§338 — Certain stock purchases treated as asset acquisitions
29 cases·3 followed·2 distinguished·24 cited—10% support
Statute Text — 26 U.S.C. §338
For purposes of this subtitle, if a purchasing corporation makes an election under this section (or is treated under subsection (e) as having made such an election), then, in the case of any qualified stock purchase, the target corporation—
shall be treated as having sold all of its assets at the close of the acquisition date at fair market value in a single transaction, and
shall be treated as a new corporation which purchased all of the assets referred to in paragraph (1) as of the beginning of the day after the acquisition date.
For purposes of subsection (a), the assets of the target corporation shall be treated as purchased for an amount equal to the sum of—
the grossed-up basis of the purchasing corporation’s recently purchased stock, and
the basis of the purchasing corporation’s nonrecently purchased stock.
The amount described in paragraph (1) shall be adjusted under regulations prescribed by the Secretary for liabilities of the target corporation and other relevant items.
Under regulations prescribed by the Secretary, the basis of the purchasing corporation’s nonrecently purchased stock shall be the basis amount determined under subparagraph (B) of this paragraph if the purchasing corporation makes an election to recognize gain as if such stock were sold on the acquisition date for an amount equal to the basis amount determined under subparagraph (B).
For purposes of subparagraph (A), the basis amount determined under this subparagraph shall be an amount equal to the grossed-up basis determined under subparagraph (A) of paragraph (1) multiplied by a fraction—
the numerator of which is the percentage of stock (by value) in the target corporation attributable to the purchasing corporation’s nonrecently purchased stock, and
the denominator of which is 100 percent minus the percentage referred to in clause (i).
For purposes of paragraph (1), the grossed-up basis shall be an amount equal to the basis of the corporation’s recently purchased stock, multiplied by a fraction—
the numerator of which is 100 percent, minus the percentage of stock (by value) in the target corporation attributable to the purchasing corporation’s nonrecently purchased stock, and
the denominator of which is the percentage of stock (by value) in the target corporation attributable to the purchasing corporation’s recently purchased stock.
The amount determined under paragraphs (1) and (2) shall be allocated among the assets of the target corporation under regulations prescribed by the Secretary.
For purposes of this subsection—
The term “recently purchased stock” means any stock in the target corporation which is held by the purchasing corporation on the acquisition date and which was purchased by such corporation during the 12-month acquisition period.
The term “nonrecently purchased stock” means any stock in the target corporation which is held by the purchasing corporation on the acquisition date and which is not recently purchased stock.
For purposes of this section—
The term “purchasing corporation” means any corporation which makes a qualified stock purchase of stock of another corporation.
The term “target corporation” means any corporation the stock of which is acquired by another corporation in a qualified stock purchase.
The term “qualified stock purchase” means any transaction or series of transactions in which stock (meeting the requirements of section 1504(a)(2)) of 1 corporation is acquired by another corporation by purchase during the 12-month acquisition period.
A purchasing corporation shall be treated as having made an election under this section with respect to any target corporation if, at any time during the consistency period, it acquires any asset of the target corporation (or a target affiliate).
Paragraph (1) shall not apply with respect to any acquisition by the purchasing corporation if—
such acquisition is pursuant to a sale by the target corporation (or the target affiliate) in the ordinary course of its trade or business,
the basis of the property acquired is determined wholly by reference to the adjusted basis of such property in the hands of the person from whom acquired,
such acquisition was before
September 1, 1982
, or
such acquisition is described in regulations prescribed by the Secretary and meets such conditions as such regulations may provide.
Whenever necessary to carry out the purpose of this subsection and subsection (f), the Secretary may treat stock acquisitions which are pursuant to a plan and which meet the requirements of section 1504(a)(2) as qualified stock purchases.
If a purchasing corporation makes qualified stock purchases with respect to the target corporation and 1 or more target affiliates during any consistency period, then (except as otherwise provided in subsection (e))—
any election under this section with respect to the first such purchase shall apply to each other such purchase, and
no election may be made under this section with respect to the second or subsequent such purchase if such an election was not made with respect to the first such purchase.
Except as otherwise provided in regulations, an election under this section shall be made not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs.
An election by the purchasing corporation under this section shall be made in such manner as the Secretary shall by regulations prescribe.
An election by a purchasing corporation under this section, once made, shall be irrevocable.
For purposes of this section—
The term “12-month acquisition period” means the 12-month period beginning with the date of the first acquisition by purchase of stock included in a qualified stock purchase (or, if any of such stock was acquired in an acquisition which is a purchase by reason of subparagraph (C) of paragraph (3), the date on which the acquiring corporation is first considered under section 318(a) (other than paragraph (4) thereof) as owning stock owned by the corporation from which such acquisition was made).
