The Internal Revenue Service recently issued final regulations under Internal Revenue Code section 336(e) which provide for an election to treat certain qualified stock dispositions as asset sales (a "Section 336(e) Election"), similar to a Section 338(h)(10) Election. The result is that the Buyer would receive a step up in the basis of the Target's assets. Most importantly, the new Section 336(e) Election applies in cases where a Section 338(h) (10) Election is not available, such as a sale to a partnership or a sale to individuals.
Eligibility for a Section 336(e) Election requires the following:
- The disposition must consist of least 80% of all classes of stock of the Target by both vote and value
- The disposition must be either (i) a taxable sale or exchange of Target stock, (ii) a taxable distribution of the Target stock, or (iii) certain distributions of Target stock under the Code section that governs spin offs, split offs, or split up
- The disposition cannot be between related parties
- Neither the Target nor the Seller can be a foreign corporation
If a transaction qualifies and the Seller makes the Section 336(e) Election, the actual sale or disposition of the stock is disregarded and the transaction is deemed to be a sale by the Target of its assets to a new unrelated corporation. The "old" target corporation is treated as recognizing gain or certain losses from the sale of the assets and then liquidating. The Buyer is treated as acquiring the stock of "new" target with the stepped up basis in the assets.
These final regulations provide a new consideration in structuring sales of corporate stock to minimize the potential impact of federal income taxes on these sales. If you have questions regarding the options available to your particular transaction, please contact Lynn Fowler or Cristin Burke at 404-815-6500.
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.
