)(2) second sentence
1.197-2(k), Example 6, See §1.338-6T(b) See §1.338-6(b)
paragraph (i), last sentence 1.197-2(k), Example 6, Under
§§1.1060- Under §§1.1060-1(c)(2) paragraph (ii),
second 1T(c)(2) and 1.338- and 1.338-6(c)(1) sentence 6T(c)(1),
1.197-2(k), Example 6, See §§1.1060-1T(c)(2) See
§§1.1060-1(c)(2) paragraph (ii), last and 1.338-6T(b) and
1.338-6(b) sentence 1.197-2(k), Example 23, (as these terms are (as
these terms are paragraph (iv), first defined as in defined in
defined as in defined in sentence §1.338-1(c)(13))
§1.338&ndas-2(c)(17))
1.338-8(h)(1), last nomenclature of §1.338- nomenclature of
§1.338- sentence 1(b) and (c) and 2(b) and (c) and 1.338-9(a),
penultimate provided in §1.338- provided in §1.338-
sentence 1(c)(14), 2(c)(18), 1.338-9(b)(1), first the deemed sale
gain, the deemed sale tax sentence as defined in §1.338-
consequences, as 3(b)(4), defined in §1.338- 2(c)(7),
1.338-9(b) (1), last the deemed sale gain. the deemed sale tax
sentence consequences.
1.338-9(b)(3)(i)(B) under §1.338(b)-1(e)(2). under
§1.338-5(d).
1.338-9(b)(3)(ii) reflect deemed sale reflect deemed sale tax gain
consequences)
1.338-9(b)(4) under §1.338(b)-1(e)(2), under §1.338-5(d),
1.338-9(f)(2), Example and §1.338(b)-1(e)(2). and
§1.338-5(d).
1, paragraph (a), last sentence 1.368-1(a), third (k) and
1.338-3T(c)(3). (k) and 1.338-3(d). sentence 1.368-1(e)(6), Example
see §1.338-3T(c)(3) see §1.338-3(d) (which 4, paragraph
(ii), last (which sentence 1.597-2(d)(5)(iii)(B) (see
§1.338-7T) (see §1.338-7)
1.597-5(c)(3)(i) under §1.338-6T(b), under §1.338-6(b),
(c)(1) and (2). (c)(1) and (2).
1.597-5(d)(2)(i) under §1.338-6T(b), under §1.338-6(b),
(c)(1) and (2). (c)(1) and (2).
1.921-1T(b)(1), A-1, and §1.338-2T(d). and §1.338-2(d).
immediately preceding the penultimate sentence 1.1031(d)-1T, see
§1.1060-1T(b), (c), see §1.1060-1(b), (c), last sentence
and (d) Example 1. and (d) Example 1.
1.1031(j)-1(b)(2)(iii), in §1.338-6T(b), to in
§1.338-6(b), to which penultimate sentence which reference is
made reference is made by §1.1060-1T(c)(2).
§1.1060-1(c)(2).1.1361-4(d), Example 3, Under section 338(a)
Under section 338(a) third sentence and §1.338(h)(10)- and
§1.338(h)(10)-1T(d)(3), 1(d)(3), 1.1502-75(k) See
§1.338(h) (10)- See §1.338(h)(10)-1T(d)(7) for 1(d)(7) for
1.1502- See §1.338-10T(a)(5) See §1.338-10(a)(5) 76(b)(1)
(ii)(A)(1), (deemed (deemed last sentence Par. 3. Sections 1.338-0
through 1.338-7 are added to read as follows: §1.338-0 Outline
of topics. This section lists the captions contained in the
regulations under section 338 as follows:
§1.338-1 General principles; status of old target and new
target.
(a) In general.
(1) Deemed transaction.
(2) Application of other rules of law.
(3) Overview.
(b) Treatment of target under other provisions of the Internal
Revenue Code.
(1) General rule for subtitle A.
(2) Exceptions for subtitle A.
(3) General rule for other provisions of the Internal Revenue Code.
(c) Anti-abuse rule.
(1) In general.
(2) Examples.
(d) Next day rule for post-closing transactions. §1.338-2
Nomenclature and definitions; mechanics of the section 338 election.
(a) Scope.
(b) Nomenclature.
(c) Definitions.
(1) Acquisition date.
(2) Acquisition date assets.
(3) Affiliated group.
(4) Common parent.
(5) Consistency period.
(6) Deemed asset sale.
(7) Deemed sale tax consequences.
(8) Deemed sale return.
(9) Domestic corporation.
(10) Old target's final return.
(11) Purchasing corporation.
(12) Qualified stock purchase.
(13) Related persons.
(14) Section 338 election.
(15) Section 338(h)(10) election.
(16) Selling group.
(17) Target; old target; new target.
(18) Target affiliate.
(19) 12-month acquisition period.
(d) Time and manner of making election.
(e) Special rules for foreign corporations or DISCs.
(1) Elections by certain foreign purchasing corporations.
(i) General rule.
(ii) Qualifying foreign purchasing corporation.
(iii) Qualifying foreign target.
(iv) Triggering event.
(v) Subject to United States tax.
(2) Acquisition period.
(3) Statement of section 338 may be filed by United States
shareholders in certain cases.
(4) Notice requirement for U.S. persons holding stock in foreign
target.
(i) General rule.
(ii) Limitation.
(iii) Form of notice.
(iv) Timing of notice.
(v) Consequence of failure to comply.
(vi) Good faith effort to comply. §1.338-3 Qualification for
the section 338 election.
(a) Scope.
(b) Rules relating to qualified stock purchases.
(1) Purchasing corporation requirement.
(2) Purchase.
(3) Acquisitions of stock from related corporations.
(i) In general.
(ii) Time for testing relationship.
(iii) Cases where section 338(h)(3)(C) applies--acquisitions treated
as purchases.
(iv) Examples.
(4) Acquisition date for tiered targets.
(i) Stock sold in deemed asset sale.
(ii) Examples.
(5) Effect of redemptions.
(i) General rule.
(ii) Redemptions from persons unrelated to the purchasing
corporation.
(iii) Redemptions from the purchasing corporation or related persons
during 12- month acquisition period.
(A) General rule.
(B) Exception for certain redemptions from related corporations.
(iv) Examples.
(c) Effect of post-acquisition events on eligibility for section 338
election.
(1) Post-acquisition elimination of target.
(2) Post-acquisition elimination of the purchasing corporation.
(d) Consequences of post-acquisition elimination of target where
section 338 election not made.
(1) Scope.
(2) Continuity of interest.
(3) Control requirement.
(4) Solely for voting stock requirement.
(5) Example. §1.338-4 Aggregate deemed sale price; various
aspects of taxation of the deemed asset sale.
(a) Scope.
(b) Determination of ADSP.
(1) General rule.
(2) Time and amount of ADSP.
(i) Original determination.
(ii) Redetermination of ADSP.
(iii) Example.
(c) Grossed-up amount realized on the sale to the purchasing
corporation of the purchasing corporation's recently purchased
target stock.
(1) Determination of amount.
(2) Example.
(d) Liabilities of old target.
(1) In general.
(2) Time and amount of liabilities.
(e) Deemed sale tax consequences.
(f) Other rules apply in determining ADSP.
(g) Examples.
(h) Deemed sale of target affiliate stock.
(1) Scope.
(2) In general.
(3) Deemed sale of foreign target affiliate by a domestic target.
(4) Deemed sale producing effectively connected income.
(5) Deemed sale of insurance company target affiliate electing under
section 953(d).
(6) Deemed sale of DISC target affiliate.
(7) Anti-stuffing rule.
(8) Examples. §1.338-5 Adjusted grossed-up basis.
(a) Scope.
(b) Determination of AGUB.
(1) General rule.
(2) Time and amount of AGUB.
(i) Original determination.
(ii) Redetermination of AGUB.
(iii) Examples.
(c) Grossed-up basis of recently purchased stock.
(d) Basis of nonrecently purchased stock; gain recognition election.
(1) No gain recognition election.
(2) Procedure for making gain recognition election.
(3) Effect of gain recognition election.
(i) In general.
(ii) Basis amount.
(iii) Losses not recognized.
(iv) Stock subject to election.
(e) Liabilities of new target.
(1) In general.
(2) Time and amount of liabilities.
(3) Interaction with deemed sale tax consequences.
(f) Adjustments by the Internal Revenue Service.
(g) Examples. §1.338-6 Allocation of ADSP and AGUB among target
assets.
(a) Scope.
(1) In general.
(2) Fair market value.
(i) In general.
(ii) Transaction costs.
(iii) Internal Revenue Service authority.
(b) General rule for allocating ADSP and AGUB.
(1) Reduction in the amount of consideration for Class I assets.
(2) Other assets.
(i) In general.
(ii) Class II assets.
(iii) Class III assets.
(iv) Class IV assets.
(v) Class V assets.
(vi) Class VI assets.
(vii) Class VII assets.
(3) Other items designated by the Internal Revenue Service.
(c) Certain limitations and other rules for allocation to an asset.
(1) Allocation not to exceed fair market value.
(2) Allocation subject to other rules.
(3) Special rule for allocating AGUB when purchasing corporation has
nonrecently purchased stock.
(i) Scope.
(ii) Determination of hypothetical purchase price.
(iii) Allocation of AGUB.
(4) Liabilities taken into account in determining amount realized on
subsequent disposition.
(d) Examples. §1.338-7 Allocation of redetermined ADSP and AGUB
among target assets.
(a) Scope.
(b) Allocation of redetermined ADSP and AGUB.
(c) Special rules for ADSP.
(1) Increases or decreases in deemed sale tax consequences taxable
notwithstanding old target ceases to exist.
(2) Procedure for transactions in which section 338(h)(10) is not
elected.
(i) Deemed sale tax consequences included in new target's return.
(ii) Carryovers and carrybacks.
(A) Loss carryovers to new target taxable years.
(B) Loss carrybacks to taxable years of old target.
(C) Credit carryovers and carrybacks.
(3) Procedure for transactions in which section 338(h)(10) is
elected.
(d) Special rules for AGUB.
(1) Effect of disposition or depreciation of acquisition date
assets.
(2) Section 38 property.
(e) Examples. §1.338-8 Asset and stock consistency. (a)
Introduction.
(1) Overview.
(2) General application.
(3) Extension of the general rules.
(4) Application where certain dividends are paid.
(5) Application to foreign target affiliates.
(6) Stock consistency.
(b) Consistency for direct acquisitions.
(1) General rule.
(2) Section 338(h)(10) elections.
(c) Gain from disposition reflected in basis of target stock.
