- Final Section 336(e) Regulations Permit New Deemed Asset Sale Election
- June 3, 2013 | Authors: Amie N. Broder; Robert A. Friedman; Mark A. Goldsmith
- Law Firm: Troutman Sanders LLP - New York Office
After more than twenty years of waiting for guidance, final Treasury regulations have been issued under Code Section 336(e) that allow taxpayers to elect to treat the sale, exchange, and/or distribution of a corporation’s stock in a subsidiary as a deemed disposition of the subsidiary’s underlying assets. The election and resulting deemed asset sale treatment of the transaction would result in a “step-up” in basis of the assets of the target. In that respect, it is similar to the election provided under Code Section 338(h)(10) for certain stock purchases. However, the Code Section 336(e) election provides a broader range of possible application because it does not require that an acquirer of corporate stock be a corporation and the election will be made only by the seller and the target.
A qualified stock disposition for purposes of these rules is generally a transaction or series of transactions in which stock of a U.S. corporation sufficient to satisfy the 80 percent vote and value tests under the consolidated group rules is sold, exchanged or distributed during the 12-month distribution period. In certain cases, stock sold, exchange or distributed in multiple transactions within a 12-month period may be aggregated.
The regulations provide two models for the deemed asset sale. Special considerations apply to S corporation targets.
Under the basic model, for qualified stock dispositions not described, in whole or in part, in Code Section 355(d)(2) or (e)(2), “old target” is treated as selling its assets to an unrelated person for the aggregate deemed asset disposition price. “New target” is treated as acquiring all of its assets from an unrelated person for an amount equal to the adjusted grossed-up basis. New target remains liable for the tax liabilities of old target (including the tax liability for the deemed disposition tax consequences). Old target and seller are treated as if, old target transferred all of the consideration deemed received from new target in the deemed asset disposition to seller and old target ceased to exist. In most cases, the transfer will be treated as a distribution in complete liquidation to which Code Sections 331 or 332 and Sections 336 or 337 apply. Seller is deemed to purchase from an unrelated person, 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.
Under the sale-to-self model, for a qualified stock disposition resulting, in whole or in part, from a disposition described in Code Section 355(d)(2) or (e)(2), old target is treated as selling its assets to an unrelated person for the aggregate deemed asset disposition price and is not deemed to liquidate after the deemed asset disposition. Immediately after the deemed asset disposition, old target is treated as acquiring all of its assets from an unrelated person in a single, separate transaction for an amount equal to the adjusted grossed-up basis. Immediately after, 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.
The final regulations apply to a qualified stock disposition that occurs on or after May 15, 2013.