§338 — Certain stock purchases treated as asset acquisitions

Statute Text — 26 U.S.C. §338

Treasury Regulations

• Treas. Reg. §1.338(h)(10)-1Deemed asset sale and liquidation Show full text ▾ Collapse ▴

  (a) Scope. This section prescribes rules for qualification for a section 338(h)(10) election and for making a section 338(h)(10) election. This section also prescribes the consequences of such election. The rules of this section are in addition to the rules of §§ 1.338-1 through 1.338-10 and, in appropriate cases, apply instead of the rules of §§ 1.338-1 through 1.338-10.

  (b) Definitions—(1) Consolidated target. A consolidated target is a target that is a member of a consolidated group within the meaning of § 1.1502-1(h) on the acquisition date and is not the common parent of the group on that date.

  (2) Selling consolidated group. A selling consolidated group is the consolidated group of which the consolidated target is a member on the acquisition date.

  (3) Selling affiliate; affiliated target. A selling affiliate is a domestic corporation that owns on the acquisition date an amount of stock in a domestic target, which amount of stock is described in section 1504(a)(2), and does not join in filing a consolidated return with the target. In such case, the target is an affiliated target.

  (4) S corporation target. An S corporation target is a target that is an S corporation immediately before the acquisition date.

  (5) S corporation shareholders. S corporation shareholders are the S corporation target's shareholders. Unless otherwise indicated, a reference to S corporation shareholders refers both to S corporation shareholders who do and those who do not sell their target stock.

  (6) Liquidation. Any reference in this section to a liquidation is treated as a reference to the transfer described in paragraph (d)(4) of this section notwithstanding its ultimate characterization for Federal income tax purposes.

  (c) Section 338(h)(10) election—(1) In general. A section 338(h)(10) election may be made for T if P acquires stock meeting the requirements of section 1504(a)(2) from a selling consolidated group, a selling affiliate, or the S corporation shareholders in a qualified stock purchase.

  (2) Availability of section 338(h)(10) election in certain multi-step transactions. Notwithstanding anything to the contrary in § 1.338-3(c)(1)(i), a section 338(h)(10) election may be made for T where P's acquisition of T stock, viewed independently, constitutes a qualified stock purchase and, after the stock acquisition, T merges or liquidates into P (or another member of the affiliated group that includes P), whether or not, under relevant provisions of law, including the step transaction doctrine, the acquisition of the T stock and the merger or liquidation of T qualify as a reorganization described in section 368(a). If a section 338(h)(10) election is made in a case where the acquisition of T stock followed by a merger or liquidation of T into P qualifies as a reorganization described in section 368(a), for all Federal tax purposes, P's acquisition of T stock is treated as a qualified stock purchase and is not treated as part of a reorganization described in section 368(a).

  (3) Simultaneous joint election requirement. A section 338(h)(10) election is made jointly by P and the selling consolidated group (or the selling affiliate or the S corporation shareholders) on Form 8023 in accordance with the instructions to the form. S corporation shareholders who do not sell their stock must also consent to the election. The section 338(h)(10) election must be made not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs.

  (4) Irrevocability. A section 338(h)(10) election is irrevocable. If a section 338(h)(10) election is made for T, a section 338 election is deemed made for T.

  (5) Effect of invalid election. If a section 338(h)(10) election for T is not valid, the section 338 election for T is also not valid.

  (d) Certain consequences of section 338(h)(10) election. For purposes of subtitle A of the Internal Revenue Code (except as provided in § 1.338-1(b)(2)), the consequences to the parties of making a section 338(h)(10) election for T are as follows:

  (1) P. P is automatically deemed to have made a gain recognition election for its nonrecently purchased T stock, if any. The effect of a gain recognition election includes a taxable deemed sale by P on the acquisition date of any nonrecently purchased target stock. See § 1.338-5(d).

  (2) New T. The AGUB for new T's assets is determined under § 1.338-5 and is allocated among the acquisition date assets under §§ 1.338-6 and 1.338-7. Notwithstanding paragraph (d)(4) of this section (deemed liquidation of old T), new T remains liable for the tax liabilities of old T (including the tax liability for the deemed sale tax consequences). For example, new T remains liable for the tax liabilities of the members of any consolidated group that are attributable to taxable years in which those corporations and old T joined in the same consolidated return. See § 1.1502-6(a).

