[Federal Register Volume 78, Number 94 (Wednesday, May 15, 2013)]
[Rules and Regulations]
[Pages 28467-28490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-11522]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.
========================================================================
Federal Register / Vol. 78, No. 94 / Wednesday, May 15, 2013 / Rules
and Regulations
[[Page 28467]]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9619]
RIN 1545-BD84
Regulations Enabling Elections for Certain Transactions Under
Section 336(e)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations that provide guidance
under section 336(e) of the Internal Revenue Code (Code), which
authorizes the issuance of regulations under which an election may be
made to treat the sale, exchange, or distribution of at least 80
percent of the voting power and value of the stock of a corporation
(target) as a sale of all its underlying assets. These regulations
provide the terms and conditions for making such an election and the
consequences of the election. These regulations affect domestic
corporate sellers (seller), S corporation shareholders, and domestic
targets.
DATES: Effective Date: These regulations are effective on May 15, 2013.
Applicability Date: These regulations apply to any qualified stock
disposition for which the disposition date is on or after May 15, 2013.
FOR FURTHER INFORMATION CONTACT: Mark J. Weiss, (202) 622-7930 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under OMB control number 1545-2125. The collection of
information in these final regulations is in Sec. Sec. 1.336-2(h) and
1.336-4(c)(4). This information is required by the IRS to allow certain
parties to make a section 336(e) election and for certain shareholders
to make a gain recognition election.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by section 6103.
Background
Section 336(e) of the Code authorizes the issuance of regulations
under which an election may be made to treat the sale, exchange, or
distribution of at least 80 percent of the voting power and value of
the stock of a corporation (target) as a sale of all its underlying
assets. Section 336(e) was enacted as part of General Utilities repeal.
Similar to an election under section 338(h)(10) available with respect
to certain purchases of target stock, section 336(e) is meant to
provide taxpayers relief from a potential multiple taxation of the same
economic gain that can result when a transfer of appreciated corporate
stock is taxed without providing a corresponding step-up in the basis
of the assets of the corporation. See H.R. Conf. Rep. No. 841, 99th
Cong., 2d Sess., Vol. II, 198, 204 (1986), 1986-3 CB, Vol. 4, 198- 207.
On August 25, 2008, the IRS and Treasury Department published a
notice of proposed rulemaking in the Federal Register (REG-143544-04,
2008-42 IRB 947 [73 FR 49965-02]) (the proposed regulations) that, when
finalized, would permit certain taxpayers to make an election to treat
certain sales, exchanges, and distributions of another corporation's
stock as taxable sales of that corporation's assets.
Summary of Proposed Regulations
A. In General
Under the proposed regulations, an election under section 336(e) is
available for ``qualified stock dispositions'' of domestic target stock
by domestic corporate sellers (seller). The proposed regulations
generally adopt the structure and principles established under section
338(h)(10) and the underlying regulations. For example, the proposed
regulations generally incorporate the rules of section 338 governing
the allocation of consideration in the resulting deemed sale of the
target's assets and the determination of target's basis in its
underlying assets resulting from such deemed sale. The proposed
regulations alter terms or concepts to reflect principles and factual
circumstances relevant to section 336(e).
Unlike an election under section 338(h)(10), which is available
only if target stock is acquired by a corporate purchaser, the proposed
regulations do not require an acquirer of target stock to be a
corporation, or even necessarily a purchaser. Also unlike section
338(h)(10), which generally requires that a single purchasing
corporation acquire the stock of a target, the proposed regulations
permit the aggregation of all stock of a target that is sold,
exchanged, and distributed by a seller to different acquirers for
purposes of determining whether there has been a qualified stock
disposition of a target.
B. Two Different Models for Deemed Transactions
The proposed regulations provide two different models for the
deemed transactions treated as occurring if a section 336(e) election
is made. The first model generally follows the same structure used for
the deemed transactions resulting from the making of a section
338(h)(10) election (basic model) and is applicable to all qualified
stock dispositions (including those consisting of taxable distributions
of target stock) other than distributions described in sections
355(d)(2) or 355(e)(2) (section 355(d)(2) and (e)(2) transactions).
Under the basic model, target, while owned by the seller (old target),
is treated as selling all of its assets to an unrelated person and new
target is treated as acquiring all of its assets from an unrelated
person at the close of the date on which the threshold amount of target
stock is disposed (deemed asset disposition). Old target recognizes the
Federal income tax consequences from the deemed asset
[[Page 28468]]
disposition before the close of the date on which its stock was
disposed. After recognizing the tax consequences of the deemed asset
disposition, old target is generally treated as liquidating into the
seller. In addition, to the extent that the qualified stock disposition
consisted of one or more distributions (rather than sales or exchanges)
of the stock of a target (other than in section 355(d)(2) and (e)(2)
transactions), the seller is treated as acquiring directly from new
target an amount of new target stock equal to the amount of target
stock distributed. The tax consequences of the purchaser(s) generally
are unaffected by the section 336(e) election.
The second model adopted by the proposed regulations for the deemed
transactions resulting from a section 336(e) election applies to
section 355(d)(2) and (e)(2) transactions (sale-to-self model). Under
the sale-to-self model, old target (the controlled corporation) is
deemed to remain in existence; old target is treated as if it sold its
assets to an unrelated person and then repurchased those assets.
Following the deemed asset disposition, old target (the controlled
corporation) is not deemed to liquidate into seller (the distributing
corporation). Instead, after old target's deemed repurchase of its own
assets, seller is treated as distributing the stock of old target to
its shareholders, with seller recognizing no gain or loss. Because no
liquidation of old target into seller is deemed to occur, old target
will generally retain the tax attributes it would have had if the
section 336(e) election had not been made, adjusted for the creation or
absorption of attributes resulting from the election.
C. The Disallowed Loss Rule
The proposed regulations contain a rule that disallows the
recognition of losses resulting from the deemed asset disposition to
the extent the qualified stock disposition consisted of one or more
distributions of target stock (disallowed loss rule). The preamble to
the proposed regulations explains that the allowance of losses pursuant
to a deemed asset disposition may be inconsistent with sections 311(a)
and 355(c) because had the target stock been distributed, any loss in
the target stock would not have been recognized pursuant to these
provisions.
D. Time and Manner of Making a Section 336(e) Election
The time and manner of making a section 336(e) election provided in
the proposed regulations also differed from those for making an
election under section 338(h)(10). Noting that a joint election may be
burdensome in cases with multiple purchasers, the proposed regulations
provide that a section 336(e) election is unilaterally made by a seller
attaching a statement to its timely filed Federal income tax return for
the taxable year that includes the disposition date.
Summary of Comments and Explanation of Provisions
Written comments were received in response to the proposed
regulations. A public hearing was not requested and none was held.
After consideration of all the comments, the proposed regulations are
adopted as amended by this Treasury decision. In general, the final
regulations follow the approach of the proposed regulations with some
modifications. The more significant comments and modifications are
discussed in this section.
A. The Disallowed Loss Rule
The IRS and Treasury Department received several comments that the
disallowed loss rule of the proposed regulations was too harsh and
frustrated the intent of mitigating multiple levels of tax as
envisioned by section 336(e). According to the comments, the result of
the disallowed loss rule was that the making of a section 336(e)
election in connection with a stock distribution would be largely
impractical. One commenter also noted that the rationale for the
disallowed loss rule, namely, that asset losses should not be allowed
because a loss in target stock would not be recognized under sections
311(a) or 355(c), did not extend to a seller's distribution of target
stock under section 336(a). This is because the seller generally would
recognize the loss with respect to the target stock in such a case. The
comments suggested several alternatives, including that realized losses
in the deemed asset disposition should be netted against the amount of
realized gains and that to the extent realized losses exceed realized
gains, the net loss should be deferred by attaching the net loss to the
basis of the assets in target's hands after the deemed asset
disposition.
After consideration of the comments, the IRS and Treasury
Department have determined that the disallowed loss rule as set forth
in the proposed regulations is broader in scope than necessary to serve
the purposes of section 336(e). Accordingly, the final regulations
modify the rule of the proposed regulations to generally permit
target's realized losses in the deemed asset disposition to offset the
amount of target's realized gains. Thus, the proposed regulations
disallow a net loss of target (that is, losses realized in excess of
target's realized gains) recognized on a deemed asset disposition, but
only in proportion to the portion of target stock that was disposed of
by seller in one or more distributions.
The loss disallowance rule in the proposed regulations only applied
to distributions that were taken into account as part of the qualified
stock disposition on or before the disposition date. Thus, stock
distributions that occurred after 80 percent of target was disposed of
were not subject to the loss disallowance rule. The final regulations
modify the disallowed loss rule of the proposed regulations to take
into account (1) target stock distributed at any time within the 12-
month disposition period, not just on or before the disposition date,
and (2) target stock distributed within the 12-month disposition period
that is not part of the qualified stock disposition, such as stock
distributed to a related person. The IRS and Treasury Department
believe that limiting disallowed losses to stock distributed on or
before the disposition date could lead to manipulation because sellers
who would otherwise distribute target stock on the disposition date may
delay the distribution for the sole purpose of decreasing the
disallowed net loss recognized by target. Further, if stock
distributions that are not part of the qualified stock disposition,
such as distributions to a related person, were not taken into account
by the disallowed loss rule, target would be able to recognize a
greater portion of its net loss by distributing stock to a related
person than it would recognize if it distributed the stock to an
unrelated person, a result that the IRS and Treasury Department believe
would be improper. Accordingly, under the disallowed loss rule of the
final regulations, if a section 336(e) election is made and any stock
of target is distributed during the 12-month disposition period,
whether or not as part of the qualified stock disposition, any net loss
attributable to such stock distribution is disallowed.
The final regulations do not follow the recommendation of some
commenters that any disallowed losses be applied to increase the basis
of target's assets after the deemed asset disposition for two reasons.
First, as discussed elsewhere in this preamble, Congressional intent in
providing for a section 336(e) election was to prevent multiple
taxation of gain. Congress was not concerned with the preservation of
loss. Second, allowing the losses to be deferred by adding the basis to
target's
[[Page 28469]]
assets would create administrative difficulties far outweighing the
benefits, and disallowing losses rather than deferring losses is
consistent with many other provisions within subchapter C. Accordingly,
to the extent the disallowed loss rule of the final regulations
applies, losses are allowed up to the amount of gains and any excess
losses are permanently disallowed.
B. Issues Relating to the Adopted Models
1. Basic Model for Non-Section 355(d)(2) or (e)(2) Transactions
In general, the final regulations retain the rules of the proposed
regulations with respect to the deemed transactions under the basic
model. One commenter expressed concern that in the case of a
distribution of stock as part of a qualified stock disposition that
does not consist of section 355(d)(2) or (e)(2) transactions, the step
in the basic model in which seller is deemed to purchase from new
target the new target stock actually distributed might be combined with
old target's deemed sale of its assets to new target resulting in a
section 351 transaction with boot, which could lead to unintended
consequences. The commenter also questioned what new target is deemed
to do with the consideration it is deemed to receive from seller in the
deemed stock acquisition. The commenter suggested resolving these
issues by having seller be deemed to purchase new target stock from
unrelated new target shareholders with cash equal to the fair market
value of the distributed stock.
The IRS and Treasury Department agree with the concerns of the
commenter. Accordingly, the final regulations modify the proposed
regulations by providing that in a distribution of target stock (and
also with respect to stock in target that seller retains after the
distribution date) seller is deemed to purchase the new target stock
that is distributed or retained not from new target but from an
unrelated person in a taxable transaction. Seller will not recognize
any gain or loss on the deemed distribution of new target stock and
purchaser will have a fair market value basis in new target stock
received without any possible application of section 351.
2. Sale-to-Self Model for Transactions Described in Section 355(d)(2)
or (e)(2)
We received several comments suggesting the removal of the sale-to-
self model and the extension of the provisions of Sec. 1.336-2(b)(1),
with any necessary adjustments, to section 355(d)(2) or (e)(2)
transactions. Commenters stated that the sale-to-self model added
unnecessary complexity and that existing law under section 312(h) and
Sec. 1.312-10 adequately addresses the concern of having sufficient
earnings and profits to allocate to the controlled corporation. One
commenter also suggested that to the extent that the sale-to-self model
is driven by a desire to have the controlled corporation retain its
attributes, a special section 381 rule could be created to reach this
result.
Although the IRS and Treasury Department agree with the commenters
who pointed out that even if target was treated as a new corporation
after the deemed sale of its assets, the rules of section 312(h) and
Sec. 1.312-10 would typically result in target having some level of
earnings and profits after the distribution of its stock, the IRS and
Treasury Department still believe that the sale-to-self model should be
retained. While the deemed transactions resulting from the making of
section 336(e) elections with respect to taxable sales, exchanges, or
distributions of target stock could actually be undertaken in a
transaction involving the sale, exchange, or distribution of the assets
of target, a transaction that included an actual sale or distribution
of all the assets of target could not qualify under section 355.
Because a deemed sale of assets to a new target cannot actually be
undertaken in section 355(d)(2) or (e)(2) transactions, and the IRS and
Treasury Department believe that the predominant feature of the section
336(e) election with respect to a section 355(d)(2) or (e)(2)
transaction is the section 355 transaction, the regulations adopt the
sale-to-self model and treat the transaction as the distribution of old
target stock.
Additionally, the IRS and Treasury Department do not believe that
the sale-to-self model adds significant complexity to the regulation;
in fact, it may reduce complexity. As the commenters pointed out, if
the IRS and Treasury Department believe that adjustments to the basic
model would have to be made to account for a section 355(d)(2) or
(e)(2) transaction, those adjustments, such as satisfying the five-year
active trade or business requirement and maintaining all section 381
attributes with target (not solely earnings and profits), would require
that exceptions and special rules be added to the basic model. These
exceptions and special rules would result in a regulation that we
believe would be more complex than the sale-to-self model. Furthermore,
because it is likely that only an insubstantial number of section
336(e) elections will be the result of transactions actually described
in section 355(d)(2) or (e)(2) (although a substantial number of
protective elections may be made), we believe that putting the
exceptions and special rules into the provisions of Sec. 1.336-2(b)(1)
for this limited number of cases would create complexity or confusion
for the majority of taxpayers engaging in transactions that are not
described in section 355(d)(2) or (e)(2). By separating the regulation
into two separate models, taxpayers whose transaction does not involve
a section 355(d)(2) or (e)(2) transaction may apply the regulation's
provisions without having to concern themselves with provisions that do
not apply to their transaction.
Commenters have suggested that if the regulations retain the sale-
to-self model, the regulations should address the wash sale rules of
section 1091 and the anti-churning rules of section 197(f)(9). For
example, old target's deemed disposition of stock or securities and
subsequent repurchase of the same stock or securities could be treated
as a wash sale, which could then be subject to loss disallowance under
section 1091(a) as well as the disallowed loss rule of these
regulations. Under the section 336(e) regulations, the basis of the
stock or security deemed purchased by target should be its fair market
value, while under section 1091(d), the basis would be the basis of the
stock or security deemed transferred plus or minus any difference in
the sale and acquisition price of the stock or security.
The IRS and Treasury Department do not believe that adoption of the
sale-to-self model should cause sections 197(f)(9) or 1091 to apply to
a section 336(e) election with respect to a section 355(d)(2) or (e)(2)
transaction. Because the deemed transactions resulting from the making
of a section 336(e) election could not actually be undertaken in the
context of a section 355(d)(2) or (e)(2) transaction, we do not believe
that the regulations should cause a section 336(e) election in the
context of a section 355(d)(2) or (e)(2) transaction to result in the
application of sections 197(f)(9) or 1091 to the extent that a section
336(e) election outside the context of a section 355(d)(2) or (e)(2)
transaction would not result in the application of such sections.
Accordingly, the final regulations provide that for purposes of section
197(f)(9), section 1091, and any other provision designated in the
Internal Revenue Bulletin by the IRS, old target, in its capacity as
seller of assets in the deemed asset disposition, is treated as a
separate and distinct taxpayer from, and
[[Page 28470]]
unrelated to, old target in its capacity as acquirer of assets in the
subsequent deemed purchase and for subsequent periods. For example, if
one of target's assets immediately before old target's deemed asset
disposition was stock or securities within the meaning of section 1091,
old target, as seller of the stock or securities in the deemed asset
disposition, is not treated for purposes of section 1091 as the same
taxpayer that acquires substantially identical stock or securities in
the deemed purchase of assets or that actually acquires substantially
identical stock or securities in periods after the deemed asset
disposition. Therefore, section 1091 will not disallow any of old
target's loss on the deemed sale of the stock or securities as a result
of either old target's deemed purchase of the same stock or securities
or an actual purchase of substantially identical stock or securities
within the 30-day period after the disposition date.
C. Time and Manner for Making the Election
Commenters requested that the unilateral seller election of the
proposed regulations be made into a joint election between seller and
target (acting in a capacity for the purchasers). The commenters
expressed concern that a unilateral election by seller could result in
unwanted results or unfair surprise to target or purchaser. The
proposed regulations were premised on the view that a unilateral
election is supportable because in sales or exchanges, purchasers
should be able to protect their interests in any purchase contract; in
distributions, distributees' interests should generally be protected
because of the distributing corporation's fiduciary responsibilities to
its shareholders. However, in response to the comments, the final
regulations modify the rule of the proposed regulations. Under the
final regulations, in order to make a section 336(e) election,
seller(s), or in the case of an S corporation target, all of the S
corporation shareholders (see section E of this preamble concerning the
availability of a section 336(e) election for an S corporation target),
and target must enter into a written, binding agreement to make a
section 336(e) election and a section 336(e) election statement must be
attached to the relevant return. If seller(s) and target are members of
a consolidated group, the election statement is filed on a timely filed
consolidated return and the common parent of the consolidated group
must provide a copy of the section 336(e) election statement to target
on or before the due date (including extensions) of the consolidated
group's consolidated Federal income tax return. If target is an S
corporation, the election statement is filed on the S corporation's
timely filed return. If seller and target are members of an affiliated
group but do not join in the filing of a consolidated return, the
election statement is filed with both seller's and target's timely
filed returns. By (1) requiring seller(s), or all the S corporation
shareholders, and target to enter into a written, binding agreement,
(2) in the case of a consolidated group, requiring the common parent of
the consolidated group to provide a copy of the election statement to
target, and (3) in the case in which seller and target are members of
an affiliated group but do not join in the filing of a consolidated
return, requiring both seller and target to file the election statement
on their respective returns, the IRS and Treasury Department believe
that the final regulations significantly reduce the potential for
unwanted results or unfair surprise.
Several commenters also requested changing the due date of the
election from the due date of the seller's return to the 15th day of
the ninth month after the disposition date, the same time for making a
section 338 election. The commenters were concerned that the due date
in the proposed regulations could result in many instances in which
target's tax return would be due before the due date for the election
(because target's taxable year will close upon its deemed dissolution),
and therefore target would be required to file its return without
knowing whether a section 336(e) election was made. After consideration
of these comments, the final regulations retain the rule that the
election must be made by the due date of the relevant tax return. The
IRS and Treasury Department believe that a due date of the 15th day of
the ninth month after the disposition date will add administrative
burden to both taxpayers and the IRS. Such due date would generally
require that the election be made prior to the filing of the tax
return, rather than on a tax return. It is administratively beneficial
for the IRS to have the election made with the filing of a return
rather than in some manner outside of the return. Additionally, an
accelerated due date would give taxpayers less time in which to decide
whether an election is beneficial or detrimental. The experience of the
IRS in administering section 338 has shown that some taxpayers miss the
due date for making a section 338 election because they wrongly believe
that the election is due with the income tax return of the taxpayer.