(1) General rule.
(2) Gain not reflected if section 338 election made for target.
(3) Gain reflected by reason of distributions.
(4) Controlled foreign corporations.
(5) Gain recognized outside the consolidated group.
(d) Basis of acquired assets.
(1) Carryover basis rule.
(2) Exceptions to carryover basis rule for certain assets.
(3) Exception to carryover basis rule for de minimis assets.
(4) Mitigation rule.
(i) General rule.
(ii) Time for transfer.
(e) Examples.
(1) In general.
(2) Direct acquisitions.
(f) Extension of consistency to indirect acquisitions.
(1) Introduction.
(2) General rule.
(3) Basis of acquired assets.
(4) Examples.
(g) Extension of consistency if dividends qualifying for 100 percent
dividends received deduction are paid.
(1) General rule for direct acquisitions from target.
(2) Other direct acquisitions having same effect.
(3) Indirect acquisitions.
(4) Examples.
(h) Consistency for target affiliates that are controlled foreign
corporations.
(1) In general.
(2) Income or gain resulting from asset dispositions.
(i) General rule.
(ii) Basis of controlled foreign corporation stock.
(iii) Operating rule.
(iv) Increase in asset or stock basis.
(3) Stock issued by target affiliate that is a controlled foreign
corporation.
(4) Certain distributions.
(i) General rule.
(ii) Basis of controlled foreign corporation stock.
(iii) Increase in asset or stock basis.
(5) Examples.
(i) [Reserved]
(j) Anti-avoidance rules.
(1) Extension of consistency period.
(2) Qualified stock purchase and 12-month acquisition period.
(3) Acquisitions by conduits.
(i) Asset ownership.
(A) General rule.
(B) Application of carryover basis rule.
(ii) Stock acquisitions.
(A) Purchase by conduit.
(B) Purchase of conduit by corporation.
(C) Purchase of conduit by conduit.
(4) Conduit.
(5) Existence of arrangement.
(6) Predecessor and successor.
(i) Persons.
(ii) Assets.
(7) Examples. §1.338-9 International aspects of section 338.
(a) Scope.
(b) Application of section 338 to foreign targets.
(1) In general.
(2) Ownership of FT stock on the acquisition date.
(3) Carryover FT stock.
(i) Definition.
(ii) Carryover of earnings and profits.
(iii) Cap on carryover of earnings and profits.
(iv) Post-acquisition date distribution of old FT earnings and
profits.
(v) Old FT earnings and profits unaffected by post-acquisition date
deficits.
(vi) Character of FT stock as carryover FT stock eliminated upon
disposition.
(4) Passive foreign investment company stock.
(c) Dividend treatment under section 1248(e).
(d) Allocation of foreign taxes.
(e) Operation of section 338(h)(16). [Reserved]
(f) Examples. §1.338-10 Filing of returns.
(a) Returns including tax liability from deemed asset sale.
(1) In general.
(2) Old target's final taxable year otherwise included in
consolidated return of selling group.
(i) General rule.
(ii) Separate taxable year.
(iii) Carryover and carryback of tax attributes.
(iv) Old target is a component member of purchasing corporation's
controlled group.
(3) Old target is an S corporation.
(4) Combined deemed sale return.
(i) General rule.
(ii) Gain and loss offsets.
(iii) Procedure for filing a combined return.
(iv) Consequences of filing a combined return.
(5) Deemed sale excluded from purchasing corporation's consolidated
return.
(6) Due date for old target's final return.
(i) General rule.
(ii) Application of §1.1502-76(c).
(A) In general.
(B) Deemed extension.
(C) Erroneous filing of deemed sale return.
(D) Erroneous filing of return for regular tax year.
(E) Last date for payment of tax.
(7) Examples.
(b) Waiver.
(1) Certain additions to tax.
(2) Notification.
(3) Elections or other actions required to be specified on a timely
filed return.
(i) In general.
(ii) New target in purchasing corporation's consolidated return.
(4) Examples. §1.338(h)(10)-1 Deemed asset sale and
liquidation.
(a) Scope.
(b) Definitions.
(1) Consolidated target.
(2) Selling consolidated group.
(3) Selling affiliate; affiliated target.
(4) S corporation target
(5) S corporation shareholders.
(6) Liquidation.
(c) Section 338(h)(10) election.
(1) In general.
(2) Simultaneous joint election requirement.
(3) Irrevocability.
(4) Effect of invalid election.
(d) Certain consequences of section 338(h)(10) election.
(1) P.
(2) New T.
(3) Old T--deemed sale.
(i) In general.
(ii) Tiered targets.
(4) Old T and selling consolidated group, selling affiliate, or S
corporation shareholders--deemed liquidation; tax characterization.
(i) In general.
(ii) Tiered targets.
(5) Selling consolidated group, selling affiliate, or S corporation
shareholders.
(i) In general.
(ii) Basis and holding period of T stock not acquired.
(iii) T stock sale.
(6) Nonselling minority shareholders other than nonselling S
corporation shareholders.
(i) In general.
(ii) T stock sale.
(iii) T stock not acquired.
(7) Consolidated return of selling consolidated group.
(8) Availability of the section 453 installment method.
(i) In deemed asset sale.
(ii) In deemed liquidation.
(9) Treatment consistent with an actual asset sale.
(e) Examples.
(f) Inapplicability of provisions.
(g) Required information. §1.338(i)-1 Effective dates.
§1.338-1 General principles; status of old target and new
target.
(a) In general--(1) Deemed transaction. Elections are available
under section 338 when a purchasing corporation acquires the stock
of another corporation (the target) in a qualified stock purchase.
One type of election, under section 338(g), is available to the
purchasing corporation. Another type of election, under section
338(h)(10), is, in more limited circumstances, available jointly to
the purchasing corporation and the sellers of the stock. (Rules
concerning eligibility for these elections are contained in
§§1.338-2, 1.338-3, and 1.338(h)(10)-1.) Although target
is a single corporation under corporate law, if a section 338
election is made, then two separate corporations, old target and new
target, generally are considered to exist for purposes of subtitle A
of the Internal Revenue Code. Old target is treated as transferring
all of its assets to an unrelated person in exchange for
consideration that includes the discharge of its liabilities (see
§1.1001-2(a)), and new target is treated as acquiring all of
its assets from an unrelated person in exchange for consideration
that includes the assumption of those liabilities. (Such transaction
is, without regard to its characterization for Federal income tax
purposes, referred to as the deemed asset sale and the income tax
consequences thereof as the deemed sale tax consequences.) If a
section 338(h)(10) election is made, old target is deemed to
liquidate following the deemed asset sale.
(2) Application of other rules of law. Other rules of law apply to
determine the tax consequences to the parties as if they had
actually engaged in the transactions deemed to occur under section
338 and the regulations thereunder except to the extent otherwise
provided in those regulations. See also §1.338- 6(c)(2). Other
rules of law may characterize the transaction as something other
than or in addition to a sale and purchase of assets; however, the
transaction between old and new target must be a taxable
transaction. For example, if target is an insurance company for
which a section 338 election is made, the deemed asset sale would be
characterized and taxed as an assumption- reinsurance transaction
under applicable Federal income tax law. See §1.817- 4(d).
(3) Overview. Definitions and special nomenclature and rules for
making the section 338 election are provided in §1.338-2.
Qualification for the section 338 election is addressed in
§1.338-3. The amount for which old target is treated as selling
all of its assets (the aggregate deemed sale price, or ADSP) is
addressed in §1.338-4. The amount for which new target is
deemed to have purchased all its assets (the adjusted grossed-up
basis, or AGUB) is addressed in §1.338-5. Section 1.338-6
addresses allocation both of ADSP among the assets old target is
deemed to have sold and of AGUB among the assets new target is
deemed to have purchased. Section 1.338-7 addresses allocation of
ADSP or AGUB when those amounts subsequently change. Asset and stock
consistency are addressed in §1.338-8. International aspects of
section 338 are covered in §1.338-9. Rules for the filing of
returns are provided in §1.338-10. Eligibility for and
treatment of section 338(h)(10) elections is addressed in
§1.338(h)(10)-1.
(b) Treatment of target under other provisions of the Internal
Revenue Code--(1) General rule for subtitle A. Except as provided in
this section, new target is treated as a new corporation that is
unrelated to old target for purposes of subtitle A of the Internal
Revenue Code. Thus--
(i) New target is not considered related to old target for
purposes of section 168 and may make new elections under section 168
without taking into account the elections made by old target; and
(ii) New target may adopt, without obtaining prior approval from
the Commissioner, any taxable year that meets the requirements of
section 441 and any method of accounting that meets the requirements
of section 446. Notwithstanding §1.441-1T(b)(2), a new target
may adopt a taxable year on or before the last day for making the
election under section 338 by filing its first return for the
desired taxable year on or before that date.
(2) Exceptions for subtitle A. New target and old target are
treated as the same corporation for purposes of--
(i) The rules applicable to employee benefit plans (including those
plans described in sections 79, 104, 105, 106, 125, 127, 129, 132,
137, and 220), qualified pension, profit-sharing, stock bonus and
annuity plans (sections 401(a) and 403(a)), simplified employee
pensions (section 408(k)), tax qualified stock option plans
(sections 422 and 423), welfare benefit funds (sections 419, 419A,
512(a)(3), and 4976), and voluntary employee benefit associations
(section 501(c)(9) and the regulations thereunder);
(ii) Sections 1311 through 1314 (relating to the mitigation of the
effect of limitations), if a section 338(h)(10) election is not made
for target;
(iii) Section 108(e)(5) (relating to the reduction of purchase
money debt);
(iv) Section 45A (relating to the Indian Employment Credit),
section 51 (relating to the Work Opportunity Credit), section 51A
(relating to the Welfare to Work Credit), and section 1396 (relating
to the Empowerment Zone Act);
(v) Sections 401(h) and 420 (relating to medical benefits for
retirees);
(vi) Section 414 (relating to definitions and special rules); and
(vii) Any other provision designated in the Internal Revenue
Bulletin by the Internal Revenue Service. See §601.601(d)(2)
(ii) of this chapter. See, for example, §1.1001-3(e)(4)(i)(F)
providing that an election under section 338 does not result in the
substitution of a new obligor on target's debt.
