Stock Purchases Treated as Asset Acquisitions — Sections 336(e) and 338
 by 
James T. Chudy, Esq.

 and
 Harsha Reddy, Esq.
 
 Pillsbury Winthrop Shaw Pittman LLP
 New York, New York

 
James T. Chudy, B.S. with Honors, Phi Beta Kappa, University of Wisconsin–Madison (1981); J.D., Harvard Law School (1984).
Harsha Reddy, B.A., magna cum laude, Phi Beta Kappa, distinction in Economics, Yale University (1993); J.D., cum laude, Harvard Law School (1996).

  

  

  

  
  
This Portfolio revises and supersedes 788-2nd T.M., Stock Purchases Treated as Asset Acquisitions — Section 338. Portfolio 788-2nd T.M. should be discarded.
Stock Purchases Treated as Asset Acquisitions — Sections 336(e) and 338
PORTFOLIO DESCRIPTION
Tax Management Portfolio, Stock Purchases Treated as Asset Acquisitions — Sections 336(e) and 338, No. 788-3rd, analyzes in detail the elections under §338(g) and §338(h)(10), available when a purchasing corporation makes a "qualified stock purchase" of a target corporation. If an election is made, "old" target is treated as selling all of its assets to itself as "new" target, and new target is treated as purchasing those assets. New target has a fresh start for most federal income tax purposes, including a fair market value basis in its assets.
Subject to a potential notice requirement and absent a contractual prohibition, a §338(g) election is made unilaterally by the purchasing corporation and generally results in a double tax — i.e., a tax on both the deemed sale of target's assets and on the sale of target stock. Except in the context of an acquisition of a foreign target, a §338(g) election is rare.
A §338(h)(10) election is made jointly by the seller and the purchasing corporation and is available only when the target is a subsidiary member of a consolidated or affiliated group or is an S corporation. A §338(h)(10) election generally has the same effect on old target and new target but avoids the shareholder-level tax by treating target as having liquidated following the deemed asset sale. Section 338(h)(10) elections are quite common.
A §336(e) election is similar in effect to a §338(h)(10) election but is made by the seller (or sellers) and, because it is not limited to targets bought by a corporation, is more broadly available than a §338(h)(10) election.
This Portfolio may be cited as Chudy & Reddy, 788-3rd T.M., Stock Purchases Treated as Asset Acquisitions — Sections 336(e) and 338.

This Tax Management Portfolio is not intended to provide legal, accounting, or tax advice for any purpose and does not apply to any particular person or factual situation. Neither the authors nor the publisher assumes responsibility for the reader's reliance on information or opinions expressed in it, and the reader is encouraged to verify all items by reviewing the original sources.	

TABLE OF CONTENTS 
DETAILED ANALYSIS 
I.  Introduction and Background	
A.  Summary	 
B.  Background	
1.  Before §338	 
2.  Legislative History of §338	 
3.  History of the §338 Regulations	  
C.  General Utilities Repeal	 
D.  Terms Used in this Portfolio	 
II.  Qualified Stock Purchase	
A.  In General	 
B.  Timing	
1.  Acquisition Date	 
2.  12-Month Acquisition Period	
a.  In General	 
b.  Extended 12-Month Acquisition Period	   
C.  Eligible Purchasers	
1.  Limited to Corporations	
a.  S Corporations	 
b.  Entities Treated as Corporations	 