Further, except with respect to the election statement filed by seller
if seller and target are members of the same affiliated group but do
not join in the filing of a consolidated return, the due date for
filing the election statement now coincides with the due date of the
return that includes the deemed disposition tax consequences.
Accordingly, the final regulations do not adopt this suggestion.
Because the general requirements for who must file a section 336(e)
election statement have been modified from the proposed regulations,
these final regulations provide detailed requirements to assist
taxpayers in making a section 336(e) election for an eligible
subsidiary of target (target subsidiary). See Sec. 1.336-2(h)(4) and
(5). Some of these requirements are different than those for making a
section 336(e) election for target subsidiaries under the proposed
regulations, which treated the seller of the directly disposed of
target (ultimate seller) as the seller of the target subsidiary for
purposes of the additional election statement to be attached to the
ultimate seller's return. Some of these requirements also differ from
those for making a section 338 election for target subsidiaries on Form
8023, which treats the purchasing corporation(s) of the directly
purchased target as the purchasing corporation(s) of any target
subsidiary for purposes of completing and signing a Form 8023 for a
target subsidiary that is filed outside of any return. For example, if
seller and target are members of the seller consolidated group but
target subsidiary is not, a section 336(e) election for target
subsidiary now requires that target subsidiary be a party to either the
agreement entered into by seller and target, or that target and target
subsidiary enter into a separate agreement to make such election.
Because target subsidiary is not a member of the same consolidated
group as target, the section 336(e) election for target subsidiary
requires that a section 336(e) election statement be attached to both
seller's timely filed consolidated Federal income tax return and the
timely filed Federal income tax return of the target subsidiary.
The IRS intends to modify Form 8883, which is currently entitled
``Asset Allocation Statement Under Section 338,'' or create a new form,
to include an election under section 336(e). However, until Form 8883
is modified or a new form is created, old target and new target should
file Form 8883 to report the results of the deemed asset disposition,
making appropriate adjustments as necessary to account for a section
336(e) election. Examples of
[[Page 28471]]
appropriate adjustments include treating a reference to Form 8023, a
qualified stock purchase, the acquisition date, the 12-month
acquisition period, or the aggregate deemed sales price on Form 8883 or
the instructions thereto as a reference to the section 336(e) election
statement, a qualified stock disposition, the disposition date, the 12-
month disposition period, or the aggregate deemed asset disposition
price, respectively. In the case of a section 336(e) election as the
result of a transaction described in section 355(d)(2) or (e)(2), old
target should file two Forms 8883 (or successor forms), one in its
capacity as the seller of assets in the deemed asset disposition and
one in its capacity as the purchaser of assets in the deemed purchase
of assets under the sale-to-self model.
D. Intragroup Sales, Exchanges, or Distributions Prior to External
Sales, Exchanges, or Distributions and Section 355(f)
The proposed regulations requested comments concerning an
intragroup sale, exchange, or distribution (an ``intragroup
transaction'') prior to an external sale, exchange, or distribution,
and also concerning the application of section 355(f).
Generally, if the stock of a corporation is sold or distributed
within an affiliated group and then is transferred outside the
affiliated group, a section 336(e) election is not available for the
intragroup transaction because the buyer and seller in the intragroup
transaction are related persons after the disposition of target outside
the affiliated group. While a section 336(e) election may be available
for the external transfer, the election could result in the affiliated
group immediately recognizing multiple levels of gain, both on target's
stock from the intragroup transaction and on target's assets from the
deemed asset disposition. Section 1.1502-13(f)(5)(ii)(C) provides an
election (a ``Sec. 1.1502-13(f)(5) election'') in the case of section
338(h)(10) and comparable transactions. A Sec. 1.1502-13(f)(5)
election allows taxpayers to treat the deemed liquidation as the result
of a section 338(h)(10) election or an actual liquidation as a taxable
liquidation in order to provide the consolidated group with a stock
loss to offset some, if not all, of the intragroup seller's stock gain
from the intragroup transaction. One commenter asked for either a
clarification that a Sec. 1.1502-13(f)(5) election is available for
section 336(e) elections or that a similar election be provided in
these regulations. Another commenter believed that the problem of
multiple levels of tax could be solved by permitting a section 336(e)
election on the intragroup transaction. With respect to the latter
comment, the IRS and Treasury Department do not believe that allowing a
section 336(e) election on the intragroup transaction is practical or
administrable. Allowing a section 336(e) election would require special
rules for related persons (see discussion of related party issues in
section H of this preamble); further, these transactions could involve
a significant time lapse between the intragroup transaction and
external disposition. However, the IRS and Treasury Department agree
with the first commenter that a taxpayer should be able to make a Sec.
1.1502-13(f)(5) election to treat the deemed liquidation of target into
seller as a result of a section 336(e) election as a taxable
liquidation. Although we believe that under the general rule of Sec.
1.336-1(a) of the proposed regulations, a Sec. 1.1502-13(f)(5)
election would be available for a section 336(e) transaction without
any modification in the final regulations, to remove any doubt the
final regulations modify Sec. 1.1502-13(f)(5)(ii)(C) to clearly
provide that the election is available for a section 336(e) election.
The IRS and Treasury Department also acknowledge that an external
distribution under section 355(d)(2) or (e)(2) that is preceded by an
intragroup transaction raises the same concerns as those described in
the preceding paragraph, but a Sec. 1.1502-13(f)(5) election would not
provide relief because in a section 355(d)(2) or (e)(2) transaction
there is no deemed liquidation of target. The IRS and Treasury
Department believe that the rationale behind Sec. 1.1502-13(f)(5) to
prevent multiple levels of taxation exists just as much with a section
336(e) election as a result of a section 355(d)(2) or (e)(2)
transaction as with a non-section 355(d)(2) or (e)(2) transaction.
Therefore, the final regulations provide that in the case of a section
355(d)(2) or (e)(2) transaction that is preceded by an intragroup
transaction, for the limited purpose of a Sec. 1.1502-13(f)(5)
election, immediately after the deemed asset disposition of target's
assets, target is deemed to liquidate into seller, thus providing
seller with a stock loss that can offset some or all of the group's
intercompany gain with respect to the intragroup transfer of target
stock.
E. Elections for S Corporations
The proposed regulations do not provide for a section 336(e)
election with respect to the sale of stock of an S corporation.
Commenters asked that, just as a corporation that acquires stock of an
S corporation in a qualified stock purchase may make a section
338(h)(10) election, the ability to make a section 336(e) election be
extended to S corporation targets. Commenters noted that the IRS and
Treasury extended the application of section 338(h)(10) to qualified
stock purchases of S corporations and that Congress intended that
``under regulations, principles similar to those of section 338(h)(10)
may be applied to taxable sales or distributions of controlled
corporation stock.'' See H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess.,
Vol. II, 198, 204 (1986) [1986-3 CB, Vol. 4, 198, 204].
The IRS and Treasury Department agree with the commenters that the
principles of the regulations implementing section 338(h)(10) should
apply to the regulations implementing section 336(e) elections.
Accordingly, these final regulations permit a section 336(e) election
to be made for S corporation targets and provide additional and special
rules to allow section 336(e) elections to be made with respect to S
corporation targets.
If a section 338(h)(10) election is made with respect to an S
corporation target, all of the S corporation shareholders, including
those who do not sell their S corporation target stock, must consent to
the election. With respect to a section 336(e) election, the final
regulations provide the same requirement for purposes of making a
section 336(e) election. While S corporation shareholders consent to a
section 338(h)(10) election by signing Form 8023, to make a section
336(e) election, the S corporation shareholders do not file a section
336(e) election statement. Instead, consent to make a section 336(e)
election is established by all the S corporation shareholders,
including those who do not dispose of their stock in the transaction,
and target entering into a written, binding agreement to make the
election, on or before the due date (including extensions) of the S
corporation target's income tax return. The section 336(e) election
statement for an S corporation target is filed with the income tax
return of the S corporation target.
If a section 336(e) election is made for an S corporation target,
old target's S election continues in effect through the close of the
disposition date (including the time of the deemed asset disposition
and the deemed liquidation) at which time old target's S election
terminates, and old target ceases to exist. If new target qualifies as
a small business corporation within the meaning of section 1361(b) and
wants to be an S corporation, a new election for new target under
section 1362(a) must be made.
[[Page 28472]]
F. Determination of AGUB and ADADP
A commenter requested that the provisions in the proposed
regulations for determining the Aggregate Deemed Asset Disposition
Price (ADADP) and Adjusted Grossed-Up Basis (AGUB) be modified by
grossing up the selling costs among all stock of target in order to
determine ADADP and by grossing up the acquisition costs among all
stock of target in order to determine AGUB. The commenter also
requested rules that would disregard preferred stock in determining the
percentage of stock disposed of in the qualified stock disposition, and
then add back the value of the preferred stock in determining the
grossed-up amount realized.
With regard to grossing up the selling costs and acquisition costs
over all target stock, this issue was specifically addressed in the
preamble to the proposed section 338 regulations in 1999 (``Grossing-up
the selling shareholders' selling costs or the purchasing corporation's
acquisition costs would result in costs not actually incurred reducing
old target's amount realized for the assets or increasing new target's
cost basis in the assets. . . . [T]here is no evidence that the
purchasing corporation's costs to acquire an amount of target stock
sufficient for there to be a qualified stock purchase would increase
proportionately if it acquired all of the target stock . . .''). See
REG-107069-97, 1999-2 CB 346, 353. Accordingly, the final regulations
retain the rule of the proposed regulations.
With regard to the preferred stock issue, the determination of
grossed-up basis in section 338 is specifically provided for in the
Code, and Congress included preferred stock in determining the
percentage of stock attributable to recently purchased stock. The
regulations under section 338 apply the same rule in determining
grossed-up amount realized. The IRS and the Treasury Department believe
that it is appropriate to use the same computation for purposes of a
section 336(e) election. Accordingly, the final regulations retain the
rule of the proposed regulations.
G. Gain Recognition Elections
Under the proposed regulations, a holder of nonrecently disposed
stock may make a gain recognition election, similar to the gain
recognition election under section 338, which treats nonrecently
disposed stock as being sold as of the disposition date. The gain
recognition election is mandatory if a purchaser owns (after the
application of the rules of section 318(a), other than section
318(a)(4)), 80-percent or more of the voting power or value of target
stock. Once made, a gain recognition election is irrevocable. The
proposed regulations requested comments on whether the rules regarding
gain recognition elections in the section 336(e) regulations are
appropriate and whether the gain recognition election rules in
regulations promulgated under section 338 should continue to apply.
Only one comment was received on this topic. The commenter was not
sure why rules relating to gain recognition elections exist and
believed they should be eliminated in both section 338(h)(10) and
section 336(e). However, if this decision was not made, the election
should be preserved for consistency in both sections. After
consideration of this comment and further internal consideration, the
IRS and Treasury Department have determined that the final regulations
should retain the rule of the proposed regulations.
H. Related Party Rule
The proposed regulations provide that a transaction is not a
disposition (and therefore is ineligible to count towards a qualified
stock disposition) if target stock is sold, exchanged, or distributed
to a related person. The proposed regulations, like the section 338
regulations, treat persons as related if stock in a corporation owned
by one of the persons would be attributed to the other person under
section 318(a), other than section 318(a)(4). Comments were requested
regarding dispositions to related persons, including special rules
needed to prevent the use of net operating losses to offset liquidation
gains, manipulation of earnings and profits, and changes of accounting
methods.
The IRS and Treasury Department received a wide range of comments,
most of which believed some type of prohibition against section 336(e)
elections in the case of related party transactions should be
maintained. However, the commenters also stated that they believe that
the definition of related person in the proposed regulations is too
restrictive and should deviate from the section 338 definition.
Commenters stated that unlike section 338, there is no statutory
definition of the term purchase, and the decision to import the section
338 definition restricts the ability of a section 336(e) election to
mitigate against multiple levels of tax. Commenters point to the fact
that the legislative history does not prohibit related party
transactions, but simply states that special rules may be needed to
police certain situations (for example, rules prohibiting net operating
loss refreshing, avoiding separate return limitation year rules, and
triggering built-in gains to offset net operating losses otherwise
limited by section 382). Suggestions made to modify the related party
definition included (a) use of the existing section 338(h)(3)(A)(iii)
definition, but limiting upstream and downstream partnership
attribution to partners owning a specified percentage of the
partnership and then only if the partnership bears some economic
relationship to the transaction; (b) defining related persons by
reference to whether the transaction that would be deemed to occur
constitutes a nondivisive D reorganization or certain types of
triangular C reorganizations using section 304(c) control; (c) defining
related persons using section 267 principles; or (d) implementing some
type of anti-abuse rule.
The IRS and Treasury Department reviewed the comments received and
continue to have concerns about the administrability and complexity of
rules that would be needed to permit related party transactions.
However, the IRS and Treasury Department do agree that the attribution
rules with respect to partnerships are more inclusive than is necessary
for the purpose of these regulations. Because the attribution rules in
section 318(a) with respect to partnerships do not have a minimum
ownership threshold, a situation in which one partner holds a very
small ownership in two different partnerships that own purchaser and
seller, respectively, could, under the proposed regulations, prevent
the making of a section 336(e) election on the sale of the stock of
target to purchaser. Although some of the same concerns exist with
respect to a section 338(h)(10) election, in such case, the statute
clearly prohibits a section 338(h)(10) election. With respect to a
section 336(e) election, there is no statutory prohibition, and the IRS
and Treasury Department agree with the comments received that deemed
asset disposition treatment should not be prohibited if cross ownership
is minimal. While each of the suggested approaches for modifying the
attribution rules have merit, the IRS and Treasury Department believe
that the best manner for addressing the commenters' concerns is to
modify the definition of related persons as pertaining to partnerships
by providing that, solely for purposes of determining whether purchaser
and seller are related for purposes of section 336(e), the attribution
rules of sections 318(a)(2)(A) and 318(a)(3)(A) will not apply to
attribute stock ownership from a partnership to a partner, or from a
[[Page 28473]]
partner to a partnership if such partner owns, directly or indirectly,
less than five percent of the value of the partnership. A five-percent
threshold is within the range suggested by comments for limiting
upstream and downstream attribution under section 318(a) between
partners and partnerships, and is consistent with the five-percent
threshold of constructive ownership rules under sections 267(e)(3) and
1562(e)(2) relevant to partners and partnerships. The IRS and Treasury
Department will continue to study whether related party transactions
should qualify for a section 336(e) election.
I. Scope of Regulations
The proposed regulations look to and build upon section 338(h)(10)
principles and guidelines that address taxable sales and exchanges of
target stock. The proposed regulations expanded the section 338(h)(10)
model to include fully taxable distributions and section 355(d)(2) and
(e)(2) distributions. All of these transactions involve a basic taxable
event relating to target's stock that is disregarded and in its place a
sale of target's assets takes place.
Commenters asked the IRS and Treasury Department to extend a
section 336(e) election to transactions in which the corporate level of
tax is duplicated by other transactions, for example section 351
exchanges or certain tax-free reorganizations, so that the section
336(e) election can be used to turn two potential levels of tax into
one. Commenters cited language from the legislative history to section
336(e), which discusses a section 336(e) election in both the context
of General Utilities repeal and the desire to avoid multiple levels of
corporate tax. ``This provision offers taxpayers relief from a
potential multiple taxation at the corporate level of the same economic
gain, which may result when a transfer of appreciated corporate stock
is taxed without providing a corresponding step-up in basis of the
assets of the corporation.'' H.R. Conf. Rep. No. 841, 99th Cong., 2d
Sess., Vol. II, 198, 204 (1986) [1986-3 CB, Vol. 4, 198, 204].
The IRS and Treasury Department believe that the commenters have
raised some valid concerns and have considered whether the scope of the
regulations should be broadened to include certain non-taxable
transactions and if so, how the regulations would address those
transactions. The issues involved are very complex. The IRS and
Treasury Department believe that addressing these concerns in these
final regulations would significantly delay the finalization of these
regulations, thus preventing taxpayers whose transactions are within
the scope of the proposed regulations from making a section 336(e)
election until the rules and regulations, if any, for non-taxable
transactions are also promulgated. Such delay would not be in the best
interests of taxpayers as a whole. Accordingly, these final regulations
do not permit an election to be made in non-taxable transfers of target
stock. However, the IRS and Treasury Department will continue to study
this issue and may address the issue in future guidance. We welcome any
comments concerning this issue, including recommendations not just on
the scope of the regulations, but on specific means and models for
implementing such suggestions.
J. International Provisions
1. Application to Foreign Targets
The proposed regulations do not apply to transactions in which
either seller or target is a foreign corporation. Comments were
requested regarding how the proposed regulations should be modified to
take into account the policies of international tax provisions if the
proposed regulations were extended to apply to foreign sellers and/or
foreign targets. The IRS and the Treasury Department received comments
in response to this request. For reasons similar to those discussed
concerning extending the scope of these regulations to non-taxable
transactions, these final regulations retain the requirements in the
proposed regulations that seller and target must be domestic
corporations. However, the IRS and the Treasury Department will
continue to study the application of section 336(e) to transactions in
which either seller or target is a foreign corporation and may consider
expanding the scope of the regulations to address these transactions in
future guidance.
2. Allocation of Foreign Taxes Paid
The proposed regulations provide that if a section 336(e) election
is made and target's taxable year under foreign law (if any) does not
close at the end of the disposition date, foreign income taxes paid by
new target attributable to the foreign taxable income earned by target
during such foreign taxable year are allocated to old target and new
target under the principles of Sec. 1.1502-76(b). The proposed rule is
consistent with a similar rule in Sec. 1.338-9(d) for allocating
foreign tax paid by a target that is acquired in a transaction that is
treated as an asset acquisition pursuant to an election under section
338 if the foreign taxable year of target does not close at the end of
the acquisition date. In addition, regulations under section 901, which
were published on February 14, 2012, provide foreign tax allocation
rules, consistent with Sec. 1.338-9(d), for certain changes in
ownership of a partnership or disregarded entity during the entity's
foreign taxable year. See Sec. 1.901-2(f)(4). The final regulations at
Sec. 1.336-2(g)(3)(ii) reflect modifications made to achieve
consistency with Sec. 1.901-2(f)(4). The regulations also provide that
if target holds an interest in a disregarded entity or partnership, the
rules of Sec. 1.901-2(f)(4) apply with respect to foreign tax imposed
at the entity level on the income of such entities. The IRS and
Treasury Department intend to issue future guidance that will make
similar modifications to Sec. 1.338-9(d).