(3) General rule for other provisions of the Internal Revenue
Code. Except as provided in the regulations under section 338 or in
the Internal Revenue Bulletin by the Internal Revenue Service (see
§601.601(d)(2)(ii) of this chapter), new target is treated as a
continuation of old target for purposes other than subtitle A of the
Internal Revenue Code. For example--
(i) New target is liable for old target's Federal income tax
liabilities, including the tax liability for the deemed sale tax
consequences and those tax liabilities of the other members of any
consolidated group that included old target that are attributable to
taxable years in which those corporations and old target joined in
the same consolidated return (see §1.1502-6(a));
(ii) Wages earned by the employees of old target are considered
wages earned by such employees from new target for purposes of
sections 3101 and 3111 (Federal Insurance Contributions Act) and
section 3301 (Federal Unemployment Tax Act); and
(iii) Old target and new target must use the same employer
identification number.
(c) Anti-abuse rule--
(1) In general. The rules of this paragraph (c) apply for purposes
of applying the residual method as provided for under the
regulations under sections 338 and 1060. The Commissioner is
authorized to treat any property (including cash) transferred by old
target in connection with the transactions resulting in the
application of the residual method (and not held by target at the
close of the acquisition date) as, nonetheless, property of target
at the close of the acquisition date if the property so transferred
is, within 24 months after the deemed asset sale, owned by new
target, or is owned, directly or indirectly, by a member of the
affiliated group of which new target is a member and continues after
the acquisition date to be held or used primarily in connection with
one or more of the activities of new target. In addition, the
Commissioner is authorized to treat any property (including cash)
transferred to old target in connection with the transactions
resulting in the application of the residual method (and held by
target at the close of the acquisition date) as, nonetheless, not
being property of target at the close of the acquisition date if the
property so transferred is, within 24 months after the deemed asset
sale, not owned by new target but owned, directly or indirectly, by
a member of the affiliated group of which new target is a member, or
owned by new target but held or used primarily in connection with an
activity conducted, directly or indirectly, by another member of the
affiliated group of which new target is a member in combination with
other property retained by or acquired, directly or indirectly, from
the transferor of the property (or a member of the same affiliated
group) to old target. For purposes of this paragraph (c)(1), an
interest in an entity is considered held or used in connection with
an activity if property of the entity is so held or used. The
authority of the Commissioner under this paragraph (c)(1) includes
the making of any appropriate correlative adjustments (avoiding, to
the extent possible, the duplication or omission of any item of
income, gain, loss, deduction, or basis).
(2) Examples. The following examples illustrate this paragraph
(c): Example 1. Prior to a qualified stock purchase under section
338, target transfers one of its assets to a related party. The
purchasing corporation then purchases the target stock and also
purchases the transferred asset from the related party. After its
purchase of target, the purchasing corporation and target are
members of the same affiliated group. A section 338 election is
made. Under an arrangement with the purchaser, the separately
transferred asset is used primarily in connection with target's
activities. Applying the anti-abuse rule of this paragraph (c),
the Commissioner may consider target to own the transferred asset
for purposes of applying the residual method under section 338.
Example 2. T owns all the stock of T1. T1 leases intellectual
property to T, which T uses in connection with its own activities.
P, a purchasing corporation, wishes to buy the T-T1 chain of
corporations. P, in connection with its planned purchase of the T
stock, contracts to consummate a purchase of all the stock of T1 on
March 1 and of all the stock of T on March 2. Section 338 elections
are thereafter made for both T and T1. Immediately after the
purchases, P, T and T1 are members of the same affiliated group. T
continues to lease the intellectual property from T1 and that is the
primary use of the intellectual property. Thus, an asset of T, the
T1 stock, was removed from T 's own assets prior to the qualified
stock purchase of the T stock, T1's own assets are used after the
deemed asset sale in connection with T's own activities, and the T1
stock is after the deemed asset sale owned by P, a member of the
same affiliated group of which T is a member. Applying the anti-
abuse rule of this paragraph (c), the Commissioner may, for purposes
of application of the residual method under section 338 both to T
and to T1, consider P to have bought only the stock of T, with T at
the time of the qualified stock purchases of both T and T1 (the
qualified stock purchase of T1 being triggered by the deemed sale
under section 338 of T's assets) owning T1. The Commissioner
accordingly would allocate consideration to T's assets as though the
T1 stock were one of those assets, and then allocate consideration
within T1 based on the amount allocated to the T1 stock at the T
level.
(d) Next day rule for post-closing transactions. If a target
corporation for which an election under section 338 is made engages
in a transaction outside the ordinary course of business on the
acquisition date after the event resulting in the qualified stock
purchase of the target or a higher tier corporation, the target and
all persons related thereto (either before or after the qualified
stock purchase) under section 267(b) or section 707 must treat the
transaction for all Federal income tax purposes as occurring at the
beginning of the day following the transaction and after the deemed
purchase by new target. §1.338-2 Nomenclature and definitions;
mechanics of the section 338 election.
(a) Scope. This section prescribes rules relating to elections
under section 338.
(b) Nomenclature. For purposes of the regulations under section
338 (except as otherwise provided):
(1) T is a domestic target corporation that has only one class of
stock outstanding. Old T refers to T for periods ending on or before
the close of T's acquisition date; new T refers to T for subsequent
periods.
(2) P is the purchasing corporation.
(3) The P group is an affiliated group of which P is a member.
(4) P1, P2, etc., are domestic corporations that are members of
the P group.
(5) T1, T2, etc., are domestic corporations that are target
affiliates of T.
These corporations (T1, T2, etc.) have only one class of stock
outstanding and may also be targets.
(6) S is a domestic corporation (unrelated to P and B) that owns T
prior to the purchase of T by P. (S is referred to in cases in which
it is appropriate to consider the effects of having all of the
outstanding stock of T owned by a domestic corporation.)
(7) A, a U.S. citizen or resident, is an individual (unrelated to
P and B) who owns T prior to the purchase of T by P. (A is referred
to in cases in which it is appropriate to consider the effects of
having all of the outstanding stock of T owned by an individual who
is a U.S. citizen or resident. Ownership of T by A and ownership of
T by S are mutually exclusive circumstances.)
(8) B, a U.S. citizen or resident, is an individual (unrelated to
T, S, and A) who owns the stock of P.
(9) F, used as a prefix with the other terms in this paragraph
(b), connotes foreign, rather than domestic, status. For example, FT
is a foreign corporation (as defined in section 7701(a)(5)) and FA
is an individual other than a U.S. citizen or resident.
(10) CFC, used as a prefix with the other terms in this paragraph
(b) referring to a corporation, connotes a controlled foreign
corporation (as defined in section 957, taking into account section
953(c)). A corporation identified with the prefix F may be a
controlled foreign corporation. (The prefix CFC is used when the
corporation's status as a controlled foreign corporation is
significant.)
(c) Definitions. For purposes of the regulations under section 338
(except as otherwise provided):
(1) Acquisition date. The term acquisition date has the same
meaning as in section 338(h)(2).
(2) Acquisition date assets. Acquisition date assets are the
assets of the target held at the beginning of the day after the
acquisition date (but see §1.338- 1(d) (regarding certain
transactions on the acquisition date)).
(3) Affiliated group. The term affiliated group has the same
meaning as in section 338(h)(5). Corporations are affiliated on any
day they are members of the same affiliated group.
(4) Common parent. The term common parent has the same meaning as
in section 1504.
(5) Consistency period. The consistency period is the period
described in section 338(h)(4)(A) unless extended pursuant to
§1.338-8(j)(1).
(6) Deemed asset sale. The deemed asset sale is the transaction
described in §1.338-1(a)(1) that is deemed to occur for
purposes of subtitle A of the Internal Revenue Code if a section 338
election is made.
(7) Deemed sale tax consequences. Deemed sale tax consequences
refers to, in the aggregate, the Federal income tax consequences
(generally, the income, gain, deduction, and loss) of the deemed
asset sale. Deemed sale tax consequences also refers to the Federal
income tax consequences of the transfer of a particular asset in the
deemed asset sale.
(8) Deemed sale return. The deemed sale return is the return on
which target's deemed sale tax consequences are reported that does
not include any other items of target. Target files a deemed sale
return when a section 338 election (but not a section 338(h)(10)
election) is filed for target and target is a member of a selling
group (defined in paragraph (c)(16) of this section) that files a
consolidated return for the period that includes the acquisition
date. See §1.338-10. If target is an S corporation for the
period that ends on the day before the acquisition date and a
section 338 election (but not a section 338(h)(10) election) is
filed for target, see §1.338-10(a)(3).
(9) Domestic corporation. A domestic corporation is a
corporation--
(i) That is domestic within the meaning of section 7701(a)(4) or
that is treated as domestic for purposes of subtitle A of the
Internal Revenue Code (e.g., to which an election under section
953(d) or 1504(d) applies); and
(ii) That is not a DISC, a corporation described in section
1248(e), or a corporation to which an election under section 936
applies.
(10) Old target's final return. Old target's final return is the
income tax return of old target for the taxable year ending at the
close of the acquisition date that includes the deemed sale tax
consequences. However, if a deemed sale return is filed for old
target, the deemed sale return is considered old target's final
return.
(11) Purchasing corporation. The term purchasing corporation has
the same meaning as in section 338(d)(1). The purchasing corporation
may also be referred to as purchaser. Unless otherwise provided, any
reference to the purchasing corporation is a reference to all
members of the affiliated group of which the purchasing corporation
is a member. See sections 338(h)(5) and (8). Also, unless otherwise
provided, any reference to the purchasing corporation is, with
respect to a deemed purchase of stock under section 338(a)(2), a
reference to new target with respect to its own deemed purchase of
stock in another target.
(12) Qualified stock purchase. The term qualified stock purchase
has the same meaning as in section 338(d)(3).
(13) Related persons. Two persons are related if stock in a
corporation owned by one of the persons would be attributed under
section 318(a) (other than section 318(a)(4)) to the other.
(14) Section 338 election. A section 338 election is an election
to apply section 338(a) to target. A section 338 election is made by
filing a statement of section 338 election pursuant to paragraph (d)
of this section. The form on which this statement is filed is
referred to in the regulations under section 338 as the Form 8023,
"Elections Under Section 338 For Corporations Making Qualified Stock
Purchases."
(15) Section 338(h)(10) election. A section 338(h)(10) election is
an election to apply section 338(h)(10) to target. A section 338(h)
(10) election is made by making a joint election for target under
§1.338(h)(10)-1 on Form 8023.
(16) Selling group. The selling group is the affiliated group (as
defined in section 1504) eligible to file a consolidated return that
includes target for the taxable period in which the acquisition date
occurs. However, a selling group is not an affiliated group of which
target is the common parent on the acquisition date.
(17) Target; old target; new target. Target is the target
corporation as defined in section 338(d)(2). Old target refers to
target for periods ending on or before the close of target's
acquisition date. New target refers to target for subsequent
periods.