c.  Disregarded Entities	  
2.  Individuals	 
3.  Partnerships	 
4.  Corporation Must Be True Purchaser	  
D.  80% Vote and Value Test	 
E.  Purchase	
1.  In General	 
2.  Exceptions to Purchase	 
3.  Redemptions from Persons Unrelated to the Purchasing Corporation	 
4.  Related Party Transactions	
a.  Acquisitions from a Related Corporation	
(1)  In General	 
(2)  Special Timing Rules	  
b.  Initial Public Offerings	 
c.  "Sell-the-Seller" Transactions	 
d.  Ralph's Grocery	 
e.  Redemptions from the Purchasing Corporation and Related Persons	 
f.  Section 304	  
5.  Reverse Subsidiary Merger	
a.  In General	 
b.  Overlap with Tax-Free Reorganizations	  
6.  Section 351 Exchanges; Leveraged Acquisitions; "Roll-Over" Investors	 
7.  Direct Issuance of Target Stock for Cash	 
8.  Insolvent Targets and Target Affiliates	 
9.  Liquidating and Non-Liquidating Distributions of Target Stock	 
10.  Deemed Purchases of Target Subsidiaries	  
F.  Post-Acquisition Events	
1.  Post-Acquisition Elimination of Purchasing Corporation	 
2.  Post-Acquisition Disposition of Target	
a.  In General	 
b.  Ability to Make a §338(g) or §338(h)(10) Election	 
c.  Liquidation of Target	
(1)  In General	 
(2)  "Check-the-Box" Election for Target	  
d.  Post-QSP §368 Reorganization of Target (No §338 Election)	
(1)  Yoc Heating Generally	 
(2)  Mitigation of Yoc Heating	 
(3)  "C" and "D" Reorganizations	  
e.  Multi-Step Transactions: Tensions between Qualified Stock Purchases and §368 Reorganizations	
(1)  Reorganization Treatment Trumps: Rev. Rul. 2001-46	 
(2)  Overriding Rev. Rul. 2001-46 to Permit a §338(h)(10) Election	 
(3)  Failed §368 Reorganization Treatment: Rev. Rul. 2008-25	  
f.  Liquidation (or Merger) of Target Without a Qualified Stock Purchase	   
III.  Effects of a §338(g) Election on Old Target	
A.  In General	
1.  Foreign Target	 
2.  Domestic Target	  
B.  Gain or Loss Recognition for Selling Shareholders	 
C.  Target's Gain Recognition	
1.  In General	 
2.  Full Recognition of Gain	 
3.  Nonrecognition of Gain for Stock of Certain Target Affiliates	
a.  In General	 
b.  Exceptions to Nonrecognition for Target Affiliate Stock	   
D.  Target's Deemed Sale Filing	
1.  Target Not Included in a Consolidated Return	
a.  Target is a C Corporation — Final Return	 
b.  Target Is an S Corporation — Separate One-Day Deemed Sale Return	  
2.  Selling Group Files a Consolidated Return	
a.  Single Target Includible in the Consolidated Return (but Not Common Parent) — Separate One-Day Deemed Sale Return	
(1)  "Selling Group"	 
(2)  Separate Taxable Year	 
(3)  Purchasing Corporation's Controlled Group	  
b.  Multiple Targets Included in the Consolidated Return — Combined Deemed Sale Return	
(1)  In General	 
(2)  Calculation of Deemed Sale Tax Consequences	 
(3)  Procedure for Filing a Combined Deemed Sale Return	 
(4)  Several Liability	  
c.  Target Is Common Parent of Affiliated Group Filing Consolidated Returns	  
3.  Return Filing Mechanics	
a.  Due Date	
(1)  In General	 
(2)  Special Consolidated Return Rules	  
b.  Estimated Taxes	 
c.  Waivers	
(1)  Additions to Tax and Additional Amounts	 
(2)  Actions Required on Timely Filed Returns	    
E.  Calculation and Allocation of Aggregate Deemed Sale Price (ADSP)	
1.  In General	 
2.  Calculation of ADSP	
a.  In General	 
b.  Grossed-Up Amount Realized on Recently Purchased Target Stock	 
c.  Liabilities of Old Target	