Section 212 of the legislation commonly referred to as the
Education Jobs and Medicaid Assistance Act of 2010, enacted on August
10, 2010 (Pub. L. 111-226), added section 901(m) to the Code. Section
901(m)(1) provides, in part, that in the case of a covered asset
acquisition, the disqualified portion of any foreign income taxes
determined with respect to the income or gain attributable to a
relevant foreign asset shall not be taken into account in determining
the foreign tax credit allowed under section 901(a). Section
901(m)(2)(B) defines a covered asset acquisition to include any
transaction that is treated as an acquisition of assets for U.S. income
tax purposes and as the acquisition of stock of a corporation (or is
disregarded) for purposes of a foreign income tax. Because a section
336(e) election for target is treated as an acquisition of assets for
U.S. income tax purposes, and is treated as the acquisition of stock of
a corporation (or is disregarded in the case of tiered section 336(e)
elections) for foreign tax purposes, a section 336(e) election for a
target corporation is a covered asset acquisition. See Staff of the
Joint Committee on Taxation, Technical Explanation of the Revenue
Provisions of the Senate Amendment to the House Amendment to the Senate
Amendment to H.R. 1586, Scheduled for Consideration by the House of
Representatives on August 10, 2010, at 13, footnote 55 (August 10,
2010). Accordingly, the final regulations contain a cross-reference to
the rules under section 901(m), which, for example, could apply if
target has foreign branch operations.
K. Retained Stock
The proposed regulations provide that if seller retains any stock
in target after the 12-month disposition period, seller
[[Page 28474]]
is treated as purchasing the stock so retained on the day after the
disposition date. The proposed regulations provide the holding period
and purchase price (and thus the basis) of the retained stock. The
regulations under Sec. 1.338(h)(10)-1 provide a similar rule
concerning retained stock, with the exception that the Sec.
1.338(h)(10)-1 rule only requires that the stock be retained after the
acquisition date. Under the proposed regulations, if seller sells,
exchanges, or distributes less than all of its stock prior to the
disposition date, but sells, exchanges, or distributes additional stock
after the disposition date but before the end of the 12-month
disposition period, the regulations are silent as to holding period and
purchase price (and thus the basis) of such stock. If the later
transaction is part of the qualified stock disposition, the basis and
holding period may not be relevant, because no gain or loss is
recognized on that transaction. However, if the stock is transferred in
a transaction not part of the qualified stock disposition, such as a
sale to a related person, the basis and holding period will be
relevant. After considering this matter, the IRS and Treasury
Department have determined that the rule in the Sec. 1.338(h)(10)-1
regulations, providing that stock is retained if seller owns the stock
after the acquisition date, should be adopted by the regulations under
section 336(e). Accordingly, the final regulations modify the rule of
the proposed regulations, so that stock is retained if owned by seller
after the disposition date.
L. Consistency Rules
The proposed regulations generally follow the structure and
policies of section 338(h)(10), including the application of the
consistency rules of Sec. 1.338-8. In general, Sec. 1.338-8 provides
that if (1) a purchasing corporation (or an affiliate) acquires an
asset meeting certain requirements from target (or a subsidiary of
target) in a sale during the target consistency period, (2) gain from
the sale is reflected in the basis of target stock as of the target
acquisition date, and (3) the purchasing corporation acquires stock of
target in a qualified stock purchase (but does not make a section 338
election), then the purchasing corporation is required to take a
carryover basis in the acquired asset.
Commenters have asked how the consistency rules apply to qualified
stock dispositions. Commenters expressed concern that although Sec.
1.338-8(b)(1)(iii) requires that the same corporate purchaser (or an
affiliate) acquire both stock of target and an asset of target (or a
subsidiary of target), because, unlike section 338, section 336(e) does
not require a single corporate purchaser of 80 percent of the stock of
target, the consistency rules could apply to any purchase of an asset
of target (or a subsidiary of target) if there was also a qualified
stock disposition of target, regardless of whether the purchaser of the
asset was also the purchaser of target stock. That is, the regulations
would be unnecessarily broad. Alternatively, the regulations could be
viewed as too narrow because the consistency rules of Sec. 1.338-8, by
their terms, only apply to corporate purchasers.
The IRS and Treasury Department agree with the commenters' concerns
about the potential breadth of the consistency rules as applied to
section 336(e). We do not believe that the purposes of the consistency
rules mandate a carryover basis for an asset unless the same person (or
a related person) acquires both the asset of the target (or subsidiary
of target) and more than a minimal amount of the stock of target. In
addition, it would be inappropriate to limit the consistency rules for
purposes of section 336(e) to corporate purchasers. Accordingly, the
final regulations provide that the consistency rules apply to an asset
only if the asset is owned, immediately after its acquisition and on
the disposition date, by a person (or by a related person to such a
person) that acquires five percent or more, by value, of the stock of
target in a qualified stock disposition.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866, as
supplemented by Executive Order 13563. Therefore, a regulatory
assessment is not required. Further, it is hereby certified that these
final regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that these regulations do not have a substantial economic
impact because they merely provide for an election in the context of
certain sales, exchanges, and distributions of stock of corporations.
The collections of information may affect small businesses if the stock
of a corporation that is a small entity is disposed of in a qualified
stock disposition. The regulations permit an election to be filed in
order to treat a stock sale as an asset sale, and impose the same type
of requirements on small businesses as section 338(h)(10). The
professional skills that would be necessary to make the election would
be the same as those required to prepare a return for the small
business. Accordingly, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code, these final regulations, as
well as the proposed regulations preceding these final regulations,
were submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business, and no
comments were received.
Drafting Information
The principal author of these regulations is Mark J. Weiss of the
Office of Associate Chief Counsel (Corporate). Other personnel from the
IRS and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.336-1 is also issued under 26 U.S.C. 336. * * *
Section 1.336-2 is also issued under 26 U.S.C. 336. * * *
Section 1.336-3 is also issued under 26 U.S.C. 336. * * *
Section 1.336-4 is also issued under 26 U.S.C. 336. * * *
Section 1.336-5 is also issued under 26 U.S.C. 336. * * *
0
Par. 2. Sections 1.336-0 through 1.336-5 are added to read as follows:
Sec. 1.336-0 Table of contents.
This section lists captions contained in Sec. Sec. 1.336-1, 1.336-
2, 1.336-3, 1.336-4, and 1.336-5.
Sec. 1.336-1 General principles, nomenclature, and definitions for
a section 336(e) election.
(a) Overview.
(1) In general.
(2) Consistency rules.
(b) Definitions.
(1) Seller.
(2) Purchaser.
(3) Target; S corporation target; old target; new target.
(4) S corporation shareholders.
(5) Disposed of; disposition.
[[Page 28475]]
(i) In general.
(ii) Exception for disposition of stock in certain section 355
transactions.
(iii) Transactions with related persons.
(iv) No consideration paid.
(v) Disposed of stock reacquired by certain persons.
(6) Qualified stock disposition.
(i) In general.
(ii) Overlap with qualified stock purchase.
(A) In general.
(B) Exception.
(7) 12-month disposition period.
(8) Disposition date.
(9) Disposition date assets.
(10) Domestic corporation.
(11) Section 336(e) election.
(12) Related persons.
(13) Liquidation.
(14) Deemed asset disposition.
(15) Deemed disposition tax consequences.
(16) 80-percent purchaser.
(17) Recently disposed stock.
(18) Nonrecently disposed stock.
(c) Nomenclature.
Sec. 1.336-2 Availability, mechanics, and consequences of section
336(e) election.
(a) Availability of election.
(b) Deemed transaction.
(1) Dispositions not described in section 355(d)(2) or (e)(2).
(i) Old target--deemed asset disposition.
(A) In general.
(B) Gains and losses.
(1) Gains.
(2) Losses.
(i) In general.
(ii) Stock distributions.
(iii) Amount and allocation of disallowed loss.
(iv) Tiered targets.
(3) Examples.
(C) Tiered targets.
(ii) New target--deemed purchase.
(iii) Old target and seller--deemed liquidation.
(A) In general.
(B) Tiered targets.
(iv) Seller--distribution of target stock.
(v) Seller--retention of target stock.
(2) Dispositions described in section 355(d)(2) or (e)(2).
(i) Old target--deemed asset disposition.
(A) In general.
(1) Old target not deemed to liquidate.
(2) Exception.
(B) Gains and losses.
(1) Gains.
(2) Losses.
(i) In general.
(ii) Stock distributions.
(iii) Amount and allocation of disallowed loss.
(iv) Tiered targets.
(3) Examples.
(C) Tiered targets.
(ii) Old target--deemed purchase.
(A) In general.
(B) Tiered targets.
(C) Application of section 197(f)(9), section 1091, and other
provisions to old target.
(iii) Seller--distribution of target stock.
(A) In general.
(B) Tiered targets.
(iv) Seller--retention of target stock.
(v) Qualification under section 355.
(vi) Earnings and profits.
(c) Purchaser.
(d) Minority shareholders.
(1) In general.
(2) Sale, exchange, or distribution of target stock by a
minority shareholder.
(3) Retention of target stock by a minority shareholder.
(e) Treatment consistent with an actual asset disposition.
(f) Treatment of target under other provisions of the Internal
Revenue Code.
(g) Special rules.
(1) Target as two corporations.
(2) Treatment of members of a consolidated group.
(3) International provisions.
(i) Source and foreign tax credit.
(ii) Allocation of foreign taxes.
(A) General rule.
(B) Taxes imposed on partnerships and disregarded entities.
(iii) Disallowance of foreign tax credits under section 901(m).
(h) Making the section 336(e) election.
(1) Consolidated group.
(2) Non-consolidated/non-S corporation target.
(3) S corporation target.
(4) Tiered targets.
(5) Section 336(e) election statement.
(i) In general.
(ii) Target subsidiaries.
(6) Contents of section 336(e) election statement.
(7) Asset Allocation Statement.
(8) Examples.
(i) [Reserved].
(j) Protective section 336(e) election.
(k) Examples.
Sec. 1.336-3 Aggregate deemed asset disposition price; various
aspects of taxation of the deemed asset disposition.
(a) Scope.
(b) Determination of ADADP.
(1) General rule.
(2) Time and amount of ADADP.
(i) Original determination.
(ii) Redetermination of ADADP.
(c) Grossed-up amount realized on the disposition of recently
disposed stock of target.
(1) Determination of amount.
(2) Example.
(d) Liabilities of old target.
(1) In general.
(2) Time and amount of liabilities.
(e) Deemed disposition tax consequences.
(f) Other rules apply in determining ADADP.
(g) Examples.
Sec. 1.336-4 Adjusted grossed-up basis.
(a) Scope.
(b) Modifications to the principles in Sec. 1.338-5.
(1) Purchasing corporation; purchaser.
(2) Acquisition date; disposition date.
(3) Section 338 election; section 338(h)(10) election; section
336(e) election.
(4) New target; old target.
(5) Recently purchased stock; recently disposed stock.
(6) Nonrecently purchased stock; nonrecently disposed stock.
(c) Gain recognition election.
(1) In general.
(2) 80-percent purchaser.
(3) Non-80-percent purchaser.
(4) Gain recognition election statement.
(d) Examples.
Sec. 1.336-5 Effective/applicability date.
Sec. 1.336-1 General principles, nomenclature, and definitions for a
section 336(e) election.
(a) Overview--(1) In general. Section 336(e) authorizes the
promulgation of regulations under which, in certain circumstances, a
sale, exchange, or distribution of the stock of a corporation may be
treated as an asset sale. This section and Sec. Sec. 1.336-2 through
1.336-5 provide the rules for and consequences of making such election.
This section provides the definitions and nomenclature. Generally,
except to the extent inconsistent with section 336(e), the results of
section 336(e) should coincide with those of section 338(h)(10).
Accordingly, to the extent not inconsistent with section 336(e) or
these regulations, the principles of section 338 and the regulations
under section 338 apply for purposes of these regulations. For example,
Sec. 1.338(h)(10)-1(d)(8), concerning the availability of the section
453 installment method, may apply with respect to section 336(e).
(2) Consistency rules. In general, the principles of Sec. 1.338-8,
concerning asset and stock consistency, apply with respect to section
336(e). However, for this purpose, the application of Sec. 1.338-
8(b)(1) is modified such that Sec. 1.338-8(b)(1)(iii) applies to an
asset if the asset is owned, immediately after its acquisition and on
the disposition date, by a person or by a related person (as defined in
Sec. 1.336-1(b)(12)) to a person that acquires, by sale, exchange,
distribution, or any combination thereof, five percent or more, by
value, of the stock of target in the qualified stock disposition.
(b) Definitions. For purposes of Sec. Sec. 1.336-1 through 1.336-5
(except as otherwise provided):
(1) Seller. The term seller means any domestic corporation that
makes a qualified stock disposition of stock of another corporation.
Seller includes both a transferor and a distributor of target stock.
Generally, all members of a consolidated group that dispose of target
stock are treated as a single seller. See Sec. 1.336-2(g)(2).
(2) Purchaser. The term purchaser means one or more persons that
acquire or receive the stock of another corporation in a qualified
stock disposition. A purchaser includes both a transferee and a
distributee of target stock.
[[Page 28476]]
(3) Target; S corporation target; old target; new target. The term
target means any domestic corporation the stock of which is sold,
exchanged, or distributed in a qualified stock disposition. An S
corporation target is a target that is an S corporation immediately
before the disposition date; any other target is a non-S corporation
target. Except as the context otherwise requires, a reference to target
includes a reference to an S corporation target. In the case of a
transaction not described in section 355(d)(2) or (e)(2), old target
refers to target for periods ending on or before the close of target's
disposition date and new target refers to target for subsequent
periods. In the case of a transaction described in section 355(d)(2) or
(e)(2), old target refers to target for periods ending on or before the
disposition date as well as for subsequent periods.
(4) S corporation shareholders. S corporation shareholders are the
S corporation target's shareholders. Unless otherwise provided, a
reference to S corporation shareholders refers both to S corporation
shareholders who dispose of and those who do not dispose of their S
corporation target stock.
(5) Disposed of; disposition--(i) In general. The term disposed of
refers to a transfer of stock in a disposition. The term disposition
means any sale, exchange, or distribution of stock, but only if--
(A) The basis of the stock in the hands of the purchaser is not
determined in whole or in part by reference to the adjusted basis of
such stock in the hands of the person from whom the stock is acquired
or under section 1014(a) (relating to property acquired from a
decedent);
(B) Except as provided in paragraph (b)(5)(ii) of this section, the
stock is not sold, exchanged, or distributed in a transaction to which
section 351, 354, 355, or 356 applies and is not sold, exchanged, or
distributed in any transaction described in regulations in which the
transferor does not recognize the entire amount of the gain or loss
realized in the transaction; and
(C) The stock is not sold, exchanged, or distributed to a related
person.
(ii) Exception for disposition of stock in certain section 355
transactions. Notwithstanding paragraph (b)(5)(i)(B) of this section, a
distribution of stock to a person who is not a related person in a
transaction in which the full amount of stock gain would be recognized
pursuant to section 355(d)(2) or (e)(2) shall be considered a
disposition.
(iii) Transactions with related persons. In determining whether
stock is sold, exchanged, or distributed to a related person, the
principles of section 338(h)(3)(C) and Sec. 1.338-3(b)(3) shall apply.
(iv) No consideration paid. Stock in target may be considered
disposed of if, under general principles of tax law, seller is
considered to sell, exchange, or distribute stock of target
notwithstanding that no amount may be paid for (or allocated to) the
stock.
(v) Disposed of stock reacquired by certain persons. Stock disposed
of by seller to another person under this section that is reacquired by
seller or a member of seller's consolidated group during the 12-month
disposition period shall not be considered as disposed of. Similarly,
stock disposed of by an S corporation shareholder to another person
under this section that is reacquired by the S corporation shareholder
or by a person related (within the meaning of paragraph (b)(12) of this
section) to the S corporation shareholder during the 12-month
disposition period shall not be considered as disposed of.
(6) Qualified stock disposition--(i) In general. The term qualified
stock disposition means any transaction or series of transactions in
which stock meeting the requirements of section 1504(a)(2) of a
domestic corporation is either sold, exchanged, or distributed, or any
combination thereof, by another domestic corporation or by the S
corporation shareholders in a disposition, within the meaning of
paragraph (b)(5) of this section, during the 12-month disposition
period.
(ii) Overlap with qualified stock purchase--(A) In general. Except
as provided in paragraph (b)(6)(ii)(B) of this section, a transaction
satisfying the definition of a qualified stock disposition under
paragraph (b)(6)(i) of this section, which also qualifies as a
qualified stock purchase (as defined in section 338(d)(3)), will not be
treated as a qualified stock disposition.
(B) Exception. If, as a result of the deemed sale of old target's
assets pursuant to a section 336(e) election, there would be, but for
paragraph (b)(6)(ii)(A) of this section, a qualified stock disposition
of the stock of a subsidiary of target, then paragraph (b)(6)(ii)(A)
shall not apply to the disposition of the stock of the subsidiary.
(7) 12-month disposition period. The term 12-month disposition
period means the 12-month period beginning with the date of the first
sale, exchange, or distribution of stock included in a qualified stock
disposition.
(8) Disposition date. The term disposition date means, with respect
to any corporation, the first day on which there is a qualified stock
disposition with respect to the stock of such corporation.
(9) Disposition date assets. Disposition date assets are the assets
of target held at the beginning of the day after the disposition date
(but see Sec. 1.338-1(d) (regarding certain transactions on the
disposition date)).
(10) Domestic corporation. The term domestic corporation has the
same meaning as in Sec. 1.338-2(c)(9).
(11) Section 336(e) election. A section 336(e) election is an
election to apply section 336(e) to target. A section 336(e) election
is made by making an election for target under Sec. 1.336-2(h).
(12) Related persons. Two persons are related if stock of a
corporation owned by one of the persons would be attributed under
section 318(a), other than section 318(a)(4), to the other. However,
neither section 318(a)(2)(A) nor section 318(a)(3)(A) apply to
attribute stock ownership from a partnership to a partner, or from a
partner to a partnership, if such partner owns, directly or indirectly,
interests representing less than five percent of the value of the
partnership.
(13) Liquidation. Any reference to a liquidation is treated as a
reference to the transfer described in Sec. 1.336-2(b)(1)(iii)
notwithstanding its ultimate characterization for Federal income tax
purposes.
(14) Deemed asset disposition. The deemed sale of old target's
assets is, without regard to its characterization for Federal income
tax purposes, referred to as the deemed asset disposition.
(15) Deemed disposition tax consequences. Deemed disposition tax
consequences refers to, in the aggregate, the Federal income tax
consequences (generally, the income, gain, deduction, and loss) of the
deemed asset disposition. Deemed disposition tax consequences also
refers to the Federal income tax consequences of the transfer of a
particular asset in the deemed asset disposition.
(16) 80-percent purchaser. An 80-percent purchaser is any purchaser
that, after application of the attribution rules of section 318(a),
other than section 318(a)(4), owns 80 percent or more of the voting
power or value of target stock.
(17) Recently disposed stock. The term recently disposed stock
means any stock in target that is not held by seller, a member of
seller's consolidated group, or an S corporation shareholder
immediately after the close of the disposition date and that was
disposed of by seller, a member of seller's consolidated group, or an S
corporation
[[Page 28477]]
shareholder during the 12-month disposition period.
(18) Nonrecently disposed stock. The term nonrecently disposed
stock means stock in target that is held on the disposition date by a
purchaser or a person related (as described in Sec. 1.336-1(b)(12)) to
the purchaser who owns, on the disposition date, with the application
of section 318(a), other than section 318(a)(4), at least 10 percent of
the total voting power or value of the stock of target and that is not
recently disposed stock.
(c) Nomenclature. For purposes of Sec. Sec. 1.336-1 through 1.336-
5, except as otherwise provided, Parent, Seller, Target, Sub, S
Corporation Target, and Target Subsidiary are domestic corporations and
A, B, C, and D are individuals, none of whom are related to Parent,
Seller, Target, Sub, S Corporation Target, Target Subsidiary, or each
other.