(18) Target affiliate. The term target affiliate has the same
meaning as in section 338(h)(6) (applied without section 338(h)(6)
(B)(i)). Thus, a corporation described in section 338(h)(6)(B)(i) is
considered a target affiliate for all purposes of section 338. If a
target affiliate is acquired in a qualified stock purchase, it is
also a target.
(19) 12-month acquisition period. The 12-month acquisition period
is the period described in section 338(h)(1), unless extended
pursuant to §1.338- 8(j)(2).
(d) Time and manner of making election. The purchasing corporation
makes a section 338 election for target by filing a statement of
section 338 election on Form 8023 in accordance with the
instructions to the form. The section 338 election must be made not
later than the 15th day of the 9th month beginning after the month
in which the acquisition date occurs. A section 338 election is
irrevocable. See §1.338(h)(10)-1(c)(2) for section 338(h)(10)
elections.
(e) Special rules for foreign corporations or DISCs--(1) Elections
by certain foreign purchasing corporations--
(i) General rule. A qualifying foreign purchasing corporation is not
required to file a statement of section 338 election for a
qualifying foreign target before the earlier of 3 years after the
acquisition date and the 180th day after the close of the purchasing
corporation's taxable year within which a triggering event occurs.
(ii) Qualifying foreign purchasing corporation. A purchasing
corporation is a qualifying foreign purchasing corporation only if,
during the acquisition period of a qualifying foreign target, all
the corporations in the purchasing corporation's affiliated group
are foreign corporations that are not subject to United States tax.
(iii) Qualifying foreign target. A target is a qualifying foreign
target only if target and its target affiliates are foreign
corporations that, during target's acquisition period, are not
subject to United States tax (and will not become subject to United
States tax during such period because of a section 338 election). A
target affiliate is taken into account for purposes of the preceding
sentence only if, during target's 12-month acquisition period, it is
or becomes a member of the affiliated group that includes the
purchasing corporation.
(iv) Triggering event. A triggering event occurs in the taxable
year of the qualifying foreign purchasing corporation in which
either that corporation or any corporation in its affiliated group
becomes subject to United States tax.
(v) Subject to United States tax. For purposes of this paragraph
(e)(1), a foreign corporation is considered subject to United States
tax--
(A) For the taxable year for which that corporation is required
under §1.6012-2(g) (other than §1.6012-2(g)(2)(i)(B)(2))
to file a United States income tax return; or
(B) For the period during which that corporation is a controlled
foreign corporation, a passive foreign investment company for which
an election under section 1295 is in effect, a foreign investment
company, or a foreign corporation the stock ownership of which is
described in section 552(a)(2).
(2) Acquisition period. For purposes of this paragraph (e), the
term acquisition period means the period beginning on the first day
of the 12-month acquisition period and ending on the acquisition
date.
(3) Statement of section 338 election may be filed by United States
shareholders in certain cases. The United States shareholders (as
defined in section 951(b)) of a foreign purchasing corporation that
is a controlled foreign corporation (as defined in section 957
(taking into account section 953(c))) may file a statement of
section 338 election on behalf of the purchasing corporation if the
purchasing corporation is not required under §1.6012-2(g)
(other than §1.6012-2(g)(2)(i)(B)(2)) to file a United States
income tax return for its taxable year that includes the acquisition
date. Form 8023 must be filed as described in the form and its
instructions and also must be attached to the Form 5471,
"Information Returns Of U.S. Persons With Respect To Certain Foreign
Corporations," filed with respect to the purchasing corporation by
each United States shareholder for the purchasing corporation's
taxable year that includes the acquisition date (or, if paragraph
(e)(1)(i) of this section applies to the election, for the
purchasing corporation's taxable year within which it becomes a
controlled foreign corporation). The provisions of §1.964-1(c)
(including §1.964- 1(c)(7)) do not apply to an election made by
the United States shareholders. (4) Notice requirement for U.S.
persons holding stock in foreign target--
(i) General rule. If a target subject to a section 338 election was
a controlled foreign corporation, a passive foreign investment
company, or a foreign personal holding company at any time during
the portion of its taxable year that ends on its acquisition date,
the purchasing corporation must deliver written notice of the
election (and a copy of Form 8023, its attachments and instructions)
to--
(A) Each U.S. person (other than a member of the affiliated group
of which the purchasing corporation is a member (the purchasing
group member)) that, on the acquisition date of the foreign target,
holds stock in the foreign target; and
(B) Each U.S. person (other than a purchasing group member) that
sells stock in the foreign target to a purchasing group member
during the foreign target's 12-month acquisition period.
(ii) Limitation. The notice requirement of this paragraph (e)(4)
applies only where the section 338 election for the foreign target
affects income, gain, loss, deduction, or credit of the U.S. person
described in paragraph (e)(4)(i) of this section under section 551,
951, 1248, or 1293. (iii) Form of notice. The notice to U.S. persons
must be identified prominently as a notice of section 338 election
and must--
(A) Contain the name, address, and employer identification number
(if any) of, and the country (and, if relevant, the lesser political
subdivision) under the laws of which are organized the purchasing
corporation and the relevant target (i.e., the target the stock of
which the particular U.S. person held or sold under the
circumstances described in paragraph (e)(4)(i) of this section);
(B) Identify those corporations as the purchasing corporation and
the foreign target, respectively; and
(C) Contain the following declaration (or a substantially similar
declaration):
THIS DOCUMENT SERVES AS NOTICE OF AN ELECTION
UNDER SECTION 338 FOR THE ABOVE CITED FOREIGN
TARGET THE STOCK OF WHICH YOU EITHER HELD OR SOLD
UNDER THE CIRCUMSTANCES DESCRIBED IN TREASURY
REGULATIONS SECTION 1.338-2(e)(4). FOR POSSIBLE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
UNDER SECTION 551, 951, 1248, OR 1293 OF THE INTERNAL
REVENUE CODE OF 1986 THAT MAY APPLY TO YOU, SEE
TREASURY REGULATIONS SECTION 1.338-9(b). YOU MAY BE
REQUIRED TO ATTACH THE INFORMATION ATTACHED TO
THIS NOTICE TO CERTAIN RETURNS.
(iv) Timing of notice. The notice required by this paragraph (e)
(4) must be delivered to the U.S. person on or before the later of
the 120th day after the acquisition date of the particular target or
the day on which Form 8023 is filed. The notice is considered
delivered on the date it is mailed to the proper address (or an
address similar enough to complete delivery), unless the date it is
mailed cannot be reasonably determined. The date of mailing will be
determined under the rules of section 7502. For example, the date of
mailing is the date of U.S. postmark or the applicable date recorded
or marked by a designated delivery service.
(v) Consequence of failure to comply. A statement of section 338
election is not valid if timely notice is not given to one or more
U.S. persons described in this paragraph (e)(4). If the form of
notice fails to comply with all requirements of this paragraph (e)
(4), the section 338 election is valid, but the waiver rule of
§1.338-10(b)(1) does not apply.
(vi) Good faith effort to comply. The purchasing corporation will
be considered to have complied with this paragraph (e)(4), even
though it failed to provide notice or provide timely notice to each
person described in this paragraph (e)(4), if the Commissioner
determines that the purchasing corporation made a good faith effort
to identify and provide timely notice to those U.S. persons.
§1.338-3 Qualification for the section 338 election.
(a) Scope. This section provides rules on whether certain
acquisitions of stock are qualified stock purchases and on other
miscellaneous issues under section 338.
(b) Rules relating to qualified stock purchases--(1) Purchasing
corporation requirement. An individual cannot make a qualified stock
purchase of target. Section 338(d)(3) requires, as a condition of a
qualified stock purchase, that a corporation purchase the stock of
target. If an individual forms a corporation (new P) to acquire
target stock, new P can make a qualified stock purchase of target if
new P is considered for tax purposes to purchase the target stock.
Facts that may indicate that new P does not purchase the target
stock include new P's merging downstream into target, liquidating,
or otherwise disposing of the target stock following the purported
qualified stock purchase.
(2) Purchase. The term purchase has the same meaning as in section
338(h)(3). Stock in a target (or target affiliate) may be considered
purchased if, under general principles of tax law, the purchasing
corporation is considered to own stock of the target (or target
affiliate) meeting the requirements of section 1504(a)(2),
notwithstanding that no amount may be paid for (or allocated to) the
stock.
(3) Acquisitions of stock from related corporations--
(i) In general. Stock acquired by a purchasing corporation from a
related corporation (R) is generally not considered acquired by
purchase. See section 338(h)(3)(A)(iii).
(ii) Time for testing relationship. For purposes of section 338(h)
(3)(A)(iii), a purchasing corporation is treated as related to
another person if the relationship specified in section 338(h)(3)(A)
(iii) exists--
(A) In the case of a single transaction, immediately after the
purchase of target stock;
(B) In the case of a series of acquisitions otherwise constituting
a qualified stock purchase within the meaning of section 338(d)(3),
immediately after the last acquisition in such series; and
(C) In the case of a series of transactions effected pursuant to
an integrated plan to dispose of target stock, immediately after the
last transaction in such series.
(iii) Cases where section 338(h)(3)(C) applies--acquisitions
treated as purchases. If section 338(h)(3)(C) applies and the
purchasing corporation is treated as acquiring stock by purchase
from R, solely for purposes of determining when the stock is
considered acquired, target stock acquired from R is considered to
have been acquired by the purchasing corporation on the day on which
the purchasing corporation is first considered to own that stock
under section 318(a) (other than section 318(a)(4)). (iv) Examples.
The following examples illustrate this paragraph (b)(3): Example 1.
(i) S is the parent of a group of corporations that are engaged in
various businesses. Prior to January 1, Year 1, S decided to
discontinue its involvement in one line of business. To accomplish
this, S forms a new corporation, Newco, with a nominal amount of
cash. Shortly thereafter, on January 1, Year 1, S transfers all the
stock of the subsidiary conducting the unwanted business (T) to
Newco in exchange for 100 shares of Newco common stock and a Newco
promissory note. Prior to January 1, Year 1, S and Underwriter (U)
had entered into a binding agreement pursuant to which U would
purchase 60 shares of Newco common stock from S and then sell those
shares in an Initial Public Offering (IPO). On January 6, Year 1,
the IPO closes.
(ii) Newco's acquisition of T stock is one of a series of
transactions undertaken pursuant to one integrated plan. The series
of transactions ends with the closing of the IPO and the transfer of
all the shares of stock in accordance with the agreements.