(1)  In General	 
(2)  Time and Amount of Liabilities	 
(3)  Contingent Liabilities	  
d.  The ADSP Formula	 
e.  Calculating Deemed Sale Tax Consequences	  
3.  The Residual Method	
a.  The Seven Classes	 
b.  Allocation Among the Acquisition Date Assets	  
4.  Treatment of Target Affiliate Stock	 
5.  Special Allocation for Certain Nuclear Decommissioning Funds	
a.  Tax Treatment - Qualified Funds and Nonqualified Funds	 
b.  Election to Treat Nonqualified Fund as Corporation	  
6.  Subsequent Adjustments to ADSP	
a.  In General	 
b.  Procedures for Making Adjustments	
(1)  Deemed Sale Tax Consequences in a §338(g) Transaction (Without a §338(h)(10) Election) Included in New Target's Return	 
(2)  Loss Carryovers to New Target Taxable Years	 
(3)  Loss Carrybacks to Old Target Taxable Years	    
F.  Special Rules for Insurance Company Targets	
1.  Assumption Reinsurance Principles	 
2.  Computing ADSP and AGUB	 
3.  Allocating ADSP and AGUB	 
4.  Consequences to Old Target and New Target	
a.  In General	 
b.  Reserve Increases	 
c.  Effect of §338 Election on Old Target's Capitalization Amounts Under §848	 
d.  Section 197 Treatment of Rights Under Insurance Contracts	 
e.  Prior Law — Policyholders Surplus Account	 
f.  Prior Law — Effect of §338 Election on Old Target's §846(e) Election	 
g.  Prior Law — Section 847 Special Estimated Tax Payments	   
IV.  Effects of a §338(g) Election on New Target	
A.  In General	
1.  New Target Treated as New Corporation Under Subtitle A of the Code	 
2.  New Target Treated as Continuation of Old Target Under Rest of Code	 
3.  Special S Corporation Considerations – Qualified S Corporation Subsidiaries (QSubs)	  
B.  Adjusted Grossed-Up Basis (AGUB)	
1.  In General	 
2.  Determination of Adjusted Grossed-Up Basis	
a.  Grossed-Up Basis in Recently Purchased Target Stock	 
b.  Basis in Nonrecently Purchased Target Stock — Gain Recognition Election	
(1)  Effect of Gain Recognition Election	 
(2)  Basis Amount	 
(3)  Miscellaneous Gain Recognition Election Rules	  
c.  Liabilities of New Target	
(1)  In General	 
(2)  Time and Amount of Liabilities	 
(3)  Contingent Liabilities	  
d.  IRS Adjustments to AGUB	 
e.  The AGUB Formula	   
C.  Allocation of AGUB Among New Target's Assets	
1.  In General	 
2.  Other Considerations in Allocating AGUB	
a.  Impaired Basis and "Bargain Purchases"	 
b.  Limitations Arising Under General Tax Principles	 
c.  Effects of Nonrecently Purchased Stock on AGUB Allocations	 
d.  New Target's Sale of Assets Subject to a Liability	 
e.  Nuclear Decommissioning Funds	 
f.  Insurance Companies	  
3.  Examples of AGUB and ADSP Allocations	
a.  Allocation Without Nonrecently Purchased Stock	 
b.  Allocation with Nonrecently Purchased Stock — Hypothetical Purchase Price	   
D.  Subsequent Adjustments to AGUB	
1.  In General	 
2.  Disposition or Depreciation of Assets	 
3.  Reallocating AGUB and ADSP	 
4.  Examples of Allocations of Redetermined AGUB and ADSP	
a.  Contingent Liability Previously Excluded from AGUB	 
b.  Reduction in Amount Realized for Recently Purchased Stock	   
E.  Discrepancy Between ADSP and AGUB	 
V.  The §338(h)(10) Election	
A.  In General	 
B.  Planning Considerations: Whether to Make a §338(h)(10) Election	
1.  Nontax Motivations for Stock Purchase	 
2.  Seller's Perspective	
a.  "Outside" and "Inside" Basis	 
b.  Net Operating and Capital Losses	 