Sec. 1.336-2 Availability, mechanics, and consequences of section
336(e) election.
(a) Availability of election. A section 336(e) election is
available if seller or S corporation shareholder(s) dispose of stock of
another corporation (target) in a qualified stock disposition (as
defined in Sec. 1.336-1(b)(6)). A section 336(e) election is
irrevocable. A section 336(e) election is not available for
transactions described in section 336(e) that do not constitute
qualified stock dispositions.
(b) Deemed transaction--(1) Dispositions not described in section
355(d)(2) or (e)(2)--(i) Old target--deemed asset disposition--(A) In
general. This paragraph (b)(1) provides the Federal income tax
consequences of a section 336(e) election made with respect to a
qualified stock disposition not described, in whole or in part, in
section 355(d)(2) or (e)(2). For the Federal income tax consequences of
a section 336(e) election made with respect to a qualified stock
disposition described, in whole or in part, in section 355(d)(2) or
(e)(2), see paragraph (b)(2) of this section. In general, if a section
336(e) election is made, seller (or S corporation shareholders) are
treated as not having sold, exchanged, or distributed the stock
disposed of in the qualified stock disposition. Instead, old target is
treated as selling its assets to an unrelated person in a single
transaction at the close of the disposition date (but before the deemed
liquidation described in paragraph (b)(1)(iii) of this section) in
exchange for the aggregate deemed asset disposition price (ADADP) as
determined under Sec. 1.336-3. ADADP is allocated among the
disposition date assets in the same manner as the aggregate deemed sale
price (ADSP) is allocated under Sec. Sec. 1.338-6 and 1.338-7 in order
to determine the amount realized from each of the sold assets. Old
target realizes the deemed disposition tax consequences from the deemed
asset disposition before the close of the disposition date while old
target is owned by seller or the S corporation shareholders. If old
target is an S corporation target, old target's S election continues in
effect through the close of the disposition date (including the time of
the deemed asset disposition and the deemed liquidation)
notwithstanding section 1362(d)(2)(B). Also, if old target is an S
corporation target (but not a qualified subchapter S subsidiary), any
direct or indirect subsidiaries of old target that old target has
elected to treat as qualified subchapter S subsidiaries under section
1361(b)(3) remain qualified subchapter S subsidiaries through the close
of the disposition date.
(B) Gains and losses--(1) Gains. Except as provided in Sec.
1.338(h)(10)-1(d)(8) (regarding the installment method), old target
shall recognize all of the gains realized on the deemed asset
disposition.
(2) Losses--(i) In general. Except as provided in paragraphs
(b)(1)(i)(B)(2)(ii), (iii), and (iv) of this section, old target shall
recognize all of the losses realized on the deemed asset disposition.
(ii) Stock distributions. Notwithstanding paragraphs (b)(1)(i)(A)
and (b)(1)(iii)(A) of this section, for purposes of determining the
amount of target's losses that are disallowed on the deemed asset
disposition, seller is still treated as selling, exchanging, or
distributing its target stock disposed of in the 12-month disposition
period. If target's losses realized on the deemed sale of all of its
assets exceed target's gains realized (a net loss), the portion of such
net loss attributable to a distribution of target stock during the 12-
month disposition period is disallowed. The total amount of disallowed
loss and the allocation of disallowed loss is determined in the manner
provided in paragraphs (b)(1)(i)(B)(2)(iii) and (iv) of this section.
(iii) Amount and allocation of disallowed loss. The total
disallowed loss pursuant to paragraph (b)(1)(i)(B)(2)(ii) of this
section shall be determined by multiplying the net loss realized on the
deemed asset disposition by the disallowed loss fraction. The numerator
of the disallowed loss fraction is the value of target stock,
determined on the disposition date, distributed by seller during the
12-month disposition period, whether or not a part of the qualified
stock disposition (for example, stock distributed to a related person),
and the denominator of the disallowed loss fraction is the sum of the
value of target stock, determined on the disposition date, disposed of
by sale or exchange in the qualified stock disposition during the 12-
month disposition period and the value of target stock, determined on
the disposition date, distributed by seller during the 12-month
disposition period, whether or not a part of the qualified stock
disposition. The amount of the disallowed loss allocated to each asset
disposed of in the deemed asset disposition is determined by
multiplying the total amount of the disallowed loss by the loss
allocation fraction. The numerator of the loss allocation fraction is
the amount of loss realized with respect to the asset and the
denominator of the loss allocation fraction is the sum of the amount of
losses realized with respect to each loss asset disposed of in the
deemed asset disposition. To the extent old target's losses from the
deemed asset disposition are not disallowed under this paragraph, such
losses may be disallowed under other provisions of the Internal Revenue
Code or general principles of tax law, in the same manner as if such
assets were actually sold to an unrelated person.
(iv) Tiered targets. If an asset of target is the stock of a
subsidiary corporation of target for which a section 336(e) election is
made, any gain or loss realized on the deemed sale of the stock of the
subsidiary corporation is disregarded in determining the amount of
disallowed loss. For purposes of determining the amount of disallowed
loss on the deemed asset disposition by a subsidiary of target for
which a section 336(e) election is made, the amount of subsidiary stock
deemed sold in the deemed asset disposition of target's assets
multiplied by the disallowed loss fraction with respect to the
corporation that is deemed to have disposed of stock of the subsidiary
is considered to have been distributed. In determining the disallowed
loss fraction with respect to the deemed asset disposition of any
subsidiary of target, disregard any sale, exchange, or distribution of
its stock that was made after the disposition date if such stock was
included in the deemed asset disposition of the corporation deemed to
have disposed of the subsidiary stock.
(3) Examples. The following examples illustrate this paragraph
(b)(1)(i)(B).
Example 1. (i) Facts. Parent owns 60 of the 100 outstanding
shares of the common stock of Seller, Seller's only class of stock
outstanding. The remaining 40 shares of the common stock of Seller
are held by shareholders unrelated to Seller or each
[[Page 28478]]
other. Seller owns 95 of the 100 outstanding shares of Target common
stock, and all 100 shares of Target preferred stock that is
described in section 1504(a)(4). The remaining 5 shares of Target
common stock are owned by A. On January 1 of Year 1, Seller sells 72
shares of Target common stock to B for $3,520. On July 1 of Year 1,
Seller distributes 12 shares of Target common stock to Parent and 8
shares to its unrelated shareholders in a distribution described in
section 301. Seller retains 3 shares of Target common stock and all
100 shares of Target preferred stock immediately after July 1. The
value of Target common stock on July 1 is $60 per share. The value
of Target preferred stock on July 1 is $36 per share. Target has
three assets, Asset 1, a Class IV asset, with a basis of $1,776 and
a fair market value of $2,000, Asset 2, a Class V asset, with a
basis of $2,600 and a fair market value of $2,750, and Asset 3, a
Class V asset, with a basis of $3,900 and a fair market value of
$3,850. Seller incurred no selling costs on the sale of the 72
shares of Target common stock to B. Target has no liabilities. A
section 336(e) election is made.
(ii) Consequences--Deemed Asset Sale. Because at least 80
percent ((72 + 8)/100) of Target stock, other than stock described
in section 1504(a)(4), was disposed of (within the meaning of Sec.
1.336-1(b)(5)) by Seller during the 12-month disposition period, a
qualified stock disposition occurred. July 1 of Year 1, the first
day on which there was a qualified stock disposition with respect to
Target stock, is the disposition date. Accordingly, pursuant to the
section 336(e) election, for Federal income tax purposes, Seller
generally is not treated as selling the 72 shares of Target common
stock sold to B or distributing the 8 shares of Target common stock
distributed to its unrelated shareholders. However, Seller is still
treated as distributing the 12 shares of Target common stock
distributed to Parent because Seller and Parent are related persons
within the meaning of Sec. 1.336-1(b)(12) and accordingly the 12
shares are not part of the qualified stock disposition. Target is
treated as if, on July 1, it sold all of its assets to an unrelated
person in exchange for the ADADP, $8,000, which is allocated $2,000
to Asset 1, $2,500 to Asset 2, and $3,500 to Asset 3 (see Example 1
of Sec. 1.336-3(g) for the determination and allocation of ADADP).
(iii) Consequences--Amount and Allocation of Disallowed Loss.
Old Target realized a net loss of $276 on the deemed asset
disposition ($224 gain realized on Asset 1, $100 loss realized on
Asset 2, and $400 loss realized on Asset 3). However, 20 shares of
Target common stock were distributed by Seller during the 12-month
disposition period (8 shares distributed to Seller's unrelated
shareholders in the qualified stock disposition plus 12 shares
distributed to Parent that were not part of the qualified stock
disposition). Therefore, because there was a net loss realized on
the deemed asset disposition and a portion of the stock of Target
was distributed during the 12-month disposition period, a portion of
the loss on the deemed sale of each of Target's loss assets is
disallowed. The total amount of disallowed loss equals $60 ($276 net
loss realized on the deemed disposition of Assets 1, 2, and 3
multiplied by the disallowed loss fraction, the numerator of which
is $1,200, the value on July 1, the disposition date, of the 20
shares of Target common stock distributed during the 12-month
disposition period, and the denominator of which is $5,520, the sum
of $4,320, the value on July 1 of the 72 shares of Target common
stock sold to B and $1,200, the value on July 1 of the 20 shares of
Target common stock distributed during the 12-month disposition
period). The portion of the disallowed loss allocated to Asset 2 is
$12 ($60 total disallowed loss multiplied by the loss allocation
fraction, the numerator of which is $100, the loss realized on the
deemed disposition of Asset 2 and the denominator of which is $500,
the sum of the losses realized on the deemed disposition of Assets 2
and 3). The portion of the disallowed loss allocated to Asset 3 is
$48 ($60 total disallowed loss multiplied by the loss allocation
fraction, the numerator of which is $400, the loss realized on the
deemed disposition of Asset 3 and the denominator of which is $500,
the sum of the losses realized on the deemed disposition of Assets 2
and 3). Accordingly, Old Target recognizes $224 of gain on Asset 1,
recognizes $88 of loss on Asset 2 (realized loss of $100 less
allocated disallowed loss of $12), and recognizes $352 of loss on
Asset 3 (realized loss of $400 less allocated disallowed loss of
$48) or a recognized net loss of $216 on the deemed asset
disposition.
Example 2. (i) Facts. The facts are the same as in Example 1
except that Asset 2 is the stock of Target Subsidiary, a corporation
of which Target owns 100 of the 110 shares of common stock, the only
outstanding class of Target Subsidiary stock. The remaining 10
shares of Target Subsidiary stock are owned by D. The value of
Target Subsidiary stock on July 1 is $27.50 per share. Target
Subsidiary has two assets, Asset 4, a Class IV asset, with a basis
of $800 and a fair market value of $1,000, and Asset 5, a Class IV
asset, with a basis of $2,200 and a fair market value of $2,025.
Target Subsidiary has no liabilities. A section 336(e) election with
respect to Target Subsidiary is also made.
(ii) Consequences--Target. The ADADP on the deemed sale of
Target's assets is determined and allocated in the same manner as in
Example 1. However, Target's loss realized on the deemed sale of
Target Subsidiary is disregarded in determining the amount of
disallowed loss on the deemed asset disposition of Target's assets.
Thus, the net loss is only $176 ($224 gain realized on Asset 1 and
$400 loss realized on Asset 3), and the amount of disallowed loss
equals $38.26 ($176 net loss multiplied by the disallowed loss
fraction with respect to Target stock, $1,200/$5,520). The entire
disallowed loss is allocated to Asset 3.
(iii) Consequences--Target Subsidiary. The deemed sale of the
stock of Target Subsidiary is disregarded and instead Target
Subsidiary is deemed to sell all of its assets to an unrelated
person. The ADADP on the deemed asset disposition of Target
Subsidiary is $2,750, which is allocated $909 to Asset 4 and $1,841
to Asset 5 (see Example 2 of Sec. 1.336-3(g) for the determination
and allocation of ADADP). Old Target Subsidiary realized $109 of
gain on Asset 4 and realized $359 of loss on Asset 5 in the deemed
asset disposition. Although Old Target Subsidiary realized a net
loss of $250 on the deemed asset disposition ($109 gain on Asset 4
and $359 loss on Asset 5), a portion of this net loss is disallowed
because a portion of Target stock was distributed during the 12-
month disposition period. For purposes of determining the amount of
disallowed loss on the deemed sale of the assets of Target
Subsidiary, the portion of the 100 shares of Target Subsidiary stock
deemed sold by Target pursuant to the section 336(e) election for
Target Subsidiary multiplied by the disallowed loss fraction with
respect to Target stock is treated as having been distributed. Thus,
for purposes of determining the amount of disallowed loss on the
deemed asset disposition of Target Subsidiary's assets, 21.74 shares
of Target Subsidiary stock (100 shares of Target Subsidiary stock
owned by Target multiplied by the disallowed loss fraction with
respect to Target stock, $1,200/$5,520) are treated as having been
distributed by Target during the 12-month disposition period. The
total amount of disallowed loss with respect to the deemed asset
disposition of Target Subsidiary's assets equals $54 ($250 net loss
realized on the deemed disposition of Assets 4 and 5 multiplied by
the disallowed loss fraction with respect to Target Subsidiary, the
numerator of which is $598, the value on July 1, the disposition
date, of the 21.74 shares of Target Subsidiary stock deemed
distributed during the 12-month disposition period (21.74 shares x
$27.50) and the denominator of which is $2,750 (the sum of $2,152,
the value on July 1 of the 78.26 shares of Target Subsidiary stock
deemed sold in the qualified stock disposition pursuant to the
section 336(e) election for Target Subsidiary (78.26 shares x
$27.50) and $598, the value on July 1 of the 21.74 shares of Target
Subsidiary stock deemed distributed during the 12-month disposition
period)). (The 10 shares of Target Subsidiary owned by D are not
part of the qualified stock disposition and therefore are not
included in the denominator of the disallowed loss fraction.) All of
the disallowed loss is allocated to Asset 5, the only loss asset.
Accordingly, Old Target Subsidiary recognizes $109 of gain on Asset
4 and recognizes $305 of loss on Asset 5 (realized loss of $359 less
disallowed loss of $54) or a net loss of $196 on the deemed asset
disposition.
Example 3. (i) Facts. The facts are the same as in Example 2
except that on August 1 of Year 1, Target sells 50 of its shares of
Target Subsidiary stock and distributes the remaining 50 shares.
(ii) Consequences. Because the 100 shares of Target Subsidiary
stock that were sold and distributed on August 1 were deemed
disposed of on July 1 in the deemed asset disposition of Target, the
August 1 sale and distribution of Target Subsidiary stock are
disregarded in determining the amount of disallowed loss.
Accordingly, the consequences are the same as in Example 2.
(C) Tiered targets. (i) In the case of parent-subsidiary chains of
corporations
[[Page 28479]]
making section 336(e) elections, the deemed asset disposition of a
higher-tier subsidiary is considered to precede the deemed asset
disposition of a lower-tier subsidiary.
(ii) New target--deemed purchase. New target is treated as
acquiring all of its assets from an unrelated person in a single
transaction at the close of the disposition date (but before the deemed
liquidation) in exchange for an amount equal to the adjusted grossed-up
basis (AGUB) as determined under Sec. 1.336-4. New target allocates
the consideration deemed paid in the transaction in the same manner as
new target would under Sec. Sec. 1.338-6 and 1.338-7 in order to
determine the basis in each of the purchased assets. If new target
qualifies as a small business corporation within the meaning of section
1361(b) and wants to be an S corporation, a new election under section
1362(a) must be made. Notwithstanding paragraph (b)(1)(iii) of this
section (deemed liquidation of old target), new target remains liable
for the tax liabilities of old target (including the tax liability for
the deemed disposition tax consequences). For example, new target
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 target joined in the same consolidated
return. See Sec. 1.1502-6(a).
(iii) Old target and seller--deemed liquidation--(A) In general. If
old target is an S corporation, S corporation shareholders (whether or
not they sell or exchange their stock) take their pro rata share of the
deemed disposition tax consequences into account under section 1366 and
increase or decrease their basis in target stock under section 1367.
Old target and seller (or S corporation shareholders) are treated as
if, before the close of the disposition date, after the deemed asset
disposition described in paragraph (b)(1)(i)(A) of this section, and
while target is owned by seller or S corporation shareholders, old
target transferred all of the consideration deemed received from new
target in the deemed asset disposition to seller or S corporation
shareholders, any S corporation election for old target terminated, and
old target ceased to exist. The transfer from old target to seller or S
corporation shareholders 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 of its stock, one of a series of
distributions in complete cancellation or redemption of all of 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 sections 331 or 332 and
sections 336 or 337 apply.
(B) Tiered targets. In the case of parent-subsidiary chains of
corporations making section 336(e) elections, the deemed liquidation of
a lower-tier subsidiary corporation is considered to precede the deemed
liquidation of a higher-tier subsidiary.
(iv) Seller--distribution of target stock. In the case of a
distribution of target stock in a qualified stock disposition, seller
(the distributor) is deemed to purchase from an unrelated person, on
the disposition date, immediately after the deemed liquidation of old
target, the amount of stock distributed in the qualified stock
disposition (new target stock) and to have distributed such new target
stock to its shareholders. Seller recognizes no gain or loss on the
distribution of such stock.
(v) Seller--retention of target stock. If seller or an S
corporation shareholder retains any target stock after the disposition
date, seller or the S corporation shareholder is treated as purchasing
the stock so retained from an unrelated person (new target stock) on
the day after the disposition date for its fair market value. The
holding period for the retained stock starts on the day after the
disposition date. For purposes of this paragraph (b)(1)(v), the fair
market value of all of the target stock equals the grossed-up amount
realized on the sale, exchange, or distribution of recently disposed
stock of target (see Sec. 1.336-3(c)).
(2) Dispositions described in section 355(d)(2) or (e)(2)--(i) Old
target--deemed asset disposition--(A) In general. This paragraph (b)(2)
provides the Federal income tax consequences of a section 336(e)
election made with respect to a qualified stock disposition resulting,
in whole or in part, from a disposition described in section 355(d)(2)
or (e)(2). Old target is treated as selling its assets to an unrelated
person in a single transaction at the close of the disposition date in
exchange for the ADADP as determined under Sec. 1.336-3. ADADP is
allocated among the disposition date assets in the same manner as ADSP
is allocated under Sec. Sec. 1.338-6 and 1.338-7 in order to determine
the amount realized from each of the sold assets. Old target realizes
the deemed disposition tax consequences from the deemed asset
disposition before the close of the disposition date while old target
is owned by seller.
(1) Old target not deemed to liquidate. In general, unlike a
section 338(h)(10) election or a section 336(e) election made with
respect to a qualified stock disposition not described, in whole or in
part, in section 355(d)(2) or (e)(2), old target is not deemed to
liquidate after the deemed asset disposition.
(2) Exception. If an election is made under Sec. 1.1502-
13(f)(5)(ii)(E), then solely for purposes of Sec. 1.1502-
13(f)(5)(ii)(C), immediately after the deemed asset disposition of old
target, old target is deemed to liquidate into seller.
(B) Gains and losses--(1) Gains. Except as provided in Sec.