Immediately after the last transaction effected pursuant to the
plan, S owns 40 percent of Newco, which does not give rise to a
relationship described in section 338(h)(3)(A)(iii). See
§1.338-3(b)(3)(ii)(C). Accordingly, S and Newco are not related
for purposes of section 338(h)(3)(A)(iii).
(iii) Further, because Newco's basis in the T stock is not
determined by reference to S's basis in the T stock and because the
transaction is not an exchange to which section 351, 354, 355, or
356 applies, Newco's acquisition of the T stock is a purchase within
the meaning of section 338(h)(3).
Example 2.
(i) On January 1 of Year 1, P purchases 75 percent in value of the R
stock. On that date, R owns 4 of the 100 shares of T stock. On June
1 of Year 1, R acquires an additional 16 shares of T stock. On
December 1 of Year 1, P purchases 70 shares of T stock from an
unrelated person and 12 of the 20 shares of T stock held by R. (ii)
Of the 12 shares of T stock purchased by P from R on December 1 of
Year 1, 3 of those shares are deemed to have been acquired by P on
January 1 of Year 1, the date on which 3 of the 4 shares of T stock
held by R on that date were first considered owned by P under
section 318(a)(2)(C) (i.e., 4 ÷ .75). The remaining 9 shares
of T stock purchased by P from R on December 1 of Year 1 are deemed
to have been acquired by P on June 1 of Year 1, the date on which an
additional 12 of the 20 shares of T stock owned by R on that date
were first considered owned by P under section 318(a)(2)(C) (i.e.,
(20 ÷ .75) -3). Because stock acquisitions by P sufficient
for a qualified stock purchase of T occur within a 12-month period
(i.e., 3 shares constructively on January 1 of Year 1, 9 shares
constructively on June 1 of Year 1, and 70 shares actually on
December 1 of Year 1), a qualified stock purchase is made on
December 1 of Year 1. Example 3.
(i) On February 1 of Year 1, P acquires 25 percent in value of the R
stock from B (the sole shareholder of P). That R stock is not
acquired by purchase. See section 338(h)(3)(A)(iii). On that date, R
owns 4 of the 100 shares of T stock. On June 1 of Year 1, P
purchases an additional 25 percent in value of the R stock, and on
January 1 of Year 2, P purchases another 25 percent in value of the
R stock. On June 1 of Year 2, R acquires an additional 16 shares of
the T stock. On December 1 of Year 2, P purchases 68 shares of the T
stock from an unrelated person and 12 of the 20 shares of the T
stock held by R.
(ii) Of the 12 shares of the T stock purchased by P from R on
December 1 of Year 2, 2 of those shares are deemed to have been
acquired by P on June 1 of Year 1, the date on which 2 of the 4
shares of the T stock held by R on that date were first considered
owned by P under section 318(a)(2)(C) (i.e., 4 ÷ .5). For
purposes of this attribution, the R stock need not be acquired by P
by purchase. See section 338(h)(1). (By contrast, the acquisition of
the T stock by P from R does not qualify as a purchase unless P has
acquired at least 50 percent in value of the R stock by purchase.
Section 338(h)(3)(C)(i).) Of the remaining 10 shares of the T stock
purchased by P from R on December 1 of Year 2, 1 of those shares is
deemed to have been acquired by P on January 1 of Year 2, the date
on which an additional 1 share of the 4 shares of the T stock held
by R on that date was first considered owned by P under section
318(a)(2)(C) (i.e., (4 ÷ .75) -2). The remaining 9 shares of
the T stock purchased by P from R on December 1 of Year 2, are
deemed to have been acquired by P on June 1 of Year 2, the date on
which an additional 12 shares of the T stock held by R on that date
were first considered owned by P under section 318(a)(2)(C) (i.e.,
(20 ÷ .75) -3). Because a qualified stock purchase of T by P
is made on December 1 of Year 2 only if all 12 shares of the T stock
purchased by P from R on that date are considered acquired during a
12-month period ending on that date (so that, in conjunction with
the 68 shares of the T stock P purchased on that date from the
unrelated person, 80 of T's 100 shares are acquired by P during a
12-month period) and because 2 of those 12 shares are considered to
have been acquired by P more than 12 months before December 1 of
Year 2 (i.e., on June 1 of Year 1), a qualified stock purchase is
not made. (Under §1.338-8(j)(2), for purposes of applying the
consistency rules, P is treated as making a qualified stock purchase
of T if, pursuant to an arrangement, P purchases T stock satisfying
the requirements of section 1504(a)(2) over a period of more than 12
months.)
Example 4. Assume the same facts as in Example 3, except that on
February 1 of Year 1, P acquires 25 percent in value of the R stock
by purchase. The result is the same as in Example 3. (4) Acquisition
date for tiered targets--
(i) Stock sold in deemed asset sale. If an election under section
338 is made for target, old target is deemed to sell target's assets
and new target is deemed to acquire those assets. Under section
338(h)(3)(B), new target's deemed purchase of stock of another
corporation is a purchase for purposes of section 338(d)(3) on the
acquisition date of target. If new target's deemed purchase causes a
qualified stock purchase of the other corporation and if a section
338 election is made for the other corporation, the acquisition date
for the other corporation is the same as the acquisition date of
target. However, the deemed sale and purchase of the other
corporation's assets is considered to take place after the deemed
sale and purchase of target's assets.
(ii) Example. The following example illustrates this paragraph (b)
(4): Example. A owns all of the T stock. T owns 50 of the 100
shares of X stock. The other 50 shares of X stock are owned by
corporation Y, which is unrelated to A, T, or P. On January 1 of
Year 1, P makes a qualified stock purchase of T from A and makes a
section 338 election for T. On December 1 of Year 1, P purchases
the 50 shares of X stock held by Y. A qualified stock purchase of
X is made on December 1 of Year 1, because the deemed purchase of
50 shares of X stock by new T because of the section 338 election
for T and the actual purchase of 50 shares of X stock by P are
treated as purchases made by one corporation. Section 338(h)(8).
For purposes of determining whether those purchases occur within a
12-month acquisition period as required by section 338(d)(3), T is
deemed to purchase its X stock on T's acquisition date, i.e.,
January 1 of Year 1.
(5) Effect of redemptions--
(i) General rule. Except as provided in this paragraph (b)(5), a
qualified stock purchase is made on the first day on which the
percentage ownership requirements of section 338(d)(3) are satisfied
by reference to target stock that is both--
(A) Held on that day by the purchasing corporation; and
(B) Purchased by the purchasing corporation during the 12-month
period
ending on that day. (ii) Redemptions from persons unrelated to the
purchasing corporation. Target stock redemptions from persons
unrelated to the purchasing corporation that occur during the 12-
month acquisition period are taken into account as
reductions in target's outstanding stock for purposes of determining
whether target stock purchased by the purchasing corporation in the
12-month acquisition period satisfies the percentage ownership
requirements of section 338(d)(3).
(iii) Redemptions from the purchasing corporation or related
persons during 12-month acquisition period--
(A) General rule. For purposes of the percentage ownership
requirements of section 338(d)(3), a redemption of target stock
during the 12-month acquisition period from the purchasing
corporation or from any person related to the purchasing corporation
is not taken into account as a reduction in target's outstanding
stock.
(B) Exception for certain redemptions from related corporations. A
redemption of target stock during the 12-month acquisition period
from a corporation related to the purchasing corporation is taken
into account as a reduction in target's outstanding stock to the
extent that the redeemed stock would have been considered purchased
by the purchasing corporation (because of section 338(h)(3)(C))
during the 12-month acquisition period if the redeemed stock had
been acquired by the purchasing corporation from the related
corporation on the day of the redemption. See paragraph (b)(3) of
this section.
(iv) Examples. The following examples illustrate this paragraph (b)
(5): Example 1. QSP on stock purchase date; redemption from
unrelated person during 12-month period. A owns all 100 shares of T
stock. On January 1 of Year 1, P purchases 40 shares of the T stock
from A. On July 1 of Year 1, T redeems 25 shares from A. On
December 1 of Year 1, P purchases 20 shares of the T stock from A.
P makes a qualified stock purchase of T on December 1 of Year 1,
because the 60 shares of T stock purchased by P within the 12-month
period ending on that date satisfy the 80-percent ownership
requirements of section 338(d)(3) (i.e., 60/75 shares), determined
by taking into account the redemption of 25 shares.
Example 2. QSP on stock redemption date; redemption from unrelated
person during 12-month period. The facts are the same as in Example
1, except that P purchases 60 shares of T stock on January 1 of Year
1 and none on December 1 of Year 1. P makes a qualified stock
purchase of T on July 1 of Year 1, because that is the first day on
which the T stock purchased by P within the preceding 12-month
period satisfies the 80-percent ownership requirements of section
338(d)(3) (i.e., 60/75 shares), determined by taking into account
the redemption of 25 shares.
Example 3. Redemption from purchasing corporation not taken into
account. On December 15 of Year 1, T redeems 30 percent of its stock
from P. The redeemed stock was held by P for several years and
constituted P's total interest in T. On December 1 of Year 2, P
purchases the remaining T stock from A. P does not make a qualified
stock purchase of T on December 1 of Year 2. For purposes of the 80-
percent ownership requirements of section 338(d)(3), the redemption
of P's T stock on December 15 of Year 1 is not taken into account as
a reduction in T's outstanding stock.
Example 4. Redemption from related person taken into account. On
January 1 of Year 1, P purchases 60 of the 100 shares of X stock. On
that date, X owns 40 of the 100 shares of T stock. On April 1 of
Year 1, T redeems X's T stock and P purchases the remaining 60
shares of T stock from an unrelated person. For purposes of the 80-
percent ownership requirements of section 338(d)(3), the redemption
of the T stock from X (a person related to P) is taken into account
as a reduction in T's outstanding stock. If P had purchased the 40
redeemed shares from X on April 1 of Year 1, all 40 of the shares
would have been considered purchased (because of section 338(h)(3)
(C)(i)) during the 12- month period ending on April 1 of Year 1 (24
of the 40 shares would have been considered purchased by P on
January 1 of Year 1 and the remaining 16 shares would have been
considered purchased by P on April 1 of Year 1). See paragraph (b)
(3) of this section. Accordingly, P makes a qualified stock purchase
of T on April 1 of Year 1, because the 60 shares of T stock
purchased by P on that date satisfy the 80-percent ownership
requirements of section 338(d)(3) (i.e., 60/60 shares), determined
by taking into account the redemption of 40 shares.
(c) Effect of post-acquisition events on eligibility for section 338
election--
(1) Post-acquisition elimination of target.