  (3) Old T—deemed sale—(i) In general. Old T is treated as transferring all of its assets to an unrelated person in exchange for consideration that includes the discharge of its liabilities in a single transaction at the close of the acquisition date (but before the deemed liquidation). See § 1.338-1(a) regarding the tax characterization of the deemed asset sale. Except as provided in § 1.338(h)(10)-1(d)(8) (regarding the installment method), old T recognizes all of the gain realized on the deemed transfer of its assets in consideration for the ADSP. ADSP for old T is determined under § 1.338-4 and allocated among the acquisition date assets under §§ 1.338-6 and 1.338-7. Old T realizes the deemed sale tax consequences from the deemed asset sale before the close of the acquisition date while old T is a member of the selling consolidated group (or owned by the selling affiliate or owned by the S corporation shareholders). If T is an affiliated target, or an S corporation target, the principles of §§ 1.338-2(c)(10) and 1.338-10(a)(1), (5), and (6)(i) apply to the return on which the deemed sale tax consequences are reported. When T is an S corporation target, T's S election continues in effect through the close of the acquisition date (including the time of the deemed asset sale and the deemed liquidation) notwithstanding section 1362(d)(2)(B). Also, when T is an S corporation target (but not a qualified subchapter S subsidiary), any direct and indirect subsidiaries of T which T has elected to treat as qualified subchapter S subsidiaries under section 1361(b)(3) remain qualified subchapter S subsidiaries through the close of the acquisition date.

  (ii) Tiered targets. In the case of parent-subsidiary chains of corporations making elections under section 338(h)(10), the deemed asset sale of a parent corporation is considered to precede that of its subsidiary. See § 1.338-3(b)(4)(i).

  (4) Old T and selling consolidated group, selling affiliate, or S corporation shareholders—deemed liquidation; tax characterization—(i) In general. Old T is treated as if, before the close of the acquisition date, after the deemed asset sale in paragraph (d)(3) of this section, and while old T is a member of the selling consolidated group (or owned by the selling affiliate or owned by the S corporation shareholders), it transferred all of its assets to members of the selling consolidated group, the selling affiliate, or S corporation shareholders and ceased to exist. The transfer from old T is characterized for Federal income tax purposes in the same manner as if the parties had actually engaged in the transactions deemed to occur because of this section and taking into account other transactions that actually occurred or are deemed to occur. For example, the transfer may be treated as a distribution in pursuance of a plan of reorganization, a distribution in complete cancellation or redemption of all its stock, one of a series of distributions in complete cancellation or redemption of all its stock in accordance with a plan of liquidation, or part of a circular flow of cash. In most cases, the transfer will be treated as a distribution in complete liquidation to which section 336 or 337 applies.

  (ii) Tiered targets. In the case of parent-subsidiary chains of corporations making elections under section 338(h)(10), the deemed liquidation of a subsidiary corporation is considered to precede the deemed liquidation of its parent.

  (5) Selling consolidated group, selling affiliate, or S corporation shareholders—(i) In general. If T is an S corporation target, S corporation shareholders (whether or not they sell their stock) take their pro rata share of the deemed sale tax consequences into account under section 1366 and increase or decrease their basis in T stock under section 1367. Members of the selling consolidated group, the selling affiliate, or S corporation shareholders are treated as if, after the deemed asset sale in paragraph (d)(3) of this section and before the close of the acquisition date, they received the assets transferred by old T in the transaction described in paragraph (d)(4)(i) of this section. In most cases, the transfer will be treated as a distribution in complete liquidation to which section 331 or 332 applies.

  (ii) Basis and holding period of T stock not acquired. A member of the selling consolidated group (or the selling affiliate or an S corporation shareholder) retaining T stock is treated as acquiring the stock so retained on the day after the acquisition date for its fair market value. The holding period for the retained stock starts on the day after the acquisition date. For purposes of this paragraph, the fair market value of all of the T stock equals the grossed-up amount realized on the sale to P of P's recently purchased target stock. See § 1.338-4(c).

  (iii) T stock sale. Members of the selling consolidated group (or the selling affiliate or S corporation shareholders) recognize no gain or loss on the sale or exchange of T stock included in the qualified stock purchase (although they may recognize gain or loss on the T stock in the deemed liquidation).