c.  S Corporation Shareholders	  
3.  Purchaser's Perspective	 
4.  Other Considerations	 
5.  Price	  
C.  Eligibility to Make a §338(h)(10) Election	
1.  Consolidated Target	 
2.  Affiliated Target	 
3.  S Corporation Target	 
4.  Ineligible Targets	  
D.  Effect of §338(h)(10) Election on Old Target	
1.  Transaction Model	
a.  In General	 
b.  Consistency of Deemed and Actual Asset Sale	  
2.  Deemed Asset Sale	
a.  In General	 
b.  ADSP for Old Target	 
c.  Reporting Gain or Loss on Old Target's Deemed Asset Sale	 
d.  Continuation of S Corporation and QSub Status	 
e.  Tiered Targets	  
3.  Deemed Liquidation of Old Target	  
E.  Effect of §338(h)(10) Election on the Seller or Sellers	
1.  Deemed Sale of Target Assets	
a.  Selling Consolidated Group	
(1)  In General	 
(2)  Mandatory Filing of Consolidated Returns	  
b.  Affiliated Target	 
c.  S Corporation Shareholders	  
2.  Deemed Liquidation of Old Target	
a.  In General	 
b.  Section 332 Liquidation	
(1)  In General	 
(2)  Retained Assets–Bootstrap Distributions	 
(3)  Partial Liquidation	 
(4)  Consolidated Return Consequences — Deferred Intercompany Transactions	  
c.  Section 331 Liquidation	  
3.  Gain or Loss on Stock Sale Ignored	 
4.  Retained Target Stock	 
5.  "Minority Shareholder": Gain Recognition and Retained Target Stock	 
6.  Unincorporated Assets	 
7.  IPO Using §338(h)(10)	 
8.  Forward Merger Alternative	 
9.  Availability of the Installment Method	  
F.  Purchasing Corporation: Automatic Gain Recognition Election	 
G.  New Target	
1.  AGUB for New Target	 
2.  Transferee Liability	  
VI.  Section 336(e)	
A.  Introduction and History	 
B.  Operation of the §336(e) Election	
1.  In General	 
2.  Section 338(h)(10) Election Model	  
C.  Eligibility to Make a §336(e) Election	
1.  In General	 
2.  Sellers, S Corporation Shareholders and Purchasers	 
3.  Disposition	
a.  In General	 
b.  Section 355(d)(2) or §355(e)(2) Transactions	 
c.  Related Parties	 
d.  No Amount Paid	 
e.  Reacquisition	  
4.  Qualified Stock Disposition (QSD)	
a.  In General	 
b.  Target	 
c.  12-Month Disposition Period	 
d.  Priority Between QSD and QSP	  
5.  Comparison with §338(h)(10) Eligibility	  
D.  Consequences of a §336(e) Election	
1.  Basic Model	
a.  In General	 
b.  Old Target Tax Consequences	
(1)  In General	 
(2)  Old Target Is an S Corporation	 
(3)  Sale Price	  
c.  Liquidation of Old Target	
(1)  In General	 
(2)  S Corporation Targets	 
(3)  Characterization of "Liquidation"	 
(4)  Creeping QSDs	  
d.  New Target	 
e.  Seller and S Corporation Shareholders	
(1)  Actual Stock Sale Ignored	 
(2)  Taxable Distribution of Target Stock	 
(3)  Retained Shares	  
f.  Tiered Target Subsidiaries	  
2.  The Sale-to-Self Model	
a.  In General	 
b.  Deemed Sale Tax Consequences	 
c.  No Liquidation	 
d.  Deemed Purchase Tax Consequences	
(1)  In General	 
(2)  Controlled Corporation Is Two Separate Taxpayers	  
e.  Seller	
(1)  Distribution of Target Stock in §355 Transaction	 
(2)  Retained Shares	  
f.  Tiered Target Subsidiaries	
(1)  Timing	 
(2)  Basic Model Applies	  
g.  Effect on §355 Transaction	  
3.  Old Target's Gains and Losses on the Deemed Sale	
a.  Old Target's Gains	 
b.  Old Target's Losses	
(1)  In General	 
(2)  Net Loss Disallowance Rule	 
(3)  Net Loss Disallowance Rule for Tiered Targets	    
E.  New Target	 
F.  Minority Shareholders	 
G.  Purchaser	 