(i) The purchasing corporation may
make an election under section 338 for target even though target is
liquidated on or after the acquisition date. If target liquidates on
the acquisition date, the liquidation is considered to occur on the
following day and immediately after new target's deemed purchase of
assets. The purchasing corporation may also make an election under
section 338 for target even though target is merged into another
corporation, or otherwise disposed of by the purchasing corporation
provided that, under the facts and circumstances, the purchasing
corporation is considered for tax purposes as the purchaser of the
target stock.
(ii) The following examples illustrate this paragraph (c)(1):
Example 1. On January 1 of Year 1, P purchases 100 percent of the
outstanding common stock of T. On June 1 of Year 1, P sells the T
stock to an unrelated person. Assuming that P is considered for tax
purposes as the purchaser of the T stock, P remains eligible, after
June 1 of Year 1, to make a section 338 election for T that results
in a deemed asset sale of T's assets on January 1 of Year 1.
Example 2. On January 1 of Year 1, P makes a qualified stock
purchase of T. On that date, T owns the stock of T1. On March 1 of
Year 1, T sells the T1 stock to an unrelated person. On April 1 of
Year 1, P makes a section 338 election for T. Notwithstanding that
the T1 stock was sold on March 1 of Year 1, the section 338 election
for T on April 1 of Year 1 results in a qualified stock purchase by
T of T1 on January 1 of Year 1. See paragraph (b)(4)(i) of this
section.
(2) Post-acquisition elimination of the purchasing corporation. An
election under section 338 may be made for target after the
acquisition of assets of the purchasing corporation by another
corporation in a transaction described in section 381(a), provided
that the purchasing corporation is considered for tax purposes as
the purchaser of the target stock. The acquiring corporation in the
section 381(a) transaction may make an election under section 338
for target.
(d) Consequences of post-acquisition elimination of target where
section 338 election not made--(1) Scope. The rules of this
paragraph (d) apply to the transfer of target assets to the
purchasing corporation (or another member of the same affiliated
group as the purchasing corporation) (the transferee) following a
qualified stock purchase of target stock, if the purchasing
corporation does not make a section 338 election for target.
Notwithstanding the rules of this paragraph (d), section 354(a) (and
so much of section 356 as relates to section 354) cannot apply to
any person other than the purchasing corporation or another member
of the same affiliated group as the purchasing corporation unless
the transfer of target assets is pursuant to a reorganization as
determined without regard to this paragraph (d).
(2) Continuity of interest. By virtue of section 338, in
determining whether the continuity of interest requirement of
§1.368-1(b) is satisfied on the transfer of assets from target
to the transferee, the purchasing corporation's target stock
acquired in the qualified stock purchase represents an interest on
the part of a person who was an owner of the target's business
enterprise prior to the transfer that can be continued in a
reorganization.
(3) Control requirement. By virtue of section 338, the acquisition
of target stock in the qualified stock purchase will not prevent the
purchasing corporation from qualifying as a shareholder of the
target transferor for the purpose of determining whether,
immediately after the transfer of target assets, a shareholder of
the transferor is in control of the corporation to which the assets
are transferred within the meaning of section 368(a)(1)(D).
(4) Solely for voting stock requirement. By virtue of section 338,
the acquisition of target stock in the qualified stock purchase for
consideration other than voting stock will not prevent the
subsequent transfer of target assets from satisfying the solely for
voting stock requirement for purposes of determining if the transfer
of target assets qualifies as a reorganization under section 368(a)
(1)(C).
(5) Example. The following example illustrates this paragraph (d):
Example.
(i) Facts.
P, T, and X are domestic corporations. T and X each operate a
trade or business. A and K, individuals unrelated to P, own 85 and
15 percent, respectively, of the stock of T. P owns all of the stock
of X. The total adjusted basis of T's property exceeds the sum of
T's liabilities plus the amount of liabilities to which T's property
is subject. P purchases all of A's T stock for cash in a qualified
stock purchase. P does not make an election under section 338(g)
with respect to its acquisition of T stock. Shortly after the
acquisition date, and as part of the same plan, T merges under
applicable state law into X in a transaction that, but for the
question of continuity of interest, satisfies all the requirements
of section 368(a)(1)(A). In the merger, all of T's assets are
transferred to X. P and K receive X stock in exchange for their T
stock. P intends to retain the stock of X indefinitely.
(ii) Status of transfer as a reorganization. By virtue of
section 338, for the purpose of determining whether the continuity
of interest requirement of §1.368- 1(b) is satisfied, P's T
stock acquired in the qualified stock purchase represents an
interest on the part of a person who was an owner of T's business
enterprise prior to the transfer that can be continued in a
reorganization through P's continuing ownership of X. Thus, the
continuity of interest requirement is satisfied and the merger of T
into X is a reorganization within the meaning of section 368(a)(1)
(A). Moreover, by virtue of section 338, the requirement of section
368(a)(1)(D) that a target shareholder control the transferee
immediately after the transfer is satisfied because P controls X
immediately after the transfer. In addition, all of T's assets are
transferred to X in the merger and P and K receive the X stock
exchanged therefor in pursuance of the plan of reorganization. Thus,
the merger of T into X is also a reorganization within the meaning
of section 368(a)(1)(D).
(iii) Treatment of T and X. Under section 361(a), T recognizes no
gain or loss in the merger. Under section 362(b), X's basis in the
assets received in the merger is the same as the basis of the assets
in T's hands. X succeeds to and takes into account the items of T as
provided in section 381.
(iv) Treatment of P. By virtue of section 338, the transfer of T
assets to X is a reorganization. Pursuant to that reorganization, P
exchanges its T stock solely for stock of X, a party to the
reorganization. Because P is the purchasing corporation, section 354
applies to P's exchange of T stock for X stock in the merger of T
into X. Thus, P recognizes no gain or loss on the exchange. Under
section 358, P's basis in the X stock received in the exchange is
the same as the basis of P's T stock exchanged therefor.
(v) Treatment of K. Because K is not the purchasing corporation
(or an affiliate thereof), section 354 cannot apply to K's exchange
of T stock for X stock in the merger of T into X unless the transfer
of T's assets is pursuant to a reorganization as determined without
regard to this paragraph (d). Under general principles of tax law
applicable to reorganizations, the continuity of interest
requirement is not satisfied because P's stock purchase and the
merger of T into X are pursuant to an integrated transaction in
which A, the owner of 85 percent of the stock of T, received solely
cash in exchange for A's T stock. See, e.g., §1.368-1(e)(1)(i);
Yoc Heating v. Commissioner, 61 T.C. 168 (1973); Kass v.
Commissioner, 60 T.C. 218 (1973), aff'd, 491 F.2d 749 (3d Cir.
1974). Thus, the requisite continuity of interest under
§1.368-1(b) is lacking and section 354 does not apply to K's
exchange of T stock for X stock. K recognizes gain or loss, if any,
pursuant to section 1001(c) with respect to its T stock.
§1.338-4 Aggregate deemed sale price; various aspects of
taxation of the deemed asset sale. (a) Scope. This section provides
rules under section 338(a)(1) to determine the aggregate deemed sale
price (ADSP) for target. ADSP is the amount for which old target is
deemed to have sold all of its assets in the deemed asset sale. ADSP
is allocated among target's assets in accordance with §1.338-6
to determine the amount for which each asset is deemed to have been
sold. When a subsequent increase or decrease is required under
general principles of tax law with respect to an element of ADSP,
the redetermined ADSP is allocated among target's assets in
accordance with §1.338-7. This §1.338-4 also provides
rules regarding the recognition of gain or loss on the deemed sale
of target affiliate stock. Notwithstanding section 338(h)(6)(B)(ii),
stock held by a target affiliate in a foreign corporation or in a
corporation that is a DISC or that is described in section 1248(e)
is not excluded from the operation of section 338.
(b) Determination of ADSP--(1) General rule. ADSP is the sum of--
(i) The grossed-up amount realized on the sale to the purchasing
corporation of the purchasing corporation's recently purchased
target stock (as defined in section 338(b)(6)(A)); and
(ii) The liabilities of old target.
(2) Time and amount of ADSP--
(i) Original determination. ADSP is initially determined at the
beginning of the day after the acquisition date of target. General
principles of tax law apply in determining the timing and amount of
the elements of ADSP.
(ii) Redetermination of ADSP. ADSP is 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. For
example, ADSP is redetermined because of an increase or decrease in
the amount realized for recently purchased stock or because
liabilities not originally taken into account in determining ADSP
are subsequently taken into account. Increases or decreases with
respect to the elements of ADSP result in the reallocation of ADSP
among target's assets under §1.338-7.
(iii) Example. The following example illustrates this paragraph
(b)(2): Example. In Year 1, T, a manufacturer, purchases a
customized delivery truck from X with purchase money indebtedness
having a stated principal amount of $100,000. P acquires all of
the stock of T in Year 3 for $700,000 and makes a section 338
election for T. Assume T has no liabilities other than its
purchase money indebtedness to X. In Year 4, when T is neither
insolvent nor in a title 11 case, T and X agree to reduce the
amount of the purchase money indebtedness to $80,000. Assume
further that the reduction would be a purchase price reduction
under section 108(e)(5). T and X's agreement to reduce the amount
of the purchase money indebtedness would not, under general
principles of tax law that would apply if the deemed asset sale
had actually occurred, change the amount of liabilities of old
target taken into account in determining its amount realized.
Accordingly, ADSP is not redetermined at the time of the
reduction. See §1.338-5(b)(2)(iii) Example 1 for the effect
on AGUB.
(c) Grossed-up amount realized on the sale to the purchasing
corporation of the purchasing corporation's recently purchased
target stock--(1) Determination of amount. The grossed-up amount
realized on the sale to the purchasing corporation of the purchasing
corporation's recently purchased target stock is an amount equal
to--
(i) The amount realized on the sale to the purchasing corporation
of the purchasing corporation's recently purchased target stock
determined as if the selling shareholder(s) were required to use old
target's accounting methods and characteristics and the installment
method were not available and determined without regard to the
selling costs taken into account under paragraph (c)(1)(iii) of this
section;
(ii) Divided by the percentage of target stock (by value,
determined on the acquisition date) attributable to that recently
purchased target stock; (iii) Less the selling costs incurred by the
selling shareholders in connection with the sale to the purchasing
corporation of the purchasing corporation's recently purchased
target stock that reduce their amount realized on the sale of the
stock (e.g., brokerage commissions and any similar costs to sell the
stock).
(2) Example. The following example illustrates this paragraph
(c): Example. T has two classes of stock outstanding, voting
common stock and preferred stock described in section 1504(a)(4).