  (6) Nonselling minority shareholders other than nonselling S corporation shareholders—(i) In general. This paragraph (d)(6) describes the treatment of shareholders of old T other than the following: Members of the selling consolidated group, the selling affiliate, S corporation shareholders (whether or not they sell their stock), and P. For a description of the treatment of S corporation shareholders, see paragraph (d)(5) of this section. A shareholder to which this paragraph (d)(6) applies is called a minority shareholder.

  (ii) T stock sale. A minority shareholder recognizes gain or loss on the shareholder's sale or exchange of T stock included in the qualified stock purchase.

  (iii) T stock not acquired. A minority shareholder does not recognize gain or loss under this section with respect to shares of T stock retained by the shareholder. The shareholder's basis and holding period for that T stock is not affected by the section 338(h)(10) election.

  (7) Consolidated return of selling consolidated group. If P acquires T in a qualified stock purchase from a selling consolidated group—

  (i) The selling consolidated group must file a consolidated return for the taxable period that includes the acquisition date;

  (ii) A consolidated return for the selling consolidated group for that period may not be withdrawn on or after the day that a section 338(h)(10) election is made for T; and

  (iii) Permission to discontinue filing consolidated returns cannot be granted for, and cannot apply to, that period or any of the immediately preceding taxable periods during which consolidated returns continuously have been filed.

  (8) Availability of the section 453 installment method. Solely for purposes of applying sections 453, 453A, and 453B, and the regulations thereunder (the installment method) to determine the consequences to old T in the deemed asset sale and to old T (and its shareholders, if relevant) in the deemed liquidation, the rules in paragraphs (d)(1) through (7) of this section are modified as follows:

  (i) In deemed asset sale. Old T is treated as receiving in the deemed asset sale new T installment obligations, the terms of which are identical (except as to the obligor) to P installment obligations issued in exchange for recently purchased stock of T. Old T is treated as receiving in cash all other consideration in the deemed asset sale other than the assumption of, or taking subject to, old T liabilities. For example, old T is treated as receiving in cash any amounts attributable to the grossing-up of amount realized under § 1.338-4(c). The amount realized for recently purchased stock taken into account in determining ADSP is adjusted (and, thus, ADSP is redetermined) to reflect the amounts paid under an installment obligation for the stock when the total payments under the installment obligation are greater or less than the amount realized.

  (ii) In deemed liquidation. Old T is treated as distributing in the deemed liquidation the new T installment obligations that it is treated as receiving in the deemed asset sale. The members of the selling consolidated group, the selling affiliate, or the S corporation shareholders are treated as receiving in the deemed liquidation the new T installment obligations that correspond to the P installment obligations they actually received individually in exchange for their recently purchased stock. The new T installment obligations may be recharacterized under other rules. See for example § 1.453-11(a)(2) which, in certain circumstances, treats the new T installment obligations deemed distributed by old T as if they were issued by new T in exchange for the stock in old T owned by members of the selling consolidated group, the selling affiliate, or the S corporation shareholders. The members of the selling consolidated group, the selling affiliate, or the S corporation shareholders are treated as receiving all other consideration in the deemed liquidation in cash.

  (9) Treatment consistent with an actual asset sale. No provision in section 338(h)(10) or this section shall produce a Federal income tax result under subtitle A of the Internal Revenue Code that would not occur if the parties had actually engaged in the transactions deemed to occur because of this section and taking into account other transactions that actually occurred or are deemed to occur. See, however, § 1.338-1(b)(2) for certain exceptions to this rule.

  (e) Examples. The following examples illustrate the provisions of this section:

  (f) Inapplicability of provisions. The provisions of section 6043, §§ 1.331-1(d) and 1.332-6 (relating to information returns and recordkeeping requirements for corporate liquidations) do not apply to the deemed liquidation of old T under paragraph (d)(4) of this section.

  (g) Required information. The Commissioner may exercise the authority granted in section 338(h)(10)(C)(iii) to require provision of any information deemed necessary to carry out the provisions of section 338(h)(10) by requiring submission of information on any tax reporting form.