H.  The §336(e) Election	
1.  The Unique Nature of the Election	
a.  In General	 
b.  Buyers Beware: The Importance of the Sale Contract	  
2.  Election Mechanics	
a.  Consolidated Groups	 
b.  Non-Consolidated/Non-S Corporation Targets	 
c.  S Corporation Target	 
d.  Tiered Targets	 
e.  Section 336(e) Election Statement	  
3.  Protective Election	  
I.  ADADP	
1.  In General	 
2.  Calculation of ADADP	
a.  Grossed-Up Amount Realized	 
b.  Recently Disposed Stock	 
c.  Liabilities	  
3.  Redetermination of ADADP	  
J.  AGUB	
1.  In General	 
2.  Calculation of AGUB	
a.  Recently Disposed Stock	 
b.  Nonrecently Disposed Stock	 
c.  Discrepancy Between ADADP and AGUB	 
d.  Gain Recognition Election	  
3.  Redetermination of AGUB	  
K.  Consistency Rules	 
L.  Foreign Provisions	
1.  Seller and Target Must Be Domestic	 
2.  Section 338(g) Available for Foreign Target Subsidiary	 
3.  Foreign Tax Credit Issues	  
VII.  The Consistency Rules	
A.  Consistency Rules Generally	
1.  Asset Consistency	 
2.  Stock Consistency	  
B.  Carryover Basis Rule	
1.  In General	 
2.  Exceptions	
a.  Section 338 Election for Target	 
b.  Disposition of Tainted Asset	 
c.  Regulatory Exceptions	  
3.  Mitigation	  
C.  Asset Consistency	
1.  In General	 
2.  Tainted Asset Acquisitions	
a.  Consolidated Groups	
(1)  In General	 
(2)  Lower Tier Target Affiliates	  
b.  Non-Consolidated Groups	   
D.  Stock Consistency	
1.  Section 338(h)(10) Transactions	 
2.  CFC Stock and Lower-Tier Target Affiliates	  
E.  Controlled Foreign Corporations	
1.  Sales of Assets by a CFC that Generate Subpart F Income or GILTI	 
2.  Sale of Stock of CFC Target Affiliate	 
3.  CFC Asset Sales Combined with Actual and Deemed Dividends	 
4.  Dividends from CFC Target	 
5.  Wholly Foreign Acquisitions	  
F.  Anti-Avoidance Rules	
1.  Indirect Asset Acquisitions	 
2.  Other Anti-Avoidance Rules	
a.  Time Periods Extended	 
b.  Conduits	 
c.  Predecessors and Successors	   
VIII.  International Aspects of §338	
A.  Background	 
B.  General Principles	
1.  The §1248 Factor	
a.  Section 1248 as an Anti-Abuse Provision Before the 1986 Act	 
b.  Section 1248 After the 1986 Act and Before the 2017 TCJA	 
c.  Section 1248 After the 2017 TCJA and the Section 245A Dividends Received Deduction	 
d.  "Enhanced" Earnings and Profits	 
e.  Direct Purchase of a Foreign Corporation	 
f.  Purchase of Holding Company	 
g.  Amount of Enhanced Earnings	 
h.  Unsold Minority Stock	  
2.  Foreign Tax Credits	
a.  In General	 
b.  Deemed Paid Foreign Tax Credit	 
c.  Source of Gain	 
d.  Foreign Tax Credit Limitation	
(1)  In General	 
(2)  Look-Through Rules for Dividends	 
(3)  Foreign Tax Credit Limitation Basket for Foreign Corporation Stock Gain	 
(4)  Effect of Enhanced Earnings and Profits on General Limitation Income	  
e.  Section 338(h)(16)	
(1)  Operation of §338(h)(16) to Cap General Limitation Income	 
(2)  Operation of §338(h)(16) when Domestic Target Has a Foreign Subsidiary	 
(3)  Effect of §338(h)(16) on Deemed Sale Earnings	 
(4)  Operation of §338(h)(16) when the Deemed Asset Sale Generates Subpart F Income	 
(5)  Operation of §338(h)(16) when Deemed Sale Subpart F Income or GILTI Results in Loss on CFC Stock	 
(6)  Section 338(h)(16) and the OFL and ODL Rules	 
(7)  Operation of §338(h)(16) to Keep a Foreign Target's Tax Year Open for Source and Foreign Tax Credit Limitation Purposes?	  