1.338(h)(10)-1(d)(8) (regarding the installment method), old target
shall recognize all of the gains realized on the deemed asset
disposition.
(2) Losses--(i) In general. Except as provided in paragraphs
(b)(2)(i)(B)(2)(ii), (iii), and (iv) of this section, old target shall
recognize all of the losses realized on the deemed asset disposition.
(ii) Stock distributions. If target's losses realized on the deemed
sale of all of its assets exceed target's gains realized (a net loss),
the portion of such net loss attributable to a distribution of target
stock during the 12-month disposition period is disallowed. The total
amount of disallowed loss and the allocation of disallowed loss is
determined in the manner provided in paragraphs (b)(2)(i)(B)(2)(iii)
and (iv) of this section.
(iii) Amount and allocation of disallowed loss. The total
disallowed loss pursuant to paragraph (b)(2)(i)(B)(2)(ii) of this
section shall be determined by multiplying the net loss realized on the
deemed asset disposition by the disallowed loss fraction. The numerator
of the disallowed loss fraction is the value of target stock,
determined on the disposition date, distributed by seller during the
12-month disposition period, whether or not a part of the qualified
stock disposition (for example, stock distributed to a related person),
and the denominator of the disallowed loss fraction is the sum of the
value of target stock, determined on the disposition date, disposed of
by sale or exchange in the qualified stock disposition during the 12-
month disposition period and the value of target stock, determined on
the disposition date, distributed by seller during the 12-month
disposition period, whether or not a part of the qualified stock
disposition. The amount of the
[[Page 28480]]
disallowed loss allocated to each asset disposed of in the deemed asset
disposition is determined by multiplying the total amount of the
disallowed loss by the loss allocation fraction. The numerator of the
loss allocation fraction is the amount of loss realized with respect to
the asset and the denominator of the loss allocation fraction is the
sum of the amount of losses realized with respect to each loss asset
disposed of in the deemed asset disposition. To the extent old target's
losses from the deemed asset disposition are not disallowed under this
paragraph, such losses may be disallowed under other provisions of the
Internal Revenue Code or general principles of tax law, in the same
manner as if such assets were actually sold to an unrelated person.
(iv) Tiered targets. If an asset of target is the stock of a
subsidiary corporation of target for which a section 336(e) election is
made, any gain or loss realized on the deemed sale of the stock of the
subsidiary corporation is disregarded in determining the amount of
disallowed loss. For purposes of determining the amount of disallowed
loss on the deemed asset disposition by a subsidiary of target for
which a section 336(e) election is made, see paragraph (b)(1)(i)(B)(2)
of this section.
(3) Examples. The following examples illustrate this paragraph
(b)(2)(i)(B).
Example 1. (i) Facts. Seller owns 90 of the 100 outstanding
shares of Target common stock, the only class of Target stock
outstanding. The remaining 10 shares of Target common stock are
owned by C. On January 1 of Year 1, Seller sells 10 shares of Target
common stock to D for $910. On July 1, in an unrelated transaction,
Seller distributes its remaining 80 shares of Target common stock to
its unrelated shareholders in a distribution described in section
355(d)(2) or (e)(2). On July 1, the value of Target common stock is
$100 per share. Target has three assets, Asset 1 with a basis of
$1,220, Asset 2 with a basis of $3,675, and Asset 3 with a basis of
$5,725. Seller incurred no selling costs on the sale of the 10
shares of Target common stock to D. Target has no liabilities. A
section 336(e) election is made.
(ii) Consequences. Because at least 80 percent of Target stock
((10 + 80)/100) was disposed of (within the meaning of Sec. 1.336-
1(b)(5)) by Seller during the 12-month disposition period, a
qualified stock disposition occurred. July 1 of Year 1, the first
day on which there was a qualified stock disposition with respect to
Target, is the disposition date. Accordingly, pursuant to the
section 336(e) election, for Federal income tax purposes, Target is
treated as if, on July 1, it sold all of its assets to an unrelated
person in exchange for the ADADP, $9,900, as determined under Sec.
1.336-3. Assume that the ADADP is allocated $2,000 to Asset 1,
$3,300 to Asset 2, and $4,600 to Asset 3 under Sec. 1.336-3. Old
Target realized a net loss of $720 on the deemed asset disposition
($780 gain realized on Asset 1, $375 loss realized on Asset 2, and
$1,125 loss realized on Asset 3). However, because a portion of
Target stock was distributed during the 12-month disposition period
and there was a net loss on the deemed asset disposition, a portion
of the loss on each of the loss assets is disallowed. The total
amount of disallowed loss equals $640 ($720 net loss realized on the
deemed disposition of Assets 1, 2, and 3 multiplied by the
disallowed loss fraction, the numerator of which is $8,000, the
value on July 1, the disposition date, of the 80 shares of Target
common stock distributed by Seller during the 12-month disposition
period, and the denominator of which is $9,000, the sum of $1,000,
the value on July 1 of the 10 shares of Target common stock sold to
D, and $8,000, the value on July 1 of the 80 shares of Target common
stock distributed by Seller during the 12-month disposition period).
The portion of the disallowed loss allocated to Asset 2 is $160
($640 total disallowed loss on the deemed asset disposition
multiplied by the loss allocation fraction, the numerator of which
is $375, the loss realized on the deemed disposition of Asset 2, and
the denominator of which is $1,500, the sum of the losses realized
on the deemed disposition of Assets 2 and 3). The portion of the
disallowed loss allocated to Asset 3 is $480 ($640 total disallowed
loss on the deemed asset disposition multiplied by the loss
allocation fraction, the numerator of which is $1,125, the loss
realized on the deemed disposition of Asset 3, and the denominator
of which is $1,500, the sum of the losses realized on the deemed
disposition of Assets 2 and 3). Accordingly, Old Target recognizes
$780 of gain on Asset 1, recognizes $215 of loss on Asset 2
(realized loss of $375 less allocated disallowed loss of $160), and
recognizes $645 of loss on Asset 3 (realized loss of $1,125 less
allocated disallowed loss of $480) or a recognized net loss of $80
on the deemed asset disposition.
Example 2. (i) Facts. The facts are the same as in Example 1
except that Asset 2 is 100 shares of common stock of Target
Subsidiary, a wholly-owned subsidiary of Target. The value of Target
Subsidiary common stock on July 1 is $40 per share. Target
Subsidiary has two assets, Asset 4 with a basis of $500 and Asset 5
with a basis of $3,000. Target Subsidiary has no liabilities. A
section 336(e) election is also made with respect to Target
Subsidiary.
(ii) Consequences--Target. The ADADP on the deemed sale of
Target's assets is determined and allocated in the same manner as in
Example 1. However, Old Target's loss realized on the deemed sale of
Target Subsidiary is disregarded in determining the amount of the
disallowed loss on the deemed asset disposition of Old Target's
assets. Thus, the realized net loss is only $345 ($780 gain on Asset
1 and $1,125 loss on Asset 3), and the amount of disallowed loss
equals $307, the $345 realized net loss multiplied by the disallowed
loss fraction with respect to Target stock, $8,000/$9,000. The
entire disallowed loss is allocated to Asset 3. Accordingly, Old
Target recognizes $780 of gain on Asset 1 and recognizes $818 of
loss on Asset 3 (realized loss of $1,125 less allocated disallowed
loss of $307) or a recognized net loss of $38 on the deemed asset
disposition.
(iii) Consequences--Target Subsidiary. Because the deemed sale
of Target Subsidiary is not a transaction described in section
355(d)(2) or (e)(2), the tax consequences of the deemed sale of
Target Subsidiary are determined under paragraph (b)(1) of this
section and not this paragraph (b)(2). The deemed sale of the stock
of Target Subsidiary is disregarded and instead Target Subsidiary is
deemed to sell all of its assets to an unrelated person. The ADADP
on the deemed asset disposition of Target Subsidiary as determined
under Sec. 1.336-3 is $3,300. Assume that the ADADP is allocated
$900 to Asset 4 and $2,400 to Asset 5 under Sec. 1.336-3. Old
Target Subsidiary realized a net loss of $200 on the deemed asset
disposition ($400 gain realized on Asset 4 and $600 loss realized on
Asset 5). However, because a portion of Target stock was distributed
during the 12-month disposition period, for purposes of determining
the amount of disallowed loss on the deemed sale of the assets of
Target Subsidiary, the portion of the 100 shares of Target
Subsidiary stock deemed sold pursuant to the section 336(e) election
for Target Subsidiary multiplied by the disallowed loss fraction
with respect to Target stock are treated as having been distributed.
Thus, for purposes of determining the amount of disallowed loss on
the deemed asset disposition of Target Subsidiary's assets, 88.89
shares of Target Subsidiary common stock (100 shares owned by Target
multiplied by the disallowed loss fraction with respect to Target
stock, $8,000/$9,000) are treated as distributed during the 12-month
disposition period. The total amount of disallowed loss with respect
to the deemed asset disposition of Target Subsidiary's assets equals
$177.78 ($200 net loss realized on the deemed disposition of Assets
4 and 5 multiplied by the disallowed loss fraction with respect to
Target Subsidiary, the numerator of which is $3,556, the value on
July 1, the disposition date, of the 88.89 shares of Target
Subsidiary common stock deemed distributed during the 12-month
disposition period (88.89 shares x $40) and the denominator of which
is $4,000 (the sum of $444, the value on July 1 of the 11.11 shares
of Target Subsidiary common stock deemed sold in the qualified stock
disposition pursuant to the section 336(e) election for Target
Subsidiary (11.11 shares x $40) and $3,556, the value on July 1 of
the 88.89 shares of Target Subsidiary common stock deemed
distributed during the 12-month disposition period)). All of the
disallowed loss is allocated to Asset 5, the only loss asset.
Accordingly, Old Target Subsidiary recognizes $400 of gain on Asset
4 and recognizes $422.22 of loss on Asset 5 (realized loss of $600
less allocated disallowed loss of $177.78) or a recognized net loss
of $22.22 on the deemed asset disposition.
(C) Tiered targets. In the case of parent-subsidiary chains of
corporations making section 336(e) elections, the
[[Page 28481]]
deemed asset disposition of a higher-tier subsidiary is considered to
precede the deemed asset disposition of a lower-tier subsidiary.
(ii) Old target--deemed purchase--(A) In general. Immediately after
the deemed asset disposition described in paragraph (b)(2)(i)(A) of
this section, old target is treated as acquiring all of its assets from
an unrelated person in a single, separate transaction at the close of
the disposition date (but before the distribution described in
paragraph (b)(2)(iii)(A) of this section) in exchange for an amount
equal to the AGUB as determined under Sec. 1.336-4. Old target
allocates the consideration deemed paid in the transaction in the same
manner as new target would under Sec. Sec. 1.338-6 and 1.338-7 in
order to determine the basis in each of the purchased assets.
(B) Tiered targets. In the case of parent-subsidiary chains of
corporations making section 336(e) elections with respect to a
qualified stock disposition described, in whole or in part, in section
355(d)(2) or (e)(2), old target's deemed purchase of all its assets is
considered to precede the deemed asset disposition of a lower-tier
subsidiary.
(C) Application of section 197(f)(9), section 1091, and other
provisions to old target. Solely for purposes of section 197(f)(9),
section 1091, and any other provision designated in the Internal
Revenue Bulletin by the Internal Revenue Service (see Sec.
601.601(d)(2)(ii) of this chapter), old target, in its capacity as
seller of assets in the deemed asset disposition described in paragraph
(b)(2)(i)(A) of this section, shall be treated as a separate and
distinct taxpayer from, and unrelated to, old target in its capacity as
acquirer of assets in the deemed purchase described in paragraph
(b)(2)(ii)(A) of this section and for subsequent periods.
(iii) Seller--distribution of target stock--(A) In general.
Immediately after old target's deemed purchase of its assets described
in paragraph (b)(2)(ii) of this section, seller is treated as
distributing the stock of old target actually distributed to its
shareholders in the qualified stock disposition. No gain or loss is
recognized by seller on the distribution. Additionally, if stock of
target is sold, exchanged, or distributed outside of the section 355
transaction but still as part of a qualified stock disposition
described, in whole or in part, in section 355(d)(2) or (e)(2), no gain
or loss is recognized by seller on such sale, exchange, or
distribution.
(B) Tiered targets. In the case of parent-subsidiary chains of
corporations making section 336(e) elections with respect to a
qualified stock disposition described, in whole or in part, in section
355(d)(2) or (e)(2), the Federal income tax consequences of the section
336(e) election for a subsidiary of target shall be determined under
paragraph (b)(1) of this section unless the stock of the subsidiary of
target is actually disposed of in a qualified stock disposition
described, in whole or in part, in section 355(d)(2) or (e)(2). The
deemed liquidation of a lower-tier subsidiary pursuant to paragraph
(b)(1)(iii) of this section is considered to precede the deemed
liquidation of a higher-tier subsidiary. The deemed liquidation of the
highest tier subsidiary of target is considered to precede the
distribution of old target stock described in paragraph (b)(2)(iii)(A)
of this section.
(iv) Seller--retention of target stock. If seller retains any
target stock after the disposition date, seller is treated as having
disposed of the old target stock so retained, on the disposition date,
in a transaction in which no gain or loss is recognized, and then, on
the day after the disposition date, purchasing the stock so retained
from an unrelated person for its fair market value. The holding period
for the retained stock starts on the day after the disposition date.
For purposes of this paragraph (b)(2)(iv), the fair market value of all
of the target stock equals the grossed-up amount realized on the sale,
exchange, or distribution of recently disposed stock of target (see
Sec. 1.336-3(c)).
(v) Qualification under section 355. Old target's deemed sale of
all its assets to an unrelated person and old target's deemed purchase
of all its assets from an unrelated person will not cause the
distribution of old target to fail to satisfy the requirements of
section 355. Similarly, any deemed transactions under paragraph (b)(1)
or (b)(2) of this section that a subsidiary of target is treated as
engaging in will not cause the distribution of old target to fail to
satisfy the requirements of section 355. For purposes of applying
section 355(a)(1)(D), seller is treated as having disposed of any stock
disposed of in the qualified stock disposition on the date seller
actually sold, exchanged, or distributed such stock. Further, seller's
deemed disposition of retained old target stock under paragraph
(b)(2)(iv) of this section is disregarded for purposes of applying
section 355(a)(1)(D).
(vi) Earnings and profits. The earnings and profits of seller and
target shall be determined pursuant to Sec. 1.312-10 and, if
applicable, Sec. 1.1502-33(e). For this purpose, target will not be
treated as a newly created controlled corporation and any increase or
decrease in target's earnings and profits pursuant to the deemed asset
disposition will increase or decrease, as the case may be, target's
earnings and profits immediately before the allocation described in
Sec. 1.312-10.
(c) Purchaser. Generally, the making of a section 336(e) election
will not affect the Federal income tax consequences to which purchaser
would have been subject with respect to the acquisition of target stock
if a section 336(e) election was not made. Thus, notwithstanding
Sec. Sec. 1.336-2(b)(1)(i)(A), 1.336-2(b)(1)(iv), and 1.336-
2(b)(2)(iii)(A), purchaser will still be treated as having purchased,
received in an exchange, or received in a distribution, the stock of
target so acquired on the date actually acquired. However, see section
1223(1)(B) with respect to the holding period for stock acquired
pursuant to a distribution qualifying under section 355 (or so much of
section 356 that relates to section 355). The Federal income tax
consequences of the deemed asset disposition and liquidation of target
may affect purchaser's consequences. For example, if seller distributes
the stock of target to its shareholders in a qualified stock
disposition for which a section 336(e) election is made, any increase
in seller's earnings and profits as a result of old target's deemed
asset disposition and liquidation into seller may increase the amount
of a distribution to the shareholders constituting a dividend under
section 301(c)(1).
(d) Minority shareholders--(1) In general. This paragraph (d)
describes the treatment of shareholders of old target other than
seller, a member of seller's consolidated group, and S corporation
shareholders (whether or not they sell or exchange their stock of
target). A shareholder to which this paragraph (d) applies is referred
to as a minority shareholder.
(2) Sale, exchange, or distribution of target stock by a minority
shareholder. A minority shareholder recognizes gain or loss (as
permitted under the general principles of tax law) on its sale,
exchange, or distribution of target stock.
(3) Retention of target stock by a minority shareholder. A minority
shareholder who retains its target stock does not recognize gain or
loss under this section with respect to its shares of target stock. The
minority shareholder's basis and holding period for that target stock
are not affected by the section 336(e) election. Notwithstanding this
treatment of the minority shareholder, if a section 336(e) election is
made, target will still be treated as disposing of all of its assets in
the deemed asset disposition.
(e) Treatment consistent with an actual asset disposition. Except
as otherwise provided, no provision in this
[[Page 28482]]
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, taking into account other transactions that actually occurred
or are deemed to occur. See Sec. 1.338-1(a)(2) regarding the
application of other rules of law.
(f) Treatment of target under other provisions of the Internal
Revenue Code. The provisions Sec. 1.338-1(b) apply with respect to the
treatment of new target after a section 336(e) election, treating any
reference to section 338 or 338(h)(10) as a reference to section
336(e).
(g) Special rules--(1) Target as two corporations. Although target
is a single corporation under corporate law, if a section 336(e)
election is made, then, except with respect to a distribution described
in section 355(d)(2) or (e)(2) and as provided in Sec. 1.338-1(b)(2),
two separate corporations, old target and new target, generally are
considered to exist for purposes of subtitle A of the Internal Revenue
Code.
(2) Treatment of members of a consolidated group. For purposes of
Sec. Sec. 1.336-1 through 1.336-5, all members of seller's
consolidated group are treated as a single seller, regardless of which
member or members actually dispose of any stock. Accordingly, any
dispositions of stock made by members of the same consolidated group
shall be treated as made by one corporation, and any stock owned by
members of the same consolidated group and not disposed of will be
treated as stock retained by seller.
(3) International provisions--(i) Source and foreign tax credit.
The principles of section 338(h)(16) apply to section 336(e) elections
for targets with foreign operations to ensure that the source and
foreign tax credit limitation are properly determined.
(ii) Allocation of foreign taxes--(A) General rule. Except as
provided in paragraph (g)(3)(ii)(B) of this section, if a section
336(e) election is made for target and target's taxable year under
foreign law (if any) does not close at the end of the disposition date,
foreign tax paid or accrued by new target with respect to such foreign
taxable year is allocated between old target and new target. If there
is more than one section 336(e) election with respect to target during
target's foreign taxable year, foreign tax paid or accrued with respect
to that foreign taxable year is allocated among all old targets and new
targets. The allocation is made based on the respective portions of the
taxable income (as determined under foreign law) for the foreign
taxable year that are attributable under the principles of Sec.
1.1502-76(b) to the period of existence of each old target and new
target during the foreign taxable year.
(B) Taxes imposed on partnerships and disregarded entities. If a
section 336(e) election is made for target and target holds an interest
in a disregarded entity or partnership, the rules of Sec. 1.901-
2(f)(4) apply to determine the person who is considered for U.S.
Federal income tax purposes to pay foreign tax imposed at the entity
level on the income of the disregarded entity or partnership.
(iii) Disallowance of foreign tax credits under section 901(m). For
rules that may apply to disallow foreign tax credits with respect to
income not subject to United States taxation by reason of a covered
asset acquisition, see section 901(m).