  (h) Effective date. This section is applicable to stock acquisitions occurring on or after July 5, 2006. For stock acquisitions occurring before July 5, 2006, see § 1.338(h)(10)-1T as contained in the edition of 26 CFR part 1, revised as of April 1, 2006.

• Treas. Reg. §1.338(h)(10)-1(a)Scope. Show full text ▾ Collapse ▴

  Scope. This section prescribes rules for qualification for a section 338(h)(10) election and for making a section 338(h)(10) election. This section also prescribes the consequences of such election. The rules of this section are in addition to the rules of §§ 1.338-1 through 1.338-10 and, in appropriate cases, apply instead of the rules of §§ 1.338-1 through 1.338-10.

• Treas. Reg. §1.338(h)(10)-1(b)Definitions—(1) Consolidated target. Show full text ▾ Collapse ▴

  Definitions—(1) Consolidated target. A consolidated target is a target that is a member of a consolidated group within the meaning of § 1.1502-1(h) on the acquisition date and is not the common parent of the group on that date.

  (2) Selling consolidated group. A selling consolidated group is the consolidated group of which the consolidated target is a member on the acquisition date.

  (3) Selling affiliate; affiliated target. A selling affiliate is a domestic corporation that owns on the acquisition date an amount of stock in a domestic target, which amount of stock is described in section 1504(a)(2), and does not join in filing a consolidated return with the target. In such case, the target is an affiliated target.

  (4) S corporation target. An S corporation target is a target that is an S corporation immediately before the acquisition date.

  (5) S corporation shareholders. S corporation shareholders are the S corporation target's shareholders. Unless otherwise indicated, a reference to S corporation shareholders refers both to S corporation shareholders who do and those who do not sell their target stock.

  (6) Liquidation. Any reference in this section to a liquidation is treated as a reference to the transfer described in paragraph (d)(4) of this section notwithstanding its ultimate characterization for Federal income tax purposes.

• Treas. Reg. §1.338(h)(10)-1(c)Section 338(h)(10) election—(1) In general. Show full text ▾ Collapse ▴

  Section 338(h)(10) election—(1) In general. A section 338(h)(10) election may be made for T if P acquires stock meeting the requirements of section 1504(a)(2) from a selling consolidated group, a selling affiliate, or the S corporation shareholders in a qualified stock purchase.

  (2) Availability of section 338(h)(10) election in certain multi-step transactions. Notwithstanding anything to the contrary in § 1.338-3(c)(1)(i), a section 338(h)(10) election may be made for T where P's acquisition of T stock, viewed independently, constitutes a qualified stock purchase and, after the stock acquisition, T merges or liquidates into P (or another member of the affiliated group that includes P), whether or not, under relevant provisions of law, including the step transaction doctrine, the acquisition of the T stock and the merger or liquidation of T qualify as a reorganization described in section 368(a). If a section 338(h)(10) election is made in a case where the acquisition of T stock followed by a merger or liquidation of T into P qualifies as a reorganization described in section 368(a), for all Federal tax purposes, P's acquisition of T stock is treated as a qualified stock purchase and is not treated as part of a reorganization described in section 368(a).

  (3) Simultaneous joint election requirement. A section 338(h)(10) election is made jointly by P and the selling consolidated group (or the selling affiliate or the S corporation shareholders) on Form 8023 in accordance with the instructions to the form. S corporation shareholders who do not sell their stock must also consent to the election. The section 338(h)(10) election must be made not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs.

  (4) Irrevocability. A section 338(h)(10) election is irrevocable. If a section 338(h)(10) election is made for T, a section 338 election is deemed made for T.

  (5) Effect of invalid election. If a section 338(h)(10) election for T is not valid, the section 338 election for T is also not valid.

• Treas. Reg. §1.338(h)(10)-1(d)Certain consequences of section 338(h)(10) election. Show full text ▾ Collapse ▴

  Certain consequences of section 338(h)(10) election. For purposes of subtitle A of the Internal Revenue Code (except as provided in § 1.338-1(b)(2)), the consequences to the parties of making a section 338(h)(10) election for T are as follows:

  (1) P. P is automatically deemed to have made a gain recognition election for its nonrecently purchased T stock, if any. The effect of a gain recognition election includes a taxable deemed sale by P on the acquisition date of any nonrecently purchased target stock. See § 1.338-5(d).