The term “acquisition date” means, with respect to any corporation, the first day on which there is a qualified stock purchase with respect to the stock of such corporation.
The term “purchase” means any acquisition of stock, but only if—
the basis of the stock in the hands of the purchasing corporation is not determined (I) in whole or in part by reference to the adjusted basis of such stock in the hands of the person from whom acquired, or (II) under section 1014(a) (relating to property acquired from a decedent),
the stock is not acquired in an exchange to which section 351, 354, 355, or 356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain or loss realized on the transaction, and
the stock is not acquired from a person the ownership of whose stock would, under section 318(a) (other than paragraph (4) thereof), be attributed to the person acquiring such stock.
The term “purchase” includes any deemed purchase under subsection (a)(2). The acquisition date for a corporation which is deemed purchased under subsection (a)(2) shall be determined under regulations prescribed by the Secretary.
Clause (iii) of subparagraph (A) shall not apply to an acquisition of stock from a related corporation if at least 50 percent in value of the stock of such related corporation was acquired by purchase (within the meaning of subparagraphs (A) and (B)).
Clause (i) of subparagraph (A) shall not apply to an acquisition of stock described in clause (i) of this subparagraph if the corporation acquiring such stock—
made a qualified stock purchase of stock of the related corporation, and
made an election under this section (or is treated under subsection (e) as having made such an election) with respect to such qualified stock purchase.
For purposes of this subparagraph, a corporation is a related corporation if stock owned by such corporation is treated (under section 318(a) other than paragraph (4) thereof) as owned by the corporation acquiring the stock.
Except as provided in subparagraph (B), the term “consistency period” means the period consisting of—
the 1-year period before the beginning of the 12-month acquisition period for the target corporation,
such acquisition period (up to and including the acquisition date), and
the 1-year period beginning on the day after the acquisition date.
The period referred to in subparagraph (A) shall also include any period during which the Secretary determines that there was in effect a plan to make a qualified stock purchase plus 1 or more other qualified stock purchases (or asset acquisitions described in subsection (e)) with respect to the target corporation or any target affiliate.
The term “affiliated group” has the meaning given to such term by section 1504(a) (determined without regard to the exceptions contained in section 1504(b)).
A corporation shall be treated as a target affiliate of the target corporation if each of such corporations was, at any time during so much of the consistency period as ends on the acquisition date of the target corporation, a member of an affiliated group which had the same common parent.
Except as otherwise provided in regulations (and subject to such conditions as may be provided in regulations)—
the term “target affiliate” does not include a foreign corporation or a DISC, and
stock held by a target affiliate in a foreign corporation or a domestic corporation which is a DISC or described in section 1248(e) shall be excluded from the operation of this section.
Except as provided in regulations prescribed by the Secretary, stock and asset acquisitions made by members of the same affiliated group shall be treated as made by 1 corporation.
Except as otherwise provided in paragraph (10) or in regulations prescribed under this paragraph, the target corporation shall not be treated as a member of an affiliated group with respect to the sale described in subsection (a)(1).
Under regulations prescribed by the Secretary, an election may be made under which if—
the target corporation was, before the transaction, a member of the selling consolidated group, and
the target corporation recognizes gain or loss with respect to the transaction as if it sold all of its assets in a single transaction,
then the target corporation shall be treated as a member of the selling consolidated group with respect to such sale, and (to the extent provided in regulations) no gain or loss will be recognized on stock sold or exchanged in the transaction by members of the selling consolidated group.
For purposes of subparagraph (A), the term “selling consolidated group” means any group of corporations which (for the taxable period which includes the transaction)—
includes the target corporation, and
files a consolidated return.
To the extent provided in regulations, such term also includes any affiliated group of corporations which includes the target corporation (whether or not such group files a consolidated return).
Under regulations, where an election is made under subparagraph (A), the purchasing corporation and the common parent of the selling consolidated group shall, at such times and in such manner as may be provided in regulations, furnish to the Secretary the following information:
The amount allocated under subsection (b)(5) to goodwill or going concern value.
Any modification of the amount described in clause (i).
Any other information as the Secretary deems necessary to carry out the provisions of this paragraph.
For purposes of subsection (a)(1), fair market value may be determined on the basis of a formula provided in regulations prescribed by the Secretary which takes into account liabilities and other relevant items.
For purposes of section 6655, tax attributable to the sale described in subsection (a)(1) shall not be taken into account. The preceding sentence shall not apply with respect to a qualified stock purchase for which an election is made under paragraph (10).
Under regulations prescribed by the Secretary, a combined deemed sale return may be filed by all target corporations acquired by a purchasing corporation on the same acquisition date if such target corporations were members of the same selling consolidated group (as defined in subparagraph (B) of paragraph (10)).