f.  Allocation of Year-of-Sale Foreign Taxes	  
3.  Foreign Target-Level Taxation and Anti-Deferral Consequences	
a.  Earnings and Profits and other Federal Income Tax Attributes	 
b.  Asset Basis Step-Up	 
c.  Covered Asset Acquisitions	 
d.  Deemed Sale Gains and Anti-Deferral Rules	
(1)  Subpart F Income	 
(2)  Subpart F Income is Taxable to the Seller	 
(3)  Impact of Subpart F Inclusion	 
(4)  GILTI	  
e.  Sale of Second-Tier CFCs	   
C.  Purchase and Sale of the Stock of a Foreign Corporation – Tax Years Beginning After 2017	
1.  Purchaser Considerations	 
2.  Seller Considerations	  
D.  Purchase and Sale of the Stock of a Foreign Corporation – Tax Years Beginning Before 2018	
1.  Purchaser Considerations	 
2.  Seller Considerations	  
E.  Summary of Application of the Consistency Rules to Foreign Affiliates of Domestic Targets	 
F.  Actual and Deemed Liquidations as an Alternative to a §338 Election	 
G.  Miscellaneous International Tax Issues	
1.  Foreign Currency Issues	 
2.  Section 338 Elections and PFICs	 
3.  Effect of §338 Election on §936 Corporations	  
H.  Section 336(e)	 
IX.  Miscellaneous Issues	
A.  New Target's Relationship to Old Target	
1.  In General	 
2.  New Target Unrelated to Old Target for Purposes of Subtitle A	
a.  Depreciation	 
b.  Methods and Taxable Years	 
c.  Anti-Churning Rules of §197	  
3.  Exceptions to Subtitle A Unrelatedness	
a.  Employee Benefit Arrangements and Plans	 
b.  Mitigation of Statute of Limitations	 
c.  Other Provisions of Subtitle A	  
4.  New Target Continuation of Old Target for Purposes Other Than Subtitle A	
a.  Collection and Administration	 
b.  Wage Withholding	 
c.  Employer Identification Number	   
B.  Interaction with Other Code Provisions	
1.  Section 269(b)	 
2.  Sections 336(e) and 338(h)(10)(B)	 
3.  Corporate Alternative Minimum Tax	 
4.  Post-QSP §368 Reorganizations	 
5.  Section 382 and Net Operating Losses	
a.  In General	 
b.  Change Date Precedes Acquisition Date	  
6.  Estimated Tax	 
7.  Partnership Provisions	 
8.  Section 1060	 
9.  Earnings Stripping	 
10.  Net Investment Income Tax	 
11.  Qualified Subchapter S Trust	 
12.  Reportable Transactions	  
C.  State and Local Tax Issues	 
X.  Mechanics of Elections	
A.  Election on Form 8023; Form 8883 Also Required	 
B.  Election Irrevocable	 
C.  Making §338 Elections	
1.  Electing Party or Parties	 
2.  Contents of the Election	 
3.  Timing	 
4.  Filing the Election	 
5.  Multiple Targets	  
D.  Foreign Purchaser/Foreign Target	
1.  In General	 
2.  CFC Purchaser/10% U.S. Shareholders File	 
3.  Extension of Time for Election Until Election Has U.S. Tax Consequences	 
4.  Foreign Targets; Schedule Requirement	 
5.  U.S. Shareholders of Certain Foreign Targets; Notice Requirement	  
E.  Gain Recognition Election	 
F.  Signatures	 
G.  Form 8883	
1.  In General	 
2.  Timing and Mechanics	
a.  Old Target	 
b.  New Target	 
c.  Foreign Target	 
d.  Multiple Targets	  
3.  Contents of Form 8883	
a.  Parties	 
b.  General Information Regarding the Consequences of a §338 Election	 
c.  Residual Method for Allocating AGUB and ADSP among Target's Assets	  
4.  Supplemental Form 8883	  
TABLE OF WORKSHEETS