  (2) New T. The AGUB for new T's assets is determined under § 1.338-5 and is allocated among the acquisition date assets under §§ 1.338-6 and 1.338-7. Notwithstanding paragraph (d)(4) of this section (deemed liquidation of old T), new T remains liable for the tax liabilities of old T (including the tax liability for the deemed sale tax consequences). For example, new T remains liable for the tax liabilities of the members of any consolidated group that are attributable to taxable years in which those corporations and old T joined in the same consolidated return. See § 1.1502-6(a).

  (3) Old T—deemed sale—(i) In general. Old T is treated as transferring all of its assets to an unrelated person in exchange for consideration that includes the discharge of its liabilities in a single transaction at the close of the acquisition date (but before the deemed liquidation). See § 1.338-1(a) regarding the tax characterization of the deemed asset sale. Except as provided in § 1.338(h)(10)-1(d)(8) (regarding the installment method), old T recognizes all of the gain realized on the deemed transfer of its assets in consideration for the ADSP. ADSP for old T is determined under § 1.338-4 and allocated among the acquisition date assets under §§ 1.338-6 and 1.338-7. Old T realizes the deemed sale tax consequences from the deemed asset sale before the close of the acquisition date while old T is a member of the selling consolidated group (or owned by the selling affiliate or owned by the S corporation shareholders). If T is an affiliated target, or an S corporation target, the principles of §§ 1.338-2(c)(10) and 1.338-10(a)(1), (5), and (6)(i) apply to the return on which the deemed sale tax consequences are reported. When T is an S corporation target, T's S election continues in effect through the close of the acquisition date (including the time of the deemed asset sale and the deemed liquidation) notwithstanding section 1362(d)(2)(B). Also, when T is an S corporation target (but not a qualified subchapter S subsidiary), any direct and indirect subsidiaries of T which T has elected to treat as qualified subchapter S subsidiaries under section 1361(b)(3) remain qualified subchapter S subsidiaries through the close of the acquisition date.

  (ii) Tiered targets. In the case of parent-subsidiary chains of corporations making elections under section 338(h)(10), the deemed asset sale of a parent corporation is considered to precede that of its subsidiary. See § 1.338-3(b)(4)(i).

  (4) Old T and selling consolidated group, selling affiliate, or S corporation shareholders—deemed liquidation; tax characterization—(i) In general. Old T is treated as if, before the close of the acquisition date, after the deemed asset sale in paragraph (d)(3) of this section, and while old T is a member of the selling consolidated group (or owned by the selling affiliate or owned by the S corporation shareholders), it transferred all of its assets to members of the selling consolidated group, the selling affiliate, or S corporation shareholders and ceased to exist. The transfer from old T is characterized for Federal income tax purposes in the same manner as if the parties had actually engaged in the transactions deemed to occur because of this section and taking into account other transactions that actually occurred or are deemed to occur. For example, the transfer may be treated as a distribution in pursuance of a plan of reorganization, a distribution in complete cancellation or redemption of all its stock, one of a series of distributions in complete cancellation or redemption of all its stock in accordance with a plan of liquidation, or part of a circular flow of cash. In most cases, the transfer will be treated as a distribution in complete liquidation to which section 336 or 337 applies.

  (ii) Tiered targets. In the case of parent-subsidiary chains of corporations making elections under section 338(h)(10), the deemed liquidation of a subsidiary corporation is considered to precede the deemed liquidation of its parent.

  (5) Selling consolidated group, selling affiliate, or S corporation shareholders—(i) In general. If T is an S corporation target, S corporation shareholders (whether or not they sell their stock) take their pro rata share of the deemed sale tax consequences into account under section 1366 and increase or decrease their basis in T stock under section 1367. Members of the selling consolidated group, the selling affiliate, or S corporation shareholders are treated as if, after the deemed asset sale in paragraph (d)(3) of this section and before the close of the acquisition date, they received the assets transferred by old T in the transaction described in paragraph (d)(4)(i) of this section. In most cases, the transfer will be treated as a distribution in complete liquidation to which section 331 or 332 applies.