On March 1 of Year 1, P purchases 40 percent of the outstanding T
stock from S1 for $500, 20 percent of the outstanding T stock
from S2 for $225, and 20 percent of the outstanding T stock from
S3 for $275. On that date, the fair market value of all the T
voting common stock is $1,250 and the preferred stock $750. S1,
S2, and S3 incur $40, $35, and $25 respectively of selling costs.
S1 continues to own the remaining 20 percent of the outstanding T
stock. The grossed-up amount realized on the sale to P of P's
recently purchased T stock is calculated as follows: The total
amount realized (without regard to selling costs) is $1,000 (500
+ 225 + 275). The percentage of T stock by value on the
acquisition date attributable to the recently purchased T stock
is 50% (1,000/(1,250 + 750)). The selling costs are $100 (40 + 35
+ 25). The grossed-up amount realized is $1,900 (1,000/.5 ! !
100).
(d) Liabilities of old target--
(1) In general. In general, the liabilities of old target are
measured as of the beginning of the day after the acquisition date.
(But see §1.338-1(d) (regarding certain transactions on the
acquisition date).) In order to be taken into account in ADSP, a
liability must be a liability of target that is properly taken into
account in amount realized under general principles of tax law that
would apply if old target had sold its assets to an unrelated person
for consideration that included the discharge of its liabilities.
See §1.1001-2(a). Such liabilities may include liabilities for
the tax consequences resulting from the deemed sale.
(2) Time and amount of liabilities. The time for taking into
account liabilities of old target in determining ADSP and the amount
of the liabilities taken into account is determined as if old target
had sold its assets to an unrelated person for consideration that
included the discharge of the liabilities by the unrelated person.
For example, if no amount of a target liability is properly taken
into account in amount realized as of the beginning of the day after
the acquisition date, the liability is not initially taken into
account in determining ADSP (although it may be taken into account
at some later date).
(e) Deemed sale tax consequences. Gain or loss on each asset in
the deemed sale is computed by reference to the ADSP allocated to
that asset. ADSP is allocated under the rules of §1.338-6.
Though deemed sale tax consequences may increase or decrease ADSP by
creating or reducing a tax liability, the amount of the tax
liability itself may be a function of the size of the deemed sale
tax consequences. Thus, these determinations may require trial and
error computations.
(f) Other rules apply in determining ADSP. ADSP may not be
applied in such a way as to contravene other applicable rules. For
example, a capital loss cannot be applied to reduce ordinary income
in calculating the tax liability on the deemed sale for purposes of
determining ADSP.
(g) Examples. The following examples illustrate this section. For
purposes of the examples in this paragraph (g), unless otherwise
stated, T is a calendar year taxpayer that files separate returns
and that has no loss, tax credit, or other carryovers to Year 1.
Depreciation for Year 1 is not taken into account. T has no
liabilities other than the Federal income tax liability resulting
from the deemed asset sale, and the T shareholders have no selling
costs. Assume that T's tax rate for any ordinary income or net
capital gain resulting from the deemed sale of assets is 34 percent
and that any capital loss is offset by capital gain. On July 1 of
Year 1, P purchases all of the stock of T and makes a section 338
election for T. The examples are as follows:
Example 1. One class.
(i) On July 1 of Year 1, T's only asset is an item of section 1245
property with an adjusted basis to T of $50,400, a recomputed basis
of $80,000, and a fair market value of $100,000. P purchases all of
the T stock for $75,000, which also equals the amount realized for
the stock determined as if the selling shareholder(s) were required
to use old target's accounting methods and characteristics. (ii)
ADSP is determined as follows (for purposes of this section (g), G
is the grossed-up amount realized on the sale to P of P's recently
purchased T stock, L is T's liabilities other than T's tax liability
for the deemed sale tax consequences, T is the applicable tax rate,
and B is the adjusted basis of the R asset deemed sold): ADSP = G +
L + T ÷ (ADSP ! ! B).
R ADSP = ($75,000/1) + $0 + .34 ÷
(ADSP ! ! $50,400) ADSP = $75,000 + .34ADSP ! !
$17,136 .66ADSP = $57,864 ADSP = $87,672.72
(iii) Because ADSP for T ($87,672.72) does not exceed the fair
market value of T's asset ($100,000), a Class V asset, T's entire
ADSP is allocated to that asset. Thus, T's deemed sale results in
$37,272.72 of taxable income (consisting of $29,600 of ordinary
income and $7,672.72 of capital gain).
(iv) The facts are the same as in paragraph (i) of this Example 1,
except that on July 1 of Year 1, P purchases only 80 of the 100
shares of T stock for
$60,000. The grossed-up amount realized on the sale to P of P's
recently purchased T stock (G) is $75,000 ($60,000/.8).
Consequently, ADSP and the deemed sale tax consequences are the same
as in paragraphs (ii) and (iii) of this Example 1.
(v) The facts are the same as in paragraph (i) of this Example 1,
except that T also has goodwill (a Class VII asset) with an
appraised value of $10,000. The results are the same as in
paragraphs (ii) and (iii) of this Example 1. Because ADSP does not
exceed the fair market value of the Class V asset, no amount is
allocated to the Class VII asset (goodwill). Example 2. More than
one class.
(i) P purchases all of the T stock for $140,000, which also equals
the amount realized for the stock determined as if the selling
shareholder(s) were required to use old target's accounting methods
and characteristics. On July 1 of Year 1, T has liabilities (not
including the tax liability for the deemed sale tax consequences) of
$50,000, cash (a Class I asset) of $10,000, actively traded
securities (a Class II asset) with a basis of $4,000 and a fair
market value of $10,000, goodwill (a Class VII asset) with a basis
of $3,000, and the following Class V assets:
Asset Basis FMV Ratio of asset FMV to total Class V FMV
Land .................... $5,000 $35,000 .14
Building.................. 10,000 50,000 .20
Equipment A (Recomputed 5,000 90,000 .36
basis $80,000) ............
Equipment B (Recomputed 10,000 75,000 .30
basis $20,000) ............
Totals........$ 30,000 $250,000 1.00
(ii) ADSP exceeds $20,000. Thus, $10,000 of ADSP is allocated to
the cash and $10,000 to the actively traded securities. The amount
allocated to an asset (other than a Class VII asset) cannot exceed
its fair market value (however, the fair market value of any
property subject to nonrecourse indebtedness is treated as being not
less than the amount of such indebtedness; see §1.338-6(a)(2)).
See §1.338-6(c)(1) (relating to fair market value limitation).
(iii) The portion of ADSP allocable to the Class V assets is
preliminarily determined as follows (in the formula, the amount
allocated to the Class I assets is referred to as I and the amount
allocated to the Class II assets as II):
ADSP = (G ! (I + II)) + L + T ÷ [(II ! B ) + (ADSP ! B )]
! ! V RIIVV
ADSP = ($140,000 ! ($10,000 + $10,000)) + $50,000 + .34 ÷
[($10,000 ! ! V $4,000) + (ADSP ! ! ($5,000 + $10,000 + $5,000 +
$10,000))]
V ADSP = $161,840 + .34 ADSP VV .66 ADSP = $161,840 V
ADSP = $245,212.12 V
(iv) Because, under the preliminary calculations of ADSP, the
amount to be allocated to the Class I, II, III, IV, V, and VI assets
does not exceed their aggregate fair market value, no ADSP amount is
allocated to goodwill. Accordingly, the deemed sale of the goodwill
results in a capital loss of $3,000. The portion of ADSP allocable
to the Class V assets is finally determined by taking into account
this loss as follows:
ADSP = (G ! (I + II)) + L + T ÷ [(II ! B ) + (ADSP ! B )
+ (ADSP ! ! ! ! V RIIVVVII B )] VII ADSP = ($140,000 ! ($10,000 +
$10,000)) + $50,000 + .34 ÷ [($10,000 ! ! V $4,000) + (ADSP !
$30,000) + ($0 ! ! $3,000)] ! V ADSP = $160,820 + .34 ADSP VV .66
ADSP = $160,820 V ADSP = $243,666.67 V
(v) The allocation of ADSP among the Class V assets is in
proportion to V their fair market values, as follows:
Asset ADSP Gain
Land ........... $34,113.33 $29,113.33
(capital gain)
Building......... 48,733.34 38,733.34
(capital gain)
Equipment A..... 87,720.00 82,720.00
(75,000 ordinary income
(7,720 capital gain)
Equipment B..... 73,100.00 63,100.00
(10,000 ordinary income
53,100 capital gain)
Totals..... $243,666.67 $213,666.67
Example 3. More than one class.
(i) The facts are the same as in Example 2, except that P purchases
the T stock for $150,000, rather than $140,000. The amount realized
for the stock determined as if the selling shareholder(s) were
required to use old target's accounting methods and characteristics
is also $150,000.
(ii) As in Example 2, ADSP exceeds $20,000. Thus, $10,000 of ADSP
is allocated to the cash and $10,000 to the actively traded
securities.
(iii) The portion of ADSP allocable to the Class V assets as
preliminarily determined under the formula set forth in paragraph
(iii) of Example 2 is $260,363.64. The amount allocated to the Class
V assets cannot exceed their aggregate fair market value ($250,000).
Thus, preliminarily, the ADSP amount allocated to Class V assets is
$250,000.
(iv) Based on the preliminary allocation, the ADSP is determined
as follows (in the formula, the amount allocated to the Class I
assets is referred to as I, the amount allocated to the Class II
assets as II, and the amount allocated to the Class V assets as V):
ADSP = G + L + T ÷ [(II ! B ) + (V ! B ) + (ADSP ! (I + II
+ V+ B ))] ! ! ! R IIV VII ADSP = $150,000 + $50,000 + .34 ÷
[($10,000 ! $4,000) + ($250,000 ! ! $30,000) + (ADSP ! ! ($10,000 +
$10,000 + $250,000 + $3,000))]
ADSP = $200,000 + .34ADSP ! ! $15,980 .66ADSP = $184,020 ADSP =
$278,818.18
(v) Because ADSP as determined exceeds the aggregate fair market
value of the Class I, II, III, IV, V, and VI assets, the $250,000
amount preliminarily allocated to the Class V assets is appropriate.
Thus, the amount of ADSP allocated to Class V assets equals their
aggregate fair market value ($250,000), and the allocated ADSP
amount for each Class V asset is its fair market value. Further,
because there are no Class VI assets, the allocable ADSP amount for
the Class VII asset (goodwill) is $8,818.18 (the excess of ADSP over
the aggregate ADSP amounts for the Class I, II, III, IV, V and VI
assets).