(h) Making the section 336(e) election--(1) Consolidated group. If
seller(s) and target are members of the same consolidated group, a
section 336(e) election is made by completing the following
requirements:
(i) Seller(s) and target must enter into a written, binding
agreement, on or before the due date (including extensions) of the
consolidated group's consolidated Federal income tax return for the
taxable year that includes the disposition date, to make a section
336(e) election;
(ii) The common parent of the consolidated group must retain a copy
of the written agreement;
(iii) The common parent of the consolidated group must attach the
section 336(e) election statement, described in paragraphs (h)(5) and
(6) of this section, to the group's timely filed (including extensions)
consolidated Federal income tax return for the taxable year that
includes the disposition date; and
(iv) The common parent of the consolidated group must provide a
copy of the section 336(e) election statement to target on or before
the due date (including extensions) of the consolidated group's
consolidated Federal income tax return.
(2) Non-consolidated/non-S corporation target. If target is neither
a member of the same consolidated group as seller nor an S corporation,
a section 336(e) election is made by completing the following
requirements:
(i) Seller and target must enter into a written, binding agreement,
on or before the due date (including extensions) of seller's or
target's Federal income tax return for the taxable year that includes
the disposition date, whichever is earlier, to make a section 336(e)
election;
(ii) Seller and target each must retain a copy of the written
agreement; and
(iii) Seller and target each must attach the section 336(e)
election statement, described in paragraphs (h)(5) and (6) of this
section, to its timely filed (including extensions) Federal income tax
return for the taxable year that includes the disposition date.
However, seller's section 336(e) election statement may disregard
paragraph (h)(6)(xii) of this section (concerning a gain recognition
election).
(3) S corporation target. A section 336(e) election for an S
corporation target is made by completing the following requirements:
(i) All of the S corporation shareholders, including those who do
not dispose of any stock in the qualified stock disposition, and the S
corporation target must enter into a written, binding agreement, on or
before the due date (including extensions) of the Federal income tax
return of the S corporation target for the taxable year that includes
the disposition date, to make a section 336(e) election;
(ii) S corporation target must retain a copy of the written
agreement; and
(iii) S corporation target must attach the section 336(e) election
statement, described in paragraphs (h)(5) and (6) of this section, to
its timely filed (including extensions) Federal income tax return for
the taxable year that includes the disposition date.
(4) Tiered targets. In the case of parent-subsidiary chains of
corporations making section 336(e) elections, in order to make a
section 336(e) election for a lower-tier target (target subsidiary),
the requirements described in paragraph (h)(1) or (h)(2), of this
section, whichever is applicable to the qualified stock disposition of
target subsidiary, must be satisfied. The written agreement described
in paragraph (h)(1) or (h)(2) of this section for the section 336(e)
election with respect to target subsidiary may be either a separate
written agreement between target subsidiary and the corporation deemed
to dispose of the stock of target subsidiary or may be included in the
written agreement between seller(s) (or the S corporation shareholders)
and target.
(5) Section 336(e) election statement--(i) In general. The section
336(e) election statement must be entitled ``THIS IS AN ELECTION UNDER
SECTION 336(e) TO TREAT THE DISPOSITION OF THE STOCK OF [insert name
and employer identification number of target] AS A DEEMED SALE OF SUCH
CORPORATION'S ASSETS.'' The
[[Page 28483]]
section 336(e) election statement must include the information
described in paragraph (h)(6) of this section. The relevant information
for each S corporation shareholder and, notwithstanding paragraph
(g)(2) of this section, each consolidated group member that disposes of
or retains target stock must be set forth individually, not in the
aggregate.
(ii) Target subsidiaries. In the case of a section 336(e) election
for a target subsidiary, a separate statement must be filed for each
target subsidiary. In preparing the section 336(e) election statement
with respect to a target subsidiary, any reference to seller in
paragraph (h)(6) of this section should be considered a reference to
the corporation deemed to dispose of the stock of the target subsidiary
and any reference to target in paragraphs (h)(5)(i) and (h)(6) of this
section should be considered a reference to the target subsidiary.
(6) Contents of section 336(e) election statement. The section
336(e) election statement must include:
(i) The name, address, taxpayer identifying number (TIN), taxable
year, and state of incorporation (if any) of the seller(s) or the S
corporation shareholder(s);
(ii) The name, address, employer identification number (EIN),
taxable year, and state of incorporation of the common parent, if any,
of seller(s);
(iii) The name, address, EIN, taxable year, and state of
incorporation of target;
(iv) The name, address, TIN, taxable year, and state of
incorporation (if any) of any 80-percent purchaser;
(v) The name, address, TIN, taxable year, and state of
incorporation (if any) of any purchaser that holds nonrecently disposed
stock within the meaning of Sec. 1.336-1(b)(18);
(vi) The disposition date;
(vii) The percentage of target stock that was disposed of by each
seller or S corporation shareholder in the qualified stock disposition;
(viii) The percentage of target stock that was disposed of by each
seller or S corporation shareholder in the qualified stock disposition
on or before the disposition date;
(ix) A statement regarding whether target realized a net loss on
the deemed asset disposition;
(x) If target realized a net loss on the deemed asset disposition,
a statement regarding whether any stock of target or that of any
higher-tier corporation up through the highest-tier corporation for
which a section 336(e) election was made by any seller(s) or S
corporation shareholder(s) was distributed during the 12-month
disposition period. If so, also provide a statement regarding whether
any stock of target or that of any higher-tier corporation up through
the highest-tier corporation for which a section 336(e) election was
made was actually sold or exchanged (rather than deemed sold in a
deemed asset disposition) by any seller(s) or S corporation
shareholder(s) in a qualified stock disposition;
(xi) The percentage of target stock that was retained by each
seller or S corporation shareholder after the disposition date;
(xii) The name, address, and TIN of any purchaser that made a gain
recognition election pursuant to Sec. 1.336-4(c). A copy of the gain
recognition election statement must be retained by the filer of the
section 336(e) election statement designated as the appropriate party
in Sec. 1.336-4(c)(3); and
(xiii) A statement that each of the seller(s) or S corporation
shareholder(s) (as applicable) and target have executed a written,
binding agreement to make a section 336(e) election.
(7) Asset Allocation Statement. Old target and new target must
report information concerning the deemed sale of target's assets on
Form 8883, ``Asset Allocation Statement Under Section 338,'' (making
appropriate adjustments to report the results of the section 336(e)
election), or on any successor form prescribed by the Internal Revenue
Service, in accordance with forms, instructions, or other appropriate
guidance provided by the Internal Revenue Service. In addition, in the
case of a section 336(e) election as the result of a transaction
described in section 355(d)(2) or (e)(2), old target should file two
Forms 8883, (or successor forms), one in its capacity as the seller of
the assets in the deemed asset disposition described in paragraph
(b)(2)(i) of this section and one in its capacity as the purchaser of
the assets in the deemed purchase described in paragraph (b)(2)(ii) of
this section.
(8) Examples. The following examples illustrate the provisions of
paragraph (h) of this section.
Example 1. (i) Facts. Seller owns all of the stock of Target
and Target owns all of the stock of Target Subsidiary. Seller is the
common parent of a consolidated group that includes Target. However,
Target Subsidiary is not included in the consolidated group pursuant
to section 1504(a)(3). On Date 1, Seller sells 80 percent of its
Target stock to A and distributes the remaining 20 percent of Target
stock to Seller's unrelated shareholders.
(ii) Making of election for Target. Because Seller and Target
are members of a consolidated group, in order to make a section
336(e) election for the qualified stock disposition of Target, the
requirements of paragraph (h)(1) of this section must be satisfied.
On or before the due date of Seller group's consolidated Federal
income tax return that includes Date 1, Seller and Target must enter
into a written, binding agreement to make a section 336(e) election;
Seller must retain a copy of the written agreement; Seller must
attach the section 336(e) election statement to the group's timely
filed consolidated return for the taxable year that includes Date 1,
and Seller must provide a copy of the section 336(e) election
statement to Target on or before the due date (including extensions)
of the consolidated return.
(iii) Making of election for Target Subsidiary. Because Target
and Target Subsidiary do not join in the filing of a consolidated
Federal income tax return and Target Subsidiary is not an S
corporation, in order to make a section 336(e) election for the
qualified stock disposition of Target Subsidiary, the requirements
of paragraph (h)(2) of this section must be satisfied. On or before
the due date of Seller group's consolidated Federal income tax
return that includes Date 1, or Target Subsidiary's Federal income
tax return that includes Date 1, whichever is earlier, either Target
Subsidiary must join in the written agreement described in paragraph
(ii) of this Example 1 to make a section 336(e) election with
respect to the qualified stock disposition of Target Subsidiary or
Target and Target Subsidiary must enter into a separate written,
binding agreement to make a section 336(e) election with respect to
the qualified stock disposition of Target Subsidiary; Seller (as
agent of the consolidated group that includes Target) and Target
Subsidiary each must retain a copy of the written agreement; and
Seller (as agent of the consolidated group that includes Target) and
Target Subsidiary each must attach the section 336(e) election
statement with respect to the qualified stock disposition of Target
Subsidiary to its timely filed Federal income tax return for the
taxable year that includes Date 1. In preparing the section 336(e)
election statement, paragraph (i) of the statement should include
the relevant information for Target, paragraph (ii) of the statement
should include the relevant information for Seller, paragraph (iii)
of the statement should include the relevant information for Target
Subsidiary, paragraphs (vii) through (xi) of the statement should
provide information for both Seller's actual sale and distribution
of Target stock as well as information for Target's deemed sale of
Target Subsidiary stock, and paragraph (xiii) of the statement
should include a statement that Seller, Target, and Target
Subsidiary, or Target and Target Subsidiary, whichever is
appropriate, have executed a written, binding agreement to make a
section 336(e) election with respect to the qualified stock
disposition of Target Subsidiary.
Example 2. (i) Facts. A and B each own 45 percent and C owns the
remaining 10 percent of the stock of S Corporation Target, an S
corporation. S Corporation Target owns 80 percent of the stock of
Target Subsidiary and D owns the remaining 20 percent. On Date 1, A
and B each sell all of their S Corporation Target stock to an
unrelated individual. C retains his 10 percent of the stock of S
Corporation Target.
[[Page 28484]]
(ii) Making of election for S Corporation Target. Because S
Corporation Target is an S corporation, in order to make a section
336(e) election for the qualified stock disposition of S Corporation
Target, the requirements of paragraph (h)(3) of this section must be
satisfied. On or before the due date of S Corporation Target's
Federal income tax return that includes Date 1, A, B, C, and Target
must enter into a written, binding agreement to make a section
336(e) election; S Corporation Target must retain a copy of the
written agreement; and S Corporation Target must attach the section
336(e) election statement to its timely filed Federal income tax
return for the taxable year that includes Date 1.
(iii) Making of election for Target Subsidiary. Because Target
Subsidiary is neither a member of the same consolidated group as S
Corporation Target nor is an S corporation, in order to make a
section 336(e) election for the qualified stock disposition of
Target Subsidiary, the requirements of paragraph (h)(2) of this
section must be satisfied. On or before the due date of S
Corporation Target's Federal income tax return that includes Date 1,
or Target Subsidiary's Federal income tax return that includes Date
1, whichever is earlier, either Target Subsidiary must join in the
written agreement described in paragraph (ii) of this Example 2 to
make a section 336(e) election with respect to the qualified stock
disposition of Target Subsidiary or S Corporation Target and Target
Subsidiary must enter into a separate written, binding agreement to
make a section 336(e) election with respect to the qualified stock
disposition of Target Subsidiary; S Corporation Target and Target
Subsidiary each must retain a copy of the written agreement; and S
Corporation Target and Target Subsidiary each must attach the
section 336(e) election statement to its timely filed Federal income
tax return for the taxable year that includes Date 1. In preparing
the section 336(e) election statement, paragraph (i) of the
statement should include the relevant information for S Corporation
Target, paragraph (iii) of the statement should include the relevant
information for Target Subsidiary, paragraphs (vii) through (xi) of
the statement should provide information for both A's and B's actual
sale and C's actual retention of S Corporation Target stock as well
as information for S Corporation Target's deemed sale of Target
Subsidiary stock, and paragraph (xiii) of the statement should
include a statement that A, B, C, S Corporation Target, and Target
Subsidiary, or S Corporation Target and Target Subsidiary, whichever
is appropriate, have executed a written, binding agreement to make a
section 336(e) election with respect to the qualified stock
disposition of Target Subsidiary.
(i) [Reserved]
(j) Protective section 336(e) election. Taxpayers may make a
protective election under section 336(e) in connection with a
transaction. Such an election will have no effect if the transaction
does not constitute a qualified stock disposition, as defined in Sec.
1.336-1(b)(6), but will otherwise be binding and irrevocable.
(k) Examples. The following examples illustrate the provisions of
this section.
Example 1. Sale of 100 percent of Target stock. (i) Facts.
Parent owns all 100 shares of Target's only class of stock. Target's
only assets are two parcels of land. Parcel 1 has a basis of $5,000
and Parcel 2 has a basis of $4,000. Target has no liabilities. On
July 1 of Year 1, Parent sells all 100 shares of Target stock to A
for $100 per share. Parent incurs no selling costs and A incurs no
acquisition costs. On July 1, the value of Parcel 1 is $7,000 and
the value of Parcel 2 is $3,000. A section 336(e) election is made.
(ii) Consequences. The sale of Target stock constitutes a
qualified stock disposition. July 1 of Year 1 is the disposition
date. Accordingly, pursuant to the section 336(e) election, for
Federal income tax purposes, rather than treating Parent as selling
the stock of Target to A, the following events are deemed to occur.
Target is treated as if, on July 1, it sold all of its assets to an
unrelated person in exchange for the ADADP of $10,000, which is
allocated $7,000 to Parcel 1 and $3,000 to Parcel 2 (see Sec. Sec.
1.336-3 and 1.338-6 for determination of amount and allocation of
ADADP). Target recognizes gain of $2,000 on Parcel 1 and loss of
$1,000 on Parcel 2. New Target is then treated as acquiring all its
assets from an unrelated person in a single transaction in exchange
for the amount of the AGUB of $10,000, which is allocated $7,000 to
Parcel 1 and $3,000 to Parcel 2 (see Sec. Sec. 1.336-4, 1.338-5,
and 1.338-6 for determination of amount and allocation of AGUB). Old
Target is treated as liquidating into Parent immediately thereafter,
distributing the $10,000 deemed received in exchange for Parcel 1
and Parcel 2 in a transaction qualifying under section 332. Parent
recognizes no gain or loss on the liquidation. A's basis in New
Target stock is $100 per share, the amount paid for the stock.
Example 2. Sale of 80 percent of Target stock. (i) Facts. The
facts are the same as in Example 1 except that Parent only sells 80
shares of its Target stock to A and retains the other 20 shares.
(ii) Consequences. The results are the same as in Example 1
except that Parent also is treated as purchasing from an unrelated
person on July 2, the day after the disposition date, the 20 shares
of Target stock (New Target stock) not sold to A, for their fair
market value as determined under Sec. 1.336-2(b)(1)(v) of $2,000
($100 per share).
Example 3. Distribution of 100 percent of Target stock. (i)
Facts. The facts are the same as in Example 1 except that instead of
on July 1 Parent selling 100 shares of Target stock to A, Parent
distributes 100 shares to its shareholders, all of whom are
unrelated to Parent, in a transaction that does not qualify under
section 355. The value of Target stock on July 1 is $100 per share.
(ii) Consequences. The distribution of Target stock constitutes
a qualified stock disposition. July 1 of Year 1 is the disposition
date. Accordingly, pursuant to the section 336(e) election, for
Federal income tax purposes, rather than treating Parent as
distributing the stock of Target to its shareholders, the following
events are deemed to occur. Target is treated as if, on July 1, it
sold all of its assets to an unrelated person in exchange for the
ADADP of $10,000, which is allocated $7,000 to Parcel 1 and $3,000
to Parcel 2 (see Sec. Sec. 1.336-3 and 1.338-6 for determination of
amount and allocation of ADADP). Target recognizes gain of $2,000 on
Parcel 1 and loss of $1,000 on Parcel 2. Because Target's losses
realized on the deemed asset disposition do not exceed Target's
gains realized on the deemed asset disposition, Target can recognize
all of the losses from the deemed asset disposition (see Sec.
1.336-2(b)(1)(i)(B)). New Target is then treated as acquiring all
its assets from an unrelated person in a single transaction in
exchange for the amount of the AGUB of $10,000, which is allocated
$7,000 to Parcel 1 and $3,000 to Parcel 2 (see Sec. Sec. 1.336-4,
1.338-5, and 1.338-6 for determination of amount and allocation of
AGUB). Old Target is treated as liquidating into Parent immediately
thereafter, distributing the $10,000 deemed received in exchange for
Parcel 1 and Parcel 2 in a transaction qualifying under section 332.
Parent recognizes no gain or loss on the liquidation. On July 1,
immediately after the deemed liquidation of Target, Parent is deemed
to purchase from an unrelated person 100 shares of New Target stock
and distribute those New Target shares to its shareholders. Parent
recognizes no gain or loss on the deemed distribution of the shares
under Sec. 1.336-2(b)(1)(iv). The shareholders receive New Target
stock as a distribution pursuant to section 301 and their basis in
New Target stock received is its fair market value pursuant to
section 301(d).
Example 4. Distribution of 80 percent of Target stock. (i)
Facts. The facts are the same as in Example 3 except that Parent
distributes only 80 shares of Target stock to its shareholders and
retains the other 20 shares.
(ii) Consequences. The results are the same as in Example 3
except that Parent is treated as purchasing on July 1 only 80 shares
of New Target stock and as distributing only 80 shares of New Target
stock to its shareholders and then as purchasing (and retaining) on
July 2, the day after the disposition date, 20 shares of New Target
stock at their fair market value as determined under Sec. 1.336-
2(b)(1)(v), $2,000 ($100 per share).
Example 5. Part sale, part distribution. (i) Facts. Parent owns
all 100 shares of Target's only class of stock. Target has two
assets, both of which are buildings used in its business. Building 1
has a basis of $6,000 and Building 2 has a basis of $5,100. Target
has no liabilities. On January 1 of Year 1, Parent sells 50 shares
of Target to A for $88 per share. Parent incurred no selling costs
with respect to the sale of Target stock and A incurred no
acquisition costs with respect to the purchase. On July 1 of Year 1,
when the value of Target stock is $120 per share, Parent distributes
30 shares of Target to Parent's unrelated shareholders. Parent
retains the remaining 20 shares. On July 1, the value of Building 1
is $7,800 and the value of Building 2 is $4,200. A section 336(e)
election is made.