  (ii) Basis and holding period of T stock not acquired. A member of the selling consolidated group (or the selling affiliate or an S corporation shareholder) retaining T stock is treated as acquiring the stock so retained on the day after the acquisition date for its fair market value. The holding period for the retained stock starts on the day after the acquisition date. For purposes of this paragraph, the fair market value of all of the T stock equals the grossed-up amount realized on the sale to P of P's recently purchased target stock. See § 1.338-4(c).

  (iii) T stock sale. Members of the selling consolidated group (or the selling affiliate or S corporation shareholders) recognize no gain or loss on the sale or exchange of T stock included in the qualified stock purchase (although they may recognize gain or loss on the T stock in the deemed liquidation).

  (6) Nonselling minority shareholders other than nonselling S corporation shareholders—(i) In general. This paragraph (d)(6) describes the treatment of shareholders of old T other than the following: Members of the selling consolidated group, the selling affiliate, S corporation shareholders (whether or not they sell their stock), and P. For a description of the treatment of S corporation shareholders, see paragraph (d)(5) of this section. A shareholder to which this paragraph (d)(6) applies is called a minority shareholder.

  (ii) T stock sale. A minority shareholder recognizes gain or loss on the shareholder's sale or exchange of T stock included in the qualified stock purchase.

  (iii) T stock not acquired. A minority shareholder does not recognize gain or loss under this section with respect to shares of T stock retained by the shareholder. The shareholder's basis and holding period for that T stock is not affected by the section 338(h)(10) election.

  (7) Consolidated return of selling consolidated group. If P acquires T in a qualified stock purchase from a selling consolidated group—

• Treas. Reg. §1.338(h)(10)-1(e)Examples. Show full text ▾ Collapse ▴

  Examples. The following examples illustrate the provisions of this section:

• Treas. Reg. §1.338(h)(10)-1(f)Inapplicability of provisions. Show full text ▾ Collapse ▴

  Inapplicability of provisions. The provisions of section 6043, §§ 1.331-1(d) and 1.332-6 (relating to information returns and recordkeeping requirements for corporate liquidations) do not apply to the deemed liquidation of old T under paragraph (d)(4) of this section.

• Treas. Reg. §1.338(h)(10)-1(g)Required information. Show full text ▾ Collapse ▴

  Required information. The Commissioner may exercise the authority granted in section 338(h)(10)(C)(iii) to require provision of any information deemed necessary to carry out the provisions of section 338(h)(10) by requiring submission of information on any tax reporting form.

• Treas. Reg. §1.338(h)(10)-1(h)Effective date. Show full text ▾ Collapse ▴

  Effective date. This section is applicable to stock acquisitions occurring on or after July 5, 2006. For stock acquisitions occurring before July 5, 2006, see § 1.338(h)(10)-1T as contained in the edition of 26 CFR part 1, revised as of April 1, 2006.

• Treas. Reg. §1.338(h)(10)-1(i)In deemed asset sale. Show full text ▾ Collapse ▴

  In deemed asset sale. Old T is treated as receiving in the deemed asset sale new T installment obligations, the terms of which are identical (except as to the obligor) to P installment obligations issued in exchange for recently purchased stock of T. Old T is treated as receiving in cash all other consideration in the deemed asset sale other than the assumption of, or taking subject to, old T liabilities. For example, old T is treated as receiving in cash any amounts attributable to the grossing-up of amount realized under § 1.338-4(c). The amount realized for recently purchased stock taken into account in determining ADSP is adjusted (and, thus, ADSP is redetermined) to reflect the amounts paid under an installment obligation for the stock when the total payments under the installment obligation are greater or less than the amount realized.

  (ii) In deemed liquidation. Old T is treated as distributing in the deemed liquidation the new T installment obligations that it is treated as receiving in the deemed asset sale. The members of the selling consolidated group, the selling affiliate, or the S corporation shareholders are treated as receiving in the deemed liquidation the new T installment obligations that correspond to the P installment obligations they actually received individually in exchange for their recently purchased stock. The new T installment obligations may be recharacterized under other rules. See for example § 1.453-11(a)(2) which, in certain circumstances, treats the new T installment obligations deemed distributed by old T as if they were issued by new T in exchange for the stock in old T owned by members of the selling consolidated group, the selling affiliate, or the S corporation shareholders. The members of the selling consolidated group, the selling affiliate, or the S corporation shareholders are treated as receiving all other consideration in the deemed liquidation in cash.

