On May 15, 2013, the IRS issued final regulations under Code
section 336(e) allowing purchasers to obtain a stepped up basis in
the assets of certain target corporations without double taxation
and in a setting in which a section 338(h)(10) election could not
be made. The new rules may simplify corporate acquisitions by
private equity investors, which are often structured as
partnerships for U.S. tax purposes. The new rules may also prove
useful to avoid double taxation in cases where an acquisition of a
target or distributing corporation follows too closely on the heels
of a tax-free spinoff.
The new rules apply where there is a "qualified stock
disposition" of a domestic target which is either an S
corporation or an 80%-owned domestic subsidiary of a domestic
corporate parent.1 Like an election under section 338,
the purchaser and seller must be unrelated, and the disposition
must take place within 12 months. The key to the new rules –
and the manner in which the rules expand on section 338 – is
that there need not be a single (or majority) purchaser, the
purchaser need not be a corporation, and the election is made by
the seller rather than the buyer (or both).2
The section 336(e) regulations permit a protective election (and
related mechanisms) for use in the context of a spinoff where gain
is triggered at the corporate level (but not the shareholder level)
due to the application of either Code section 355(d) (involving an
acquisition of control of a distributing or controlled corporation
within five years after the spinoff) or (e) (where there is a plan
to acquire either the distributing or controlled corporation within
two years of the spinoff and no exception applies).
The new election is available for qualified stock dispositions
completed after May 15, 2013.
1 The rules do not currently permit a foreign seller or
foreign target to made a section 336(e) election, but Treasury is
continuing to study that issue and may consider allowing such
elections in the future.
2 A section 336(e) election must be made pursuant to an
agreement between the seller and the target and must be filed with
the relevant corporate tax return.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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