Example 4. Amount allocated to T1 stock.
(i) The facts are the same as in Example 2, except that T owns all
of the T1 stock (instead of the building), and T1's only asset is
the building. The T1 stock and the building each have a fair market
value of $50,000, and the building has a basis of $10,000. A section
338 election is made for T1 (as well as T), and T1 has no
liabilities other than the tax liability for the deemed sale tax
consequences. T is the common parent of a consolidated group filing
a final consolidated return described in §1.338- 10(a)(1).
(ii) ADSP exceeds $20,000. Thus, $10,000 of ADSP is allocated to
the cash and $10,000 to the actively traded securities.
(iii) Because T does not recognize any gain on the deemed sale of
the T1 stock under paragraph (h)(2) of this section, appropriate
adjustments must be made to reflect accurately the fair market value
of the T and T1 assets in determining the allocation of ADSP among
T's Class V assets (including the T1 stock). In preliminarily
calculating ADSP in this case, the T1 stock can be V disregarded
and, because T owns all of the T1 stock, the T1 asset can be treated
as a T asset. Under this assumption, ADSP is $243,666.67. See V
paragraph (iv) of Example 2.
(iv) Because the portion of the preliminary ADSP allocable to
Class V assets ($243,666.67) does not exceed their fair market value
($250,000), no amount is allocated to Class VII assets for T.
Further, this amount ($243,666.67) is allocated among T's Class V
assets in proportion to their fair market values. See paragraph (v)
of Example 2. Tentatively, $48,733.34 of this amount is allocated to
the T1 stock.
(v) The amount tentatively allocated to the T1 stock, however,
reflects the tax incurred on the deemed sale of the T1 asset equal
to $13,169.34 (.34 ÷ ($48,733.34 ! ! $10,000)). Thus, the
ADSP allocable to the Class V assets of T, and the ADSP allocable to
the T1 stock, as preliminarily calculated, each must be reduced by
$13,169.34. Consequently, these amounts, respectively, are
$230,497.33 and $35,564.00. In determining ADSP for T1, the grossed-
up amount realized on the deemed sale to new T of new T's recently
purchased T1 stock is $35,564.00.
(vi) The facts are the same as in paragraph (i) of this Example
4, except that the T1 building has a $12,500 basis and a $62,500
value, all of the outstanding T1 stock has a $62,500 value, and T
owns 80 percent of the T1 stock. In preliminarily calculating ADSP ,
the T1 stock can be disregarded but, V because T owns only 80
percent of the T1 stock, only 80 percent of T1 asset basis and value
should be taken into account in calculating T's ADSP. By taking into
account 80 percent of these amounts, the remaining calculations and
results are the same as in paragraphs (ii), (iii), (iv), and (v) of
this Example 4, except that the grossed-up amount realized on the
sale of the recently purchased T1 stock is $44,455.00
($35,564.00/0.8).
(h) Deemed sale of target affiliate stock--(1) Scope. This
paragraph (h) prescribes rules relating to the treatment of gain or
loss realized on the deemed sale of stock of a target affiliate when
a section 338 election (but not a section 338(h)(10) election) is
made for the target affiliate. For purposes of this paragraph (h),
the definition of domestic corporation in §1.338-2(c)(9) is
applied without the exclusion therein for DISCs, corporations
described in section 1248(e), and corporations to which an election
under section 936 applies.
(2) In general. Except as otherwise provided in this paragraph
(h), if a section 338 election is made for target, target recognizes
no gain or loss on the deemed sale of stock of a target affiliate
having the same acquisition date and for which a section 338
election is made if--
(i) Target directly owns stock in the target affiliate satisfying
the requirements of section 1504(a)(2);
(ii) Target and the target affiliate are members of a
consolidated group filing a final consolidated return described in
§1.338-10(a)(1); or
(iii) Target and the target affiliate file a combined return
under §1.338- 10(a)(4).
(3) Deemed sale of foreign target affiliate by a domestic target.
A domestic target recognizes gain or loss on the deemed sale of
stock of a foreign target affiliate. For the proper treatment of
such gain or loss, see, e.g., sections 1246, 1248, 1291 et seq., and
338(h)(16) and §1.338-9.
(4) Deemed sale producing effectively connected income. A foreign
target recognizes gain or loss on the deemed sale of stock of a
foreign target affiliate to the extent that such gain or loss is
effectively connected (or treated as effectively connected) with the
conduct of a trade or business in the United States.
(5) Deemed sale of insurance company target affiliate electing
under section 953(d). A domestic target recognizes gain (but not
loss) on the deemed sale of stock of a target affiliate that has in
effect an election under section 953(d) in an amount equal to the
lesser of the gain realized or the earnings and profits described in
section 953(d)(4)(B).
(6) Deemed sale of DISC target affiliate. A foreign or domestic
target recognizes gain (but not loss) on the deemed sale of stock of
a target affiliate that is a DISC or a former DISC (as defined in
section 992(a)) in an amount equal to the lesser of the gain
realized or the amount of accumulated DISC income determined with
respect to such stock under section 995(c). Such gain is included in
gross income as a dividend as provided in sections 995(c)(2) and
996(g).
(7) Anti-stuffing rule. If an asset the adjusted basis of which
exceeds its fair market value is contributed or transferred to a
target affiliate as transferred basis property (within the meaning
of section 7701(a)(43)) and a purpose of such transaction is to
reduce the gain (or increase the loss) recognized on the deemed sale
of such target affiliate's stock, the gain or loss recognized by
target on the deemed sale of stock of the target affiliate is
determined as if such asset had not been contributed or transferred.
(8) Examples. The following examples illustrate this paragraph
(h):
Example 1.
(i) P makes a qualified stock purchase of T and makes a section 338
election for T. T's sole asset, all of the T1 stock, has a basis of
$50 and a fair market value of $150. T's deemed purchase of the T1
stock results in a qualified stock purchase of T1 and a section 338
election is made for T1. T1's assets have a basis of $50 and a fair
market value of $150.
(ii) T realizes $100 of gain on the deemed sale of the T1 stock,
but the gain is not recognized because T directly owns stock in T1
satisfying the requirements of section 1504(a)(2) and a section 338
election is made for T1.
(iii) T1 recognizes gain of $100 on the deemed sale of its
assets.
Example 2. The facts are the same as in Example 1, except that P
does not make a section 338 election for T1. Because a section 338
election is not made for T1, the $100 gain realized by T on the
deemed sale of the T1 stock is recognized. Example 3.
(i) P makes a qualified stock purchase of T and makes a section 338
election for T. T owns all of the stock of T1 and T2. T's deemed
purchase of the T1 and T2 stock results in a qualified stock
purchase of T1 and T2 and section 338 elections are made for T1 and
T2. T1 and T2 each own 50 percent of the vote and value of T3 stock.
The deemed purchases by T1 and T2 of the T3 stock result in a
qualified stock purchase of T3 and a section 338 election is made
for T3. T is the common parent of a consolidated group and all of
the deemed asset sales are reported on the T group's final
consolidated return. See §1.338-10(a)(1).
(ii) Because T, T1, T2 and T3 are members of a consolidated group
filing a final consolidated return, no gain or loss is recognized by
T, T1 or T2 on their respective deemed sales of target affiliate
stock. Example 4.
(i) T's sole asset, all of the FT1 stock, has a basis of $25 and a
fair market value of $150. FT1's sole asset, all of the FT2 stock,
has a basis of $75 and a fair market value of $150. FT1 and FT2 each
have $50 of accumulated earnings and profits for purposes of section
1248(c) and (d). FT2's assets have a basis of $125 and a fair market
value of $150, and their sale would not generate subpart F income
under section 951. The sale of the FT2 stock or assets would not
generate income effectively connected with the conduct of a trade or
business within the United States. FT1 does not have an election in
effect under section 953(d) and neither FT1 nor FT2 is a passive
foreign investment company.
(ii) P makes a qualified stock purchase of T and makes a section
338 election for T. T's deemed purchase of the FT1 stock results in
a qualified stock purchase of FT1 and a section 338 election is made
for FT1. Similarly, FT1's deemed purchase of the FT2 stock results
in a qualified stock purchase of FT2 and a section 338 election is
made for FT2.
(iii) T recognizes $125 of gain on the deemed sale of the FT1
stock under paragraph (h)(3) of this section. FT1 does not recognize
$75 of gain on the deemed sale of the FT2 stock under paragraph (h)
(2) of this section. FT2 recognizes $25 of gain on the deemed sale
of its assets. The $125 gain T recognizes on the deemed sale of the
FT1 stock is included in T's income as a dividend under section
1248, because FT1 and FT2 have sufficient earnings and profits for
full recharacterization ($50 of accumulated earnings and profits in
FT1, $50 of accumulated earnings and profits in FT2, and $25 of
deemed sale earnings and profits in FT2). Section 1.338-9(b). For
purposes of sections 901 through 908, the source and foreign tax
credit limitation basket of $25 of the recharacterized gain on the
deemed sale of the FT1 stock is determined under section 338(h)(16).
§1.338-5 Adjusted grossed-up basis.
(a) Scope. This section provides rules under section 338(b) to
determine
the adjusted grossed-up basis (AGUB) for target. AGUB is the amount
for which new target is deemed to have purchased all of its assets
in the deemed purchase under section 338(a)(2). AGUB is allocated
among target's assets in accordance with §1.338-6 to determine
the price at which the assets are deemed to have been purchased.
When a subsequent increase or decrease with respect to an element of
AGUB is required under general principles of tax law, redetermined
AGUB is allocated among target's assets in accordance with
§1.338-7.
(b) Determination of AGUB--(1) General rule. AGUB is the sum of--
(i) The grossed-up basis in the purchasing corporation's recently
purchased target stock;
(ii) The purchasing corporation's basis in nonrecently purchased
target stock; and
(iii) The liabilities of new target.
(2) Time and amount of AGUB--
(i) Original determination. AGUB is initially determined at the
beginning of the day after the acquisition date of target. General
principles of tax law apply in determining the timing and amount of
the elements of AGUB.
(ii) Redetermination of AGUB. AGUB is redetermined at such time and
in such amount as an increase or decrease would be required, under
general principles of tax law, with respect to an element of AGUB.
For example, AGUB is redetermined because of an increase or decrease
in the amount paid or incurred for recently purchased stock or
nonrecently purchased stock or because liabilities not originally
taken into account in determining AGUB are subsequently taken into
account. An increase or decrease to one element of AGUB also may
cause an increase or decrease to another element of AGUB. For
example, if |