Except as provided in regulations, this section shall not apply for purposes of determining the source or character of any item for purposes of subpart A of part III of subchapter N of this chapter (relating to foreign tax credit). The preceding sentence shall not apply to any gain to the extent such gain is includible in gross income as a dividend under section 1248 (determined without regard to any deemed sale under this section by a foreign corporation).
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including—
regulations to ensure that the purpose of this section to require consistency of treatment of stock and asset sales and purchases may not be circumvented through the use of any provision of law or regulations (including the consolidated return regulations) and
regulations providing for the coordination of the provisions of this section with the provision of this title relating to foreign corporations and their shareholders.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.338(h)(10)-1 Deemed asset sale and liquidation
- Treas. Reg. §Treas. Reg. §1.338(h)(10)-1(a) Scope.
- Treas. Reg. §Treas. Reg. §1.338(h)(10)-1(b) Definitions—(1) Consolidated target.
- Treas. Reg. §Treas. Reg. §1.338(h)(10)-1(c) Section 338(h)(10) election—(1) In general.
- Treas. Reg. §Treas. Reg. §1.338(h)(10)-1(d) Certain consequences of section 338(h)(10) election.
- Treas. Reg. §Treas. Reg. §1.338(h)(10)-1(e) Examples.
- Treas. Reg. §Treas. Reg. §1.338(h)(10)-1(f) Inapplicability of provisions.
- Treas. Reg. §Treas. Reg. §1.338(h)(10)-1(g) Required information.
- Treas. Reg. §Treas. Reg. §1.338(h)(10)-1(h) Effective date.
- Treas. Reg. §Treas. Reg. §1.338(h)(10)-1(i) In deemed asset sale.
- Treas. Reg. §Treas. Reg. §1.338-0 Outline of topics
- Treas. Reg. §Treas. Reg. §1.338-0(a) In general.
- Treas. Reg. §Treas. Reg. §1.338-0(b) Section 338(h)(10) elections for S corporation targets.
- Treas. Reg. §Treas. Reg. §1.338-0(c) Section 338 elections for insurance company targets.
- Treas. Reg. §Treas. Reg. §1.338-0(d) Certain consequences of section 338(h)(10) election.
- Treas. Reg. §Treas. Reg. §1.338-0(e) Examples.
- Treas. Reg. §Treas. Reg. §1.338-0(f) Inapplicability of provisions.
- Treas. Reg. §Treas. Reg. §1.338-0(g) Required information.
- Treas. Reg. §Treas. Reg. §1.338-0(h) Effect of section 338 election on section 847 special estimated tax payments.
- Treas. Reg. §Treas. Reg. §1.338-0(i) Availability of election.
- Treas. Reg. §Treas. Reg. §1.338-0(j) Anti-avoidance rules.
- Treas. Reg. §Treas. Reg. §1.338-0(v) Old FT earnings and profits unaffected by post-acquisition date deficits.
- Treas. Reg. §Treas. Reg. §1.338-1 General principles; status of old target and new target
- Treas. Reg. §Treas. Reg. §1.338-1(a) In general—(1) Deemed transaction.
- Treas. Reg. §Treas. Reg. §1.338-1(b) Treatment of target under other provisions of the Internal Revenue Code—(1) General rule for subtitle A.
29 Citing Cases
For present purposes, we descry no reason to distinguish the two situations. Moreover, these tax law principles antedate petitioner's purchase of the assets of LHJ and are thus appropriately considered by the Court. The Secretary states: These [section 1.338(b)-3T] rules provide for the incorporation of general principles of tax law which are applicable to the determination of the basis of assets acquired in actual asset purchases.
We hold-that the continuity-of-interest requirement is not satisfiad in' the Ralphs tranaaction and that that transaction is not a r organization under s ction 368(a) (1) (B)", (C), or (G)-.72 Respond nt does not dispute hat if we were to hold, which' we have, tnat the Ralphs transa tion is not a reorganiz
ing authority. Nevertheless, we think the general principles espoused therein comport equally well with the increase in basis of fully amortized subscriber relationships as they do with adjustments to AGUB of fully amortized or disposed assets under section 338. For present purposes, we descry no reason to distinguish the two situations. Moreover, these tax law principles antedate petitioner’s purchase of the assets of lhj and are thus appropriately considered by the Court. The Secretary states:
I was also proposed in the proposed final indemnification agreem at that Holdings III e indemni-fied against« any deficiency in tax attributable to the PÁlphs transaction, including any tax attributable to an election under section 338 (h) (10) .
The report assumes that a purchaser of the 56.7- percent share holding would be allowed to make a section 338 election and, as a consequence, would be able to amortize the franchise agreement under section 1253.
