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