  (9) Treatment consistent with an actual asset sale. No provision in section 338(h)(10) or this section shall produce a Federal income tax result under subtitle A of the Internal Revenue Code that would not occur if the parties had actually engaged in the transactions deemed to occur because of this section and taking into account other transactions that actually occurred or are deemed to occur. See, however, § 1.338-1(b)(2) for certain exceptions to this rule.

• Treas. Reg. §1.338-0Outline of topics Show full text ▾ Collapse ▴

  This section lists the captions contained in the regulations under section 338 as follows:

  (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.

  (e) Effective/applicability date.

  (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.

  (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.

  (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.

  (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.

  (h) Effective/applicability date.

  (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.

  (5) Allocation to certain nuclear decommissioning funds.

  (d) Examples.

  (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.

  (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.

  (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.

  (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.

  (c) Effective/applicability date.

  (a) In general.

  (b) Computation of ADSP and AGUB.

  (1) Reserves taken into account as a liability.

  (2) Allocation of ADSP and AGUB to specific insurance contracts.

  (c) Application of assumption reinsurance principles.

  (1) In general.

  (2) Reinsurance premium.

  (3) Ceding commission.

  (4) Examples.

  (d) Reserve increases by new target after the deemed asset sale.

  (1) In general.

  (2) Exceptions.

  (3) Amount of additional premium.

  (i) In general.

  (ii) Increases in unpaid loss reserves.

  (iii) Increases in other reserves.

  (4) Limitation on additional premium.

  (5) Treatment of additional premium under section 848.

  (6) Examples.

  (7) Effective/applicability date.

  (i) In general.

  (ii) Application to pre-effective date increases to reserves.

  (e) Effect of section 338 election on section 846(e) election.

  (1) In general.

  (2) Revocation of existing section 846(e) election.

  (f) Effect of section 338 election on old target's capitalization amounts under section 848.

  (1) Determination of net consideration for specified insurance contracts.

  (2) Determination of capitalization amount.

  (3) Section 381 transactions.

  (g) Effect of section 338 election on policyholders surplus account.

  (h) Effect of section 338 election on section 847 special estimated tax payments.

  (a) through (c) [Reserved]

  (d) Reserve increases by new target after the deemed asset sale.

  (1) In general.

  (2) Exceptions.

  (3) Amount of additional premium.

  (i) In general.

  (ii) Increases in unpaid loss reserves.

  (iii) Increases in other reserves.

  (4) Limitation on additional premium.

  (5) Treatment of additional premium under section 848.

  (6) Examples.

  (7) Effective dates.

  (i) In general.

  (ii) Application to pre-effective date increases to reserves.

  (e) Effect of section 338 election on section 846(e) election.

  (1) In general.

  (2) Revocation of existing section 846(e) election.

  (f) through (h) [Reserved]

  (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.

  (a) In general.

  (b) Section 338(h)(10) elections for S corporation targets.

  (c) Section 338 elections for insurance company targets.

  (1) In general.

  (2) New target election for retroactive election.

  (i) Availability of election.

  (ii) Time and manner of making the election for new target.

  (3) Old target election for retroactive election.

  (i) Availability of election.

  (ii) Time and manner of making the election for old target.

• Treas. Reg. §1.338-0(a)In general. Show full text ▾ Collapse ▴

  In general.

• Treas. Reg. §1.338-0(b)Section 338(h)(10) elections for S corporation targets. Show full text ▾ Collapse ▴

  Section 338(h)(10) elections for S corporation targets.

• Treas. Reg. §1.338-0(c)Section 338 elections for insurance company targets. Show full text ▾ Collapse ▴

  Section 338 elections for insurance company targets.

  (1) In general.

  (2) New target election for retroactive election.

• Treas. Reg. §1.338-0(d)Certain consequences of section 338(h)(10) election. Show full text ▾ Collapse ▴

  Certain consequences of section 338(h)(10) election.

  (1) P.

  (2) New T.

  (3) Old T—deemed sale.

• Treas. Reg. §1.338-0(e)Examples. Show full text ▾ Collapse ▴

  Examples.

• Treas. Reg. §1.338-0(f)Inapplicability of provisions. Show full text ▾ Collapse ▴

  Inapplicability of provisions.