324, 631. The text of section 6038(b)(1) does not specify a mode of collection. Therefore, the default rule of 28 U.S.C. § 2461(a) applies. 13 Because “[a]gencies have only those powers given to them by Congress,” the Commissioner does not have authority to assess the section 6038(b)(1) penalty. See West Virginia, 142 S. Ct. at 260
These records included (among other things) third-party purchase agreements, intercompany purchase agreements, section 338 elections, and third-party valuation reports.
Thurs., Dec. 28 Latest effective date ofcheck-the-box election Fri., Dec. 29 Remaining positions expire or are sold Mar. 13, 2001 Latest date for making retroactive check-the-box election Tax return due Sec. 367(b) gain election date Sept. 15, 2001 Sec. 338 election On December 18, 2000, Mr. Tucker spoke with Messrs. Schorr and Speiss by telephone about the FX transaction. Mr. Tucker decided to implement the FX transaction and signed an engagement letter, dated December 27, 2000, for KPMG -15- [
Deloitte’s $12,587,000 value for the Rose accounts for section 338 tax basis purposes comprised the following: Customer Accounts Amount Cash brokerage $4,014 Margin brokerage 6,522 Pension 2,051 Total customer accounts 12,587 In valuing the Rose accounts, Deloitte compared Rose’s customer account categories with those of petitioner and determined, with one exception, that both companies used similar ca
Deloitte’s $12,587,000 value for the Rose accounts for section 338 tax basis purposes comprised the following: Customer Accounts Amount Cash brokerage $4,014 Margin brokerage 6,522 Pension 2,051 Total customer accounts 12,587 In valuing the Rose accounts, Deloitte compared Rose’s customer account categories with those of petitioner and determined, with one exception, that both companies used similar ca
Deloitte’s $12,587,000 value for the Rose accounts for section 338 tax basis purposes comprised the following: Customer accounts Amount Cash brokerage.
Since the deposit base cases involved asset acquisitions, mergers, or stock acquisitions with a section 338 election,8 and the taxpayers’ positions in those cases were that they paid an allocable portion of the overall purchase price for the value of the deposit base of the target bank, this allocable portion represented their “ascertainable cost basis” for amortization under section 167(g).9 In the instant cases, we are dealing with a unique
Since the deposit base cases involved asset acquisitions, mergers, or stock acquisitions with a section 338 election, and the taxpayers’ positions in those cases were that they paid an allocable portion of the overall purchase price for the value of the deposit base of the target bank, this allocable portion represented their “ascertainable cost basis” for amortization under section 167(g).
August 1986 meeting. Petitioner, however, never implemented that plan. 14 Arthur Andersen believed that the installment sale would act as a poison pill because acquisition of petitioner's stock by a hostile bidder would, if the hostile bidder made a sec. 338 election, trigger recognition of the unrecognized gain from the installment sale. The resulting tax would effectively increase the cost to a potential hostile bidder trying to acquire petitioner. In the absence of a sec. 338 election, the ho
The 1986 Acquisitions and Section 338 Elections In December 1986, Sealy Mattress Co., formerly known as Ohio-Sealy Mattress Manufacturing Co., a subsidiary of the Ohio Mattress Co., bought the stock of Slumber Products Corp., Sealy Mattress Co.
The 1986 Acquisitions and Section 338 Elections In December 1986, Sealy Mattress Co., formerly known as Ohio-Sealy Mattress Manufacturing Co., a subsidiary of the Ohio Mattress Co., bought the stock of Slumber Products Corp., Sealy Mattress Co.
The 1986 Acquisitions and Section 338 Elections In December 1986, Sealy Mattress Co., formerly known as Ohio-Sealy Mattress Manufacturing Co., a subsidiary of the Ohio Mattress Co., bought the stock of Slumber Products Corp., Sealy Mattress Co.
The 1986 Acquisitions and Section 338 Elections In December 1986, Sealy Mattress Co., formerly known as Ohio-Sealy Mattress Manufacturing Co., a subsidiary of the Ohio Mattress Co., bought the stock of Slumber Products Corp., Sealy Mattress Co.
The 1986 Acquisitions and Section 338 Elections In December 1986, Sealy Mattress Co., formerly known as Ohio-Sealy Mattress Manufacturing Co., a subsidiary of the Ohio Mattress Co., bought the stock of Slumber Products Corp., Sealy Mattress Co.
The 1986 Acquisitions and Section 338 Elections In December 1986, Sealy Mattress Co., formerly known as Ohio-Sealy Mattress Manufacturing Co., a subsidiary of the Ohio Mattress Co., bought the stock of Slumber Products Corp., Sealy Mattress Co.