[[Page 28485]]
(ii) Consequences. Because the sale of the 50 shares and the
distribution of the 30 shares occurred within a 12-month disposition
period, the 80 shares of Target stock sold and distributed were
disposed of in a qualified stock disposition. July 1 of Year 1 is
the disposition date. On July 1, Target is treated as if it sold its
assets to an unrelated person in exchange for the ADADP, $10,000
($8,000 ((50 shares x $88) + (30 shares x $120))/.80 ($9,600 (80
shares x $120)/$12,000 (100 shares x $120))), which is allocated to
Buildings 1 and 2 in proportion to their fair market values, $6,500
to Building 1 and $3,500 to Building 2 (see Sec. Sec. 1.336-3 and
1.338-6 for determination of amount and allocation of ADADP). Target
realizes a gain of $500 on the deemed sale of Building 1 ($6,500-
$6,000). Target realizes a loss of $1,600 on the deemed sale of
Building 2 ($3,500-$5,100). Target recognizes all of its gains on
the deemed asset disposition. However, because 30 shares of Target
stock were distributed during the 12-month disposition period and
there was a net loss of $1,100 realized on the deemed disposition of
Buildings 1 and 2, $413 of the loss on the deemed sale is disallowed
(see Sec. 1.336-2(b)(1)(i)(B)(2) for the determination of the
disallowed loss amount). New Target is then treated as acquiring all
its assets from an unrelated person in a single transaction in
exchange for the amount of the AGUB, $10,000 ($8,000 ((50 shares x
$88) + (30 shares x $120)) x 1.25 ((100-0)/80)), which is allocated
to Buildings 1 and 2 in proportion to their fair market values,
$6,500 to Building 1 and $3,500 to Building 2 (see Sec. Sec. 1.336-
4, 1.338-5, and 1.338-6 for determination of amount and allocation
of AGUB). Old Target is treated as liquidating into Parent
immediately after the deemed asset disposition, distributing the
$10,000 deemed received in exchange for its assets in a transaction
qualifying under section 332. Parent recognizes no gain or loss on
the liquidation. Parent is then deemed to purchase 30 shares of New
Target stock from an unrelated person on July 1, and to distribute
those 30 New Target shares to its shareholders. Parent recognizes no
gain or loss on the deemed distribution of the 30 shares under Sec.
1.336-2(b)(1)(iv). Parent is then deemed to purchase (and retain) on
July 2, the day after the disposition date, 20 shares of New Target
stock at their fair market value as determined under Sec. 1.336-
2(b)(1)(v), $2,000 ($100 per share (20 shares multiplied by $100
fair market value per share ($10,000 grossed-up amount realized on
the sale and distribution of 80 shares of target stock divided by
100 shares)). A is treated as having purchased the 50 shares of New
Target stock on January 1 of Year 1 at a cost of $88 per share, the
same as if no section 336(e) election had been made. Parent's
shareholders are treated as receiving New Target stock on July 1 of
Year 1 as a distribution pursuant to section 301 and their basis in
New Target stock received is $120 per share, its fair market value,
pursuant to section 301(d), the same as if no section 336(e)
election had been made.
Example 6. Sale of Target stock by consolidated group members.
(i) Facts. Parent owns all of the stock of Sub and 50 of the 100
outstanding shares of Target stock. Sub owns the remaining 50 shares
of Target stock. Target's assets have an aggregate basis of $9,000.
Target has no liabilities. Parent, Sub, and Target file a
consolidated Federal income tax return. On February 1 of Year 1,
Parent sells 30 shares of its Target stock to A for $2,400. On March
1 of Year 1, Sub sells all 50 shares of its Target stock to B for
$5,600. Neither Parent nor Sub incurred any selling costs. Neither A
nor B incurred any acquisition costs. A section 336(e) election is
made.
(ii) Consequences. Because Parent and Sub are members of the
same consolidated group, their sale of Target stock is treated as
made by one seller (see paragraph (g)(2) of this section), and the
sales of Target stock constitute a qualified stock disposition.
March 1 of Year 1 is the disposition date. For Federal income tax
purposes, Parent and Sub are not treated as selling the stock of
Target to A and B, respectively. Instead, the following events are
deemed to occur. Old Target is treated as if, on March 1, it sold
all its assets to unrelated person in exchange for the ADADP,
$10,000 (see Sec. 1.336-3 for determination of ADADP), recognizing
a net gain of $1,000. New Target is then treated as acquiring all
its assets from an unrelated person in a single transaction in
exchange for the amount of the AGUB, $10,000 (see Sec. Sec. 1.336-4
and 1.338-5 for the determination of AGUB). Old Target is treated as
liquidating into Parent and Sub immediately thereafter, distributing
the $10,000 deemed received in exchange for its assets in a
transaction qualifying under section 332 (see Sec. 1.1502-34).
Neither Parent nor Sub recognizes gain or loss on the liquidation.
Parent is then treated as purchasing from an unrelated person on
March 2, the day after the disposition date, the 20 shares of Target
stock (New Target stock) retained for their fair market value as
determined under Sec. 1.336-2(b)(1)(v), $2,000 ($100 per share). A
is treated as having purchased 30 shares of New Target stock on
February 1 of Year 1 at a cost of $2,400 ($80 per share), the same
as if no section 336(e) election had been made. B is treated as
having purchased 50 shares of New Target stock on March 1 of Year 1
at a cost of $5,600 ($112 per share), the same as if no section
336(e) election had been made.
Example 7. Sale of Target stock by non-consolidated group
members. (i) Facts. The facts are the same as in Example 6 except
that Parent, Sub, and Target do not join in the filing of a
consolidated Federal income tax return.
(ii) Consequences. Because Parent and Sub do not join in the
filing of a consolidated Federal income tax return and no single
seller sells, exchanges, or distributes Target stock meeting the
requirements of section 1504(a)(2), the transaction does not
constitute a qualified stock disposition. The section 336(e)
election made with respect to the disposition of Target stock has no
effect.
Example 8. Distribution of 80 percent of Target stock in
complete redemption of a greater-than-50-percent shareholder. (i)
Facts. A and B own 51 and 49 shares, respectively, of Seller's only
class of stock. Seller owns all 100 shares of Target's only class of
stock. Seller distributes 80 shares of Target stock to A in complete
redemption of A's 51 shares of Seller in a transaction that does not
qualify under section 355. A section 336(e) election is made.
(ii) Consequences. Prior to the redemption, Seller and A would
be related persons because, under section 318(a)(2)(C), any stock of
a corporation that is owned by Seller would be attributed to A
because A owns 50 percent or more of the value of the stock of
Seller. However, for purposes of Sec. Sec. 1.336-1 through 1.336-5,
the determination of whether Seller and A are related is made
immediately after the redemption of A's stock. See Sec. Sec. 1.336-
1(b)(5)(iii) and 1.338-3(b)(3)(ii)(A). After the redemption, A no
longer owns any stock of Seller. Accordingly, A and Seller are not
related persons, as defined in Sec. 1.336-1(b)(12), and the
distribution of Target stock constitutes a qualified stock
disposition. For Federal income tax purposes, rather than Seller
distributing the stock of Target to A, the following is deemed to
occur. Old Target is treated as if it sold its assets to an
unrelated person. New Target is then treated as acquiring all its
assets from an unrelated person in a single transaction. Immediately
thereafter, Old Target is treated as liquidating into Seller in a
transaction qualifying under section 332. Seller recognizes no gain
or loss on the liquidation. Seller is then treated as purchasing 80
shares of New Target stock from an unrelated person and then
distributing the 80 shares of New Target stock to A in exchange for
A's 51 shares of Seller stock. Seller recognizes no gain or loss on
the distribution of New Target stock pursuant to Sec. 1.336-
2(b)(1)(iv). Seller is then treated as purchasing from an unrelated
person on the day after the disposition date the 20 shares of Target
stock (New Target stock) retained for their fair market value as
determined under Sec. 1.336-2(b)(1)(v). The Federal income tax
consequences to A are the same as if no section 336(e) election had
been made.
Example 9. Pro-rata distribution of 80 percent of Target stock.
(i) Facts. A and B own 60 and 40 shares, respectively, of Seller's
only class of stock. Seller owns all 100 shares of Target's only
class of stock. Seller distributes 48 shares of Target stock to A
and 32 shares of Target stock to B in a transaction that does not
qualify under section 355. A section 336(e) election is made.
(ii) Consequences. Any stock of a corporation that is owned by
Seller would be attributed to A under section 318(a)(2)(C) because,
after the distribution, A owns 50 percent or more of the value of
the stock of Seller. Therefore, after the distribution, A and Seller
are related persons, as defined in Sec. 1.336-1(b)(12), and the
distribution of Target stock to A is not a disposition. Because only
32 percent of Target stock was sold, exchanged, or distributed to
unrelated persons, there has not been a qualified stock disposition.
Accordingly, the section 336(e) election made with respect to the
distribution of Target stock has no effect.
[[Page 28486]]
Sec. 1.336-3 Aggregate deemed asset disposition price; various
aspects of taxation of the deemed asset disposition.
(a) Scope. This section provides rules under section 336(e) to
determine the aggregate deemed asset disposition price (ADADP) for
Target. ADADP is the amount for which old Target is deemed to have sold
all of its assets in the deemed asset disposition. ADADP is allocated
among Target's assets in the same manner as the aggregate deemed sale
price (ADSP) is allocated under Sec. 1.338-6 to determine the amount
for which each asset is deemed to have been sold. If a subsequent
increase or decrease is required under general principles of tax law
with respect to an element of ADADP, the redetermined ADADP is
allocated among Target's assets in the same manner as redetermined ADSP
is allocated under Sec. 1.338-7.
(b) Determination of ADADP--(1) General rule. ADADP is the sum of--
(i) The grossed-up amount realized on the sale, exchange, or
distribution of recently disposed stock of Target; and
(ii) The liabilities of old Target.
(2) Time and amount of ADADP--(i) Original determination. ADADP is
initially determined at the beginning of the day after the disposition
date of Target. General principles of tax law apply in determining the
timing and amount of the elements of ADADP.
(ii) Redetermination of ADADP. ADADP is redetermined at such time
and in such amount as an increase or decrease would be required, under
general principles of tax law, for the elements of ADADP. For example,
ADADP is redetermined because of an increase or decrease in the amount
realized on the sale or exchange of recently disposed stock of Target
or because liabilities not originally taken into account in determining
ADADP are subsequently taken into account. Increases or decreases with
respect to the elements of ADADP result in the reallocation of ADADP
among Target's assets in the same manner as ADSP under Sec. 1.338-7.
(c) Grossed-up amount realized on the disposition of recently
disposed stock of Target--(1) Determination of amount. The grossed-up
amount realized on the disposition of recently disposed stock of Target
is an amount equal to--
(i) The sum of --
(A) With respect to recently disposed of stock of Target that is
not distributed in the qualified stock disposition, the amount realized
on the sale or exchange of such recently disposed stock of Target,
determined as if seller or S corporation shareholders were required to
use old Target's accounting methods and characteristics and the
installment method were not available and determined without regard to
the selling costs taken into account under paragraph (c)(1)(iii) of
this section, and
(B) With respect to recently disposed of stock of Target that is
distributed in the qualified stock disposition, the fair market value
of such recently disposed stock of Target determined on the date of
each distribution;
(ii) Divided by the percentage of Target stock (by value,
determined on the disposition date) attributable to the recently
disposed stock;
(iii) Less the selling costs incurred by seller or S corporation
shareholders in connection with the sale or exchange of recently
disposed stock that reduce its amount realized on the sale or exchange
of the stock (for example, brokerage commissions and any similar costs
to sell the stock).
(2) Example. The following example illustrates this paragraph (c):
Example. Target has two classes of stock outstanding, voting
common stock and preferred stock described in section 1504(a)(4).
Seller owns all 100 shares of each class of stock. On March 1 of
Year 1, Seller sells 10 shares of Target voting common stock to A
for $75. On April 1 of Year 2, Seller distributes 15 shares of
Target voting common stock with a fair market value of $120 to B. On
May 1 of Year 2, Seller distributes 10 shares of Target voting
common stock with a fair market value of $110 to C. On July 1 of
Year 2, Seller sells 55 shares of Target voting common stock to D
for $550. On July 1 of Year 2, the fair market value of all the
Target voting common stock is $1,000 ($10 per share) and the fair
market value of all the preferred stock is $600 ($6 per share).
Seller incurs $20 of selling costs with respect to the sale to A and
$60 of selling costs with respect to the sale to D. The grossed-up
amount realized on the sale, exchange, or distribution of recently
disposed stock of Target is calculated as follows: The sum of the
amount realized on the sale or exchange of recently disposed stock
sold or exchanged (without regard to selling costs) and the fair
market value of the recently disposed stock distributed is $780
($120 + $110 + $550) (the 10 shares sold to A on March 1 of Year 1
is not recently disposed stock because it was not disposed of during
the 12-month disposition period). The percentage of Target stock by
value on the disposition date attributable to recently disposed
stock equals 50% ($800 (80 shares of recently disposed stock x $10,
the fair market value of each share of Target common stock on the
disposition date)/$1,600 ($1,000 (the total value of Target's common
stock on the disposition date) + $600 (the total value of Target's
preferred stock on the disposition date))). The grossed-up amount
realized equals $1,500 (($780/.50)-$60 selling costs).
(d) Liabilities of old Target--(1) In general. In general, the
liabilities of old Target are measured as of the beginning of the day
after the disposition date. However, if a Target for which a section
336(e) election is made engages in a transaction outside the ordinary
course of business on the disposition date after the event resulting in
the qualified stock disposition of Target or a higher-tier corporation,
Target and all persons related thereto (either before or after the
qualified stock disposition) 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 disposition by old Target. In order to be taken into account in
ADADP, a liability must be a liability of Target that is properly taken
into account in amount realized under general principles of tax law
that would apply if old Target had sold its assets to an unrelated
person for consideration that included the discharge of its
liabilities. See Sec. 1.1001-2(a). Such liabilities may include
liabilities for the tax consequences resulting from the deemed asset
disposition.
(2) Time and amount of liabilities. The time for taking into
account liabilities of old Target in determining ADADP and the amount
of the liabilities taken into account is determined as if old Target
had sold its assets to an unrelated person for consideration that
included the discharge of the liabilities by the unrelated person. For
example, if no amount of a Target liability is properly taken into
account in amount realized as of the beginning of the day after the
disposition date, the liability is not initially taken into account in
determining ADADP, but it may be taken into account at some later date.
(e) Deemed disposition tax consequences. Gain or loss on each asset
in the deemed asset disposition is computed by reference to the ADADP
allocated to that asset. ADADP is allocated in the same manner as is
ADSP under Sec. 1.338-6. Although deemed disposition tax consequences
may increase or decrease ADADP by creating or reducing a tax liability,
the amount of the tax liability itself may be a function of the size of
the deemed disposition tax consequences. Thus, these determinations may
require trial and error computations.
(f) Other rules apply in determining ADADP. ADADP may not be
applied in such a way as to contravene other applicable rules. For
example, a capital loss cannot be applied to reduce ordinary income in
calculating the tax liability on the deemed asset disposition for
purposes of determining ADADP.
(g) Examples. The following examples illustrate this section.
[[Page 28487]]
Example 1. (i) Facts. The facts are the same as in Example 1 of
Sec. 1.336-2(b)(1)(i)(B)(3), that is, Parent owns 60 of the 100
outstanding shares of the common stock of Seller, Seller's only
class of stock outstanding. The remaining 40 shares of the common
stock of Seller are held by shareholders unrelated to Seller or each
other. Seller owns 95 of the 100 outstanding shares of Target common
stock, and all 100 shares of Target preferred stock that is
described in section 1504(a)(4). The remaining 5 shares of Target
common stock are owned by A. On January 1 of Year 1, Seller sells 72
shares of Target common stock to B for $3,520. On July 1 of Year 1,
Seller distributes 12 shares of Target common stock to Parent and 8
shares to its unrelated shareholders in a distribution described in
section 301. Seller retains 3 shares of Target common stock and all
100 shares of Target preferred stock immediately after July 1. The
value of Target common stock on July 1 is $60 per share. The value
of Target preferred stock on July 1 is $36 per share. Target has
three assets, Asset 1, a Class IV asset, with a basis of $1,776 and
a fair market value of $2,000, Asset 2, a Class V asset, with a
basis of $2,600 and a fair market value of $2,750, and Asset 3, a
Class V asset, with a basis of $3,900 and a fair market value of
$3,850. Seller incurred no selling costs on the sale of the 72
shares of Target common stock to B. Target has no liabilities. A
section 336(e) election is made.
(ii) Determination of ADADP. The ADADP on the deemed asset
disposition of Target is determined as follows. The grossed-up
amount realized on the sale, exchange, or distribution of recently
disposed stock of Target is $8,000, the sum of $3,520, the amount
realized on the sale to B of the 72 shares of Target common stock
and $480, the fair market value on the date distributed of the 8
shares of Target common stock distributed to Seller's unrelated
shareholders in the qualified stock disposition, divided by .50, the
percentage of Target stock by value, determined on the disposition
date, attributable to the recently disposed stock ($4,800 (80 shares
of Target common stock disposed of in the qualified stock
disposition x $60, the value of a share of Target common stock on
the disposition date) divided by $9,600 ((100, the total number of
shares of Target common stock x $60, the value of a share of Target
common stock on the disposition date) + (100, the total number of
shares of Target preferred stock x $36, the value of a share of
Target preferred stock on the disposition date))), minus $0,
Seller's selling costs in connection with the sale of the 72 shares
of Target common stock sold to B. The $8,000 grossed-up amount
realized on the sale, exchange, or distribution of recently disposed
stock of Target is then added to the liabilities of Old Target, $0,
to arrive at the ADADP, $8,000.
(iii) Allocation of ADADP. The ADADP of $8,000 is allocated
first to Asset 1, the Class IV asset, but not in excess of Asset 1's
fair market value, $2,000. The remaining ADADP of $6,000 is
allocated between Assets 2 and 3, both Class V assets, in proportion
to their fair market values, but not in excess of their fair market
values. Because the total fair market value of Assets 2 and 3,
$6,600, exceeds the ADADP remaining after allocation of a portion of
the ADADP to Asset 1, the $6,000 remaining ADADP is allocated to
Assets 2 and 3 in proportion to their respective fair market values.
Accordingly, $2,500 is allocated to Asset 2 ($6,000 x ($2,750/
($2,750 + $3,850))) and $3,500 is allocated to Asset 3 ($6,000 x
($3,850/($2,750 + $3,850))).
Example 2. (i) Facts. The facts are the same as in Example 1
except that Asset 2 is the stock of Target Subsidiary, a corporation
of which Target owns 100 of the 110 shares of common stock, the only
outstanding class of Target Subsidiary stock. The remaining 10
shares of Target Subsidiary stock are owned by D. The value of
Target Subsidiary stock on July 1 is $27.50 per share. Target
Subsidiary has two assets, Asset 4, a Class IV asset, with a basis
of $800 and a fair market value of $1,000, and Asset 5, a Class IV
asset, with a basis of $2,200 and a fair market value of $2,025.
Target Subsidiary has no liabilities. A section 336(e) election with
respect to Target Subsidiary is also made.
(ii) Determination of ADADP. The ADADP on the deemed asset
disposition of Target Subsidiary is determined as follows. The
grossed-up amount realized on the sale, exchange, or distribution of
recently disposed stock of Target Subsidiary is $2,750, ($2,500
ADADP allocable to Asset 2, the 100 shares of the stock of Target
Subsidiary owned by Target, divided by .909, the percentage of
Target Subsidiary stock by value, determined on the disposition
date, attributable to the recently disposed stock ($2,750 (100
shares of the stock of Target Subsidiary deemed disposed in the
qualified stock disposition x $27.50, the value of a share of Target
Subsidiary stock on the disposition date) divided by $3,025 (110,
the total number of shares of Target Subsidiary stock x $27.50, the
value of a share of Target Subsidiary stock on the disposition
date)), minus $0, Seller's selling costs in connection with the
deemed sale of the 100 shares of Target Subsidiary stock). The
$2,750 grossed-up amount realized on the sale, exchange, or
distribution of recently disposed stock of Target Subsidiary is then
added to the liabilities of Old Target Subsidiary, $0, to arrive at
the ADADP of Target Subsidiary, $2,750.