• Treas. Reg. §1.338-0(g)Required information. Show full text ▾ Collapse ▴

  Required information.

• Treas. Reg. §1.338-0(h)Effect of section 338 election on section 847 special estimated tax payments. Show full text ▾ Collapse ▴

  Effect of section 338 election on section 847 special estimated tax payments.

• Treas. Reg. §1.338-0(i)Availability of election. Show full text ▾ Collapse ▴

  Availability of election.

  (ii) Time and manner of making the election for old target.

• Treas. Reg. §1.338-0(j)Anti-avoidance rules. Show full text ▾ Collapse ▴

  Anti-avoidance rules.

  (1) Extension of consistency period.

  (2) Qualified stock purchase and 12-month acquisition period.

  (3) Acquisitions by conduits.

• Treas. Reg. §1.338-0(v)Old FT earnings and profits unaffected by post-acquisition date deficits. Show full text ▾ Collapse ▴

  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.

• Treas. Reg. §1.338-1General principles; status of old target and new target Show full text ▾ Collapse ▴

  (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.) However, if, as a result of the deemed purchase of old target's assets pursuant to a section 336(e) election, there would be both a qualified stock purchase and a qualified stock disposition (as defined in § 1.336-1(b)(6)) of the stock of a subsidiary of target, neither a section 338(g) election nor a section 338(h)(10) election may be made with respect to the qualified stock purchase of the subsidiary. Instead, a section 336(e) election may be made with respect to such purchase. See § 1.336-1(b)(6)(ii). 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 the target is an insurance company for which a section 338 election is made, the deemed asset sale results in an assumption reinsurance transaction for the insurance contracts deemed transferred from old target to new target. See, generally, § 1.817-4(d), and for special rules regarding the acquisition of insurance company targets, § 1.338-11. See also § 1.367(a)-8(k)(13) for a rule applicable to gain recognition agreements (filed under §§ 1.367(a)-3(b)(1)(ii) and 1.367(a)-8) and deemed asset sales as a result of an election under section 338(g).

  (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. Section 1.338-11 provides special rules for insurance company targets. 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), voluntary employees' beneficiary associations (section 501(c)(9) and the regulations thereunder), and tax on excess tax-exempt organization executive compensation (section 4960) and the regulations in part 53 under section 4960;

  (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) Section 846(e) (relating to an election to use an insurance company's historical loss payment pattern).

  (viii) 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. See also, for example, § 1.1502-77(c)(8), providing that an election under section 338 does not result in a deemed termination of target's existence for purposes of the rules applicable to the agent for a consolidated group.

  (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 regulations under sections 336(e), 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):

  (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.

  (e) Effective/applicability date. Paragraphs (a)(1) and (c)(1) of this section are applicable to any qualified stock disposition for which the disposition date (as defined in § 1.336-1(b)(8)) is on or after May 15, 2013.

• Treas. Reg. §1.338-1(a)In general—(1) Deemed transaction. Show full text ▾ Collapse ▴

  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.) However, if, as a result of the deemed purchase of old target's assets pursuant to a section 336(e) election, there would be both a qualified stock purchase and a qualified stock disposition (as defined in § 1.336-1(b)(6)) of the stock of a subsidiary of target, neither a section 338(g) election nor a section 338(h)(10) election may be made with respect to the qualified stock purchase of the subsidiary. Instead, a section 336(e) election may be made with respect to such purchase. See § 1.336-1(b)(6)(ii). 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 the target is an insurance company for which a section 338 election is made, the deemed asset sale results in an assumption reinsurance transaction for the insurance contracts deemed transferred from old target to new target. See, generally, § 1.817-4(d), and for special rules regarding the acquisition of insurance company targets, § 1.338-11. See also § 1.367(a)-8(k)(13) for a rule applicable to gain recognition agreements (filed under §§ 1.367(a)-3(b)(1)(ii) and 1.367(a)-8) and deemed asset sales as a result of an election under section 338(g).

  (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. Section 1.338-11 provides special rules for insurance company targets. Eligibility for and treatment of section 338(h)(10) elections is addressed in § 1.338(h)(10)-1.

• Treas. Reg. §1.338-1(b)Treatment of target under other provisions of the Internal Revenue Code—(1) General rule for subtitle A. Show full text ▾ Collapse ▴

  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—