(iii) Allocation of ADADP. Because Assets 4 and 5 are each
assets of the same class, and the total fair market value of Assets
4 and 5 exceeds the $2,750 ADADP of Target Subsidiary, the $2,750
ADADP is allocated to Assets 4 and 5 in proportion to their
respective fair market values. Accordingly, $909 is allocated to
Asset 4 ($2,750 x ($1,000/($1,000 + $2,025))) and $1,841 is
allocated to Asset 5 ($2,750 x ($2,025/($1,000 + $2,025))).
Example 3. (i) Seller owns all 100 of the outstanding shares of
the common stock of Target, the only class of Target stock
outstanding. On January 1 of Year 1, Seller sells 10 shares of
Target stock to A for $6,000 ($600 per share). On August 1 of Year
1, Seller distributes the remaining 90 shares of Target stock to its
unrelated shareholders in a transaction described in section
355(d)(2) or (e)(2). The value of Target stock on August 1 is $560
per share. Target has two assets, Asset 1, which is stock in trade
of Target, a Class IV asset, with a basis of $15,000 and a value of
$50,000, and Asset 2, which is stock in a publicly traded, unrelated
corporation, a Class II asset, with a basis of $38,000 and a value
of $16,000. Target has no liabilities other than any liabilities for
Federal tax on account of the deemed asset disposition. Assume
Target's Federal tax rate for any gain or income on the deemed asset
disposition is 34 percent. Seller had no selling costs in connection
with its sale of the 10 shares of Target stock. A section 336(e)
election is made.
(ii) Because at least 80 percent of Target stock was disposed of
(within the meaning of Sec. 1.336-1(b)(5)) by Seller during the 12-
month disposition period, a qualified stock disposition occurred.
August 1 of Year 1 is the disposition date. Accordingly, pursuant to
the section 336(e) election, for Federal income tax purposes, Target
is treated as if, on August 1, it sold all of its assets to an
unrelated person in exchange for the ADADP.
(iii) Under these facts, although a portion of the qualified
stock disposition was the result of a stock distribution, because
the grossed-up amount realized on the disposition of recently
disposed stock of Target, $56,400 (($6,000 + ($560 x 90))/1) exceeds
Target's total basis in its assets, none of the losses realized on
the deemed asset disposition are disallowed under Sec. 1.336-
2(b)(2)(i)(B)(2). Because the grossed-up amount realized on the
disposition of recently disposed stock of Target exceeds the value
of Asset 2, the ADADP allocated to Asset 2 equals the value of Asset
2, $16,000, and Target realizes a $22,000 loss on the deemed
disposition of Asset 2. None of this loss is disallowed under
section 1091. See Sec. 1.336-2(b)(2)(ii)(C). Accordingly, Target
recognizes a $22,000 loss on the deemed disposition of Asset 2.
(iv) The ADADP allocated to Asset 1 is determined as follows
(for purposes of this Example 3, TotADADP is the total ADADP for the
deemed asset disposition, A1ADADP is the tentative amount of the
total ADADP allocated to Asset 1, A2ADADP is the amount of the total
ADADP allocated to Asset 2, G is the grossed-up amount realized on
the disposition of recently disposed stock of Target, L is Target's
liabilities other than Target's tax liability for the deemed
disposition tax consequences, TR is the applicable tax
rate, and B1 is the adjusted basis of Asset 1 and B2 is the adjusted
basis of Asset 2):
TotADADP = G + L + (TR x (TotADADP-B1-B2))
A1ADADP = TotADADP-A2ADADP
A2ADADP = $16,000
A1ADADP = TotADADP-$16,000
G = ($6,000 + ($560 x 90))/1
G = $56,400
TotADADP = $56,400 + 0 + (.34 x (TotADADP-$15,000-$38,000))
TotADADP = $56,400 + .34TotADADP-$18,020
.66TotADADP = $38,380
TotADADP = $58,152
A1ADADP = $42,152
(v) Because A1ADADP, $42,152, does not exceed the value of Asset
1, $50,000, the
[[Page 28488]]
entire A1ADADP is allocated to Asset 1. Old Target thus realizes and
recognizes a gain of $27,152 on the deemed disposition of Asset 1
($42,152-$15,000).
Sec. 1.336-4 Adjusted grossed-up basis.
(a) Scope. Except as provided in paragraphs (b) and (c) of this
section or as the context otherwise requires, the principles of
paragraphs (b) through (g) of Sec. 1.338-5 apply in determining the
adjusted grossed-up basis (AGUB) for target and the consequences of a
gain recognition election. AGUB is the amount for which new target is
deemed to have purchased all of its assets in the deemed purchase under
Sec. 1.336-2(b)(1)(ii) or the amount for which old target is deemed to
have purchased all of its assets in the deemed purchase under Sec.
1.336-2(b)(2)(ii). AGUB is allocated among target's assets in
accordance with Sec. 1.338-6 to determine the price at which the
assets are deemed to have been purchased. If a subsequent increase or
decrease with respect to an element of AGUB is required under general
principles of tax law, redetermined AGUB is allocated among target's
assets in accordance with Sec. 1.338-7.
(b) Modifications to the principles in Sec. 1.338-5. Solely for
purposes of applying Sec. Sec. 1.336-1 through 1.336-4, the principles
of Sec. 1.338-5 are modified as follows--
(1) Purchasing corporation; purchaser. Any reference to the
purchasing corporation shall be treated as a reference to a purchaser,
as defined in Sec. 1.336-1(b)(2).
(2) Acquisition date; disposition date. Any reference to the
acquisition date shall be treated as a reference to the disposition
date, as defined in Sec. 1.336-1(b)(8).
(3) Section 338 election; section 338(h)(10) election; section
336(e) election. Any reference to a section 338 election or a section
338(h)(10) election shall be treated as a reference to a section 336(e)
election, as defined in Sec. 1.336-1(b)(11).
(4) New target; old target. In the case of a disposition described
in section 355(d)(2) or (e)(2), any reference to new target shall be
treated as a reference to old target in its capacity as the purchaser
of assets pursuant to the section 336(e) election.
(5) Recently purchased stock; recently disposed stock. Any
reference to recently purchased stock shall be treated as a reference
to recently disposed stock, as defined in Sec. 1.336-1(b)(17). In the
case of a distribution of stock, for purposes of determining the
purchaser's grossed-up basis of recently disposed stock, the
purchaser's basis in recently disposed stock shall be deemed to be such
stock's fair market value on the date it was acquired.
(6) Nonrecently purchased stock; nonrecently disposed stock. Any
reference to nonrecently purchased stock shall be treated as a
reference to nonrecently disposed stock, as defined in Sec. 1.336-
1(b)(18).
(c) Gain recognition election--(1) In general. Any holder of
nonrecently disposed stock of target may make a gain recognition
election. The gain recognition election is irrevocable. Each owner of
nonrecently disposed stock determines its basis amount, and therefore
the gain recognized pursuant to the gain recognition election, by
applying Sec. Sec. 1.338-5(c) and 1.338-5(d)(3)(ii) by reference to
its own recently disposed stock and nonrecently disposed stock, and not
by reference to all recently disposed stock and nonrecently disposed
stock.
(2) 80-percent purchaser. If a section 336(e) election is made for
target, any 80-percent purchaser and all persons related to the 80-
percent purchaser are automatically deemed to have made a gain
recognition election for its nonrecently disposed target stock.
(3) Non-80-percent purchaser. If not automatically deemed made
under paragraph (c)(2) of this section, a gain recognition election is
made by a non-80-percent purchaser providing, on or before the due date
for filing the section 336(e) election statement by the appropriate
party, a gain recognition election statement, as described in paragraph
(c)(4) of this section, to the appropriate party. If seller and target
are members of the same consolidated group, seller is the appropriate
party and the common parent of the consolidated group must retain the
gain recognition election statement. If seller and target are members
of the same affiliated group but do not join in the filing of a
consolidated Federal income tax return, or if target is an S
corporation, target is the appropriate party and target must retain the
gain recognition election statement. If a non-80-percent purchaser
makes a gain recognition election, all related persons to the non-80-
percent purchaser must also make a gain recognition election.
Otherwise, the gain recognition election for the non-80-percent
purchaser will have no effect.
(4) Gain recognition election statement. A gain recognition
election statement must include the following declarations (or
substantially similar declarations):
(i) [Insert name, address, and taxpayer identifying number of
person for whom gain recognition election is actually being made] has
elected to recognize gain under Sec. 1.336-4(c) with respect to [his,
hers, or its] nonrecently disposed stock.
(ii) [Insert name of person for whom gain recognition election is
actually being made] agrees to report any gain under the gain
recognition election on [his, hers, or its] Federal income tax return
(including an amended return, if necessary) for the taxable year that
includes the disposition date of [insert name and employer
identification number of target].
(d) Examples. The following examples illustrate the provisions of
this section.
Example 1. On January 1 of Year 1, Seller owns 85 shares of
Target stock, A owns 8 shares, B owns 4 shares, and C owns the
remaining 3 shares. Each of A's 8 shares, B's 4 shares, and C's 3
shares have a $5 basis. Assume that Target has no liabilities. On
July 1 of Year 2, Seller sells 70 shares of Target stock to A for
$10 per share. On September 1 of Year 2, Seller sells 5 shares of
Target stock to B and 5 shares of Target stock to C for $14 per
share. A section 336(e) election is made. A does not make a gain
recognition election. A incurs $25 of acquisition costs and B and C
each incur $10 of acquisition costs in connection with their
respective Year 2 purchases. These costs are capitalized in the
basis of Target stock. September 1 of Year 2 is the disposition
date. Because A owns at least 10 percent of Target stock on
September 1, the disposition date, and A's original 8 shares of
Target stock owned on January 1 of Year 1 were not disposed of in
the qualified stock disposition, A's original 8 shares of Target
stock are nonrecently disposed stock. Although B's original 4 shares
and C's original 3 shares were not disposed of in the qualified
stock disposition, because neither B nor C owns, with the
application of section 318(a), other than section 318(a)(4), at
least 10 percent of the total voting power or value of Target stock
on the disposition date, their original shares are not nonrecently
disposed stock. The grossed-up basis of recently disposed Target
stock is $1,011, determined as follows: The purchasers' (A, B, and
C) aggregate basis in the recently disposed target stock, determined
without regard to acquisition costs, is $840 ((70 x $10) + (5 x $14)
+ (5 x $14)). This amount is multiplied by a fraction, the numerator
of which is 100 minus 8, the percentage of Target stock that is
nonrecently disposed stock, and the denominator of which is 80, the
percentage of Target stock attributable to recently disposed stock
($840 x 92/80 = $966). This amount is then increased by the $45 of
acquisition costs incurred by A, B, and C to arrive at the $1,011
grossed-up basis of recently disposed Target stock ($966 + $45 =
$1,011). New Target's AGUB is $1,051, the sum of $1,011, the
grossed-up basis of recently disposed Target stock and $40 (8 x $5),
A's basis in his nonrecently disposed Target stock.
Example 2. The facts are the same as in Example 1 except that A
makes a gain recognition election. Pursuant to the gain
[[Page 28489]]
recognition election, A is treated as if he sold on September 1 of
Year 2, the disposition date, his 8 shares of nonrecently disposed
Target stock for the basis amount, and A's basis in nonrecently
disposed target stock immediately after the deemed sale is the basis
amount. A's basis amount equals his basis in his recently disposed
Target stock without regard to acquisition costs, $700 (70 x $10),
multiplied by a fraction, the numerator of which is 100 minus 8, the
percentage of Target stock, by value, determined on the disposition
date, which is A's nonrecently disposed Target stock, and the
denominator of which is 70, the percentage of Target stock, by
value, determined on the disposition date, which is A's recently
disposed stock, which is then multiplied by a fraction, the
numerator of which is 8, the percentage of Target stock, by value,
determined on the disposition date, attributable to A's nonrecently
disposed Target stock and the denominator of which is 100 minus the
numerator amount. Accordingly, A's basis amount is $80 ($700 x 92/70
x 8/92). A therefore recognizes gain of $40 under the gain
recognition election ($80 basis amount minus A's $40 basis in his
nonrecently disposed stock prior to the gain recognition election).
New Target's AGUB is $1,091, the sum of $1,011, the grossed-up basis
of all recently disposed Target stock and $80, A's basis in his
nonrecently disposed Target stock pursuant to the gain recognition
election.
Example 3. (i) The facts are the same as in Example 3 of Sec.
1.336-3(g), that is, Seller owns all 100 of the outstanding shares
of the common stock of Target, the only class of Target stock
outstanding. On January 1 of Year 1, Seller sells 10 shares of
Target stock to A for $6,000 ($600 per share). On August 1 of Year
1, Seller distributes the remaining 90 shares of Target stock to its
unrelated shareholders in a transaction described in section
355(d)(2) or (e)(2). The value of Target stock on August 1 is $560
per share. Target has two assets, Asset 1, which is stock in trade
of Target, a Class IV asset, with a basis of $15,000 and a value of
$50,000, and Asset 2, which is stock in a publicly traded, unrelated
corporation, a Class II asset, with a basis of $38,000 and a value
of $16,000. Target has no liabilities other than any liabilities for
Federal tax on account of the deemed asset disposition. Assume
Target's Federal tax rate for any gain or income on the deemed asset
disposition is 34 percent. Seller had no selling costs in connection
with its sale of the 10 shares of Target stock. A section 336(e)
election is made. In addition, A incurred $100 of acquisition costs
with respect to the purchase of the 10 shares of Target stock.
Target's AGUB in the assets deemed acquired pursuant to Sec. 1.336-
2(b)(2)(ii)(B) is determined as follows (for purposes of this
Example 3, GRD is the grossed-up basis of recently disposed stock,
BND is the basis in nonrecently disposed stock, TotL is Target's
total liabilities, including Target's tax liability, and X is the
A's total acquisition costs):
AGUB = GRD + BND + TotL
GRD = ($6,000 + ($560 x 90)) x ((100 - 0)/100) + X
GRD = ($6,000 + $50,400) x (100/100) + $100
GRD = $56,500
BND = $0
TotL = .34 x ($27,152 (Target's gain recognized on deemed
disposition of Asset 1) - $22,000 (Target's loss recognized on
deemed disposition of Asset 2)) (see Example 3 of Sec. 1.336-3(g)
for determination of Target's gain and loss recognized on deemed
disposition of Assets 1 and 2)
TotL = $1,752
AGUB = $56,500 + $0 + $1,752
AGUB = $58,252
(ii) The AGUB allocated to Asset 2 is $16,000, the value of
Asset 2. Because the excess of the total AGUB, $58,252, over the
portion of the AGUB allocated to Asset 2, $16,000, does not exceed
the value of Asset 1, the AGUB allocated to Asset 1 is such excess,
$42,252.
Sec. 1.336-5 Effective/applicability date.
The provisions of Sec. Sec. 1.336-1 through 1.336-4 apply to any
qualified stock disposition for which the disposition date is on or
after May 15, 2013.
0
Par. 3. Section 1.338-0 is amended by adding entries for Sec. Sec.
1.338-1(e) and 1.338-5(h) to read as follows:
Sec. 1.338-0 Outline of topics.
* * * * *
Sec. 1.338-1 General principles; status of old target and new
target.
* * * * *
(e) Effective/applicability date.
* * * * *
Sec. 1.338-5 Adjusted grossed-up basis.
* * * * *
(h) Effective/applicability date.
* * * * *
0
Par. 4. Section 1.338-1 is amended by adding three new sentences after
the parenthetical that follows the third sentence of paragraph (a)(1),
by revising the first sentence in paragraph (c)(1), and adding a new
paragraph (e) to read as follows:
Sec. 1.338-1 General principles; status of old target and new target.
(a) * * *
(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 Sec. 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 Sec. 1.336-1(b)(6)(ii). * * *
* * * * *
(c) * * *
(1) In general. The rules of this paragraph (c) apply for purposes
of applying the regulations under sections 336(e), 338, and 1060. * * *
* * * * *
(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 Sec. 1.336-1(b)(8)) is on or
after May 15, 2013.
0
Par. 5. Section 1.338-5 is amended by revising the first sentence in
paragraph (d)(3)(ii) and by adding a new paragraph (h) to read as
follows:
Sec. 1.338-5 Adjusted grossed-up basis.
* * * * *
(d) * * *
(3) * * *
(ii) Basis amount. The basis amount is equal to the amount in
paragraphs (c)(1) and (2) of this section (the purchasing corporation's
grossed-up basis in recently purchased target stock at the beginning of
the day after the acquisition date determined without regard to the
acquisition costs taken into account in paragraph (c)(3) of this
section) multiplied by a fraction the numerator of which is the
percentage of target stock (by value, determined on the acquisition
date) attributable to the purchasing corporation's nonrecently
purchased target stock and the denominator of which is 100 percent
minus the numerator amount. * * *
* * * * *
(h) Effective/applicability date. Paragraph (d)(3)(ii) of this
section is applicable to any qualified stock purchase or qualified
stock disposition (as defined in Sec. 1.336-1(b)(6)) for which the
acquisition date or disposition date (as defined in Sec. 1.336-
1(b)(8)), respectively, is on or after May 15, 2013.
0
Par. 6. Section 1.901-2 is amended by redesignating paragraph (f)(5) as
paragraph (f)(6), adding a new paragraph (f)(5), and revising the first
sentence in paragraph (h)(4) to read as follows:
Sec. 1.901-2 Income, war profits, or excess profits tax paid or
accrued.
* * * * *
(f) * * *
(5) Allocation of foreign taxes in connection with elections under
section 336(e) or 338. For rules relating to the allocation of foreign
taxes in connection with elections made pursuant to section 336(e), see
Sec. 1.336-2(g)(3)(ii). For rules relating to the allocation of
foreign taxes in connection with elections made pursuant to section
338, see Sec. 1.338-9(d).
* * * * *
(h) * * *
(4) Paragraphs (f)(3), (f)(4), and (f)(6) of this section apply to
foreign taxes
[[Page 28490]]
paid or accrued in taxable years beginning after February 14, 2012. * *
*
0
Par. 7. Section 1.1502-13 is amended by:
0
1. Revising the heading of paragraph (f)(5)(ii)(C).
0
2. Revising the first sentence in paragraph (f)(5)(ii)(C)(1).
0
3. Adding a new sentence at the end of paragraph (m).
The revisions and addition read as follows:
Sec. 1.1502-13 Intercompany transactions.
* * * * *
(f) * * *
(5) * * *
(ii) * * *
(C) Section 338(h)(10) and Section 336(e).-- (1) In general. This
paragraph (f)(5)(ii)(C) applies to a deemed liquidation of T under
section 332 as the result of an election under section 338(h)(10) or
section 336(e). * * *
* * * * *
(m) Effective/applicability date. * * * Paragraph (f)(5)(ii)(C) of
this section is applicable to any qualified stock disposition (as
defined in Sec. 1.336-1(b)(6)) for which the disposition date (as
defined in Sec. 1.336-1(b)(8)) is on or after May 15, 2013.
* * * * *
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: May 9, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-11522 Filed 5-10-13; 4:15 pm]
BILLING CODE 4830-01-P