Section 338 Business Sale
Under Section 197, all intangibles thus recognized are amortized over 15 years. The depreciation and amortization of all asset write-ups and intangibles, including goodwill, identified in the purchase price allocation then become tax-deductible expenses. Since the transaction is treated as an asset deal, IRC Section 197 applies and all intangible assets, including goodwill, recognized in the transaction are thus amortized over 15 years for tax purposes. Then the target corporation shall be treated as a member of the selling consolidated group with respect to such sale, and no gain or loss will be recognized on stock sold or exchanged in the transaction by members of the selling consolidated group. In the consolidated group context, the gain in the target’s assets arising from a section 338 election passes up to the selling consolidated group, and the tax on that gain is payable by the selling consolidated group.
- Further, the regulation enables a stock sale of an S Corporation to be taxed as if the transaction were an asset sale.
- Suppose that a target corporation (valued at $200) operates two businesses of equal value .
- If you purchase the target’s stock, under Section 1012 you will take a $1 million basis in that stock.
- Denver area businessandtax attorneyspecializing in business transactions, tax planning for individuals & businesses, tax matters before the IRS, and estate planning.
- T is deemed to liquidate by passing out the cash deemed received from New T of $1,800 to A in exchange for A’s T stock.
1988—Subsec. 100–647, § 1018, substituted “which meet the requirements of section 1504” for “which meet the 80 percent requirements of subparagraphs and of subsection ”. Except as otherwise provided in regulations, an election under this section shall be made not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs. Denver area businessandtax attorneyspecializing in business transactions, tax planning for individuals & businesses, tax matters before the IRS, and estate planning. We and our advertising partners use electronic technologies to collect certain types of personal information through our digital properties in order to provide you with relevant advertisements. Personal information may include your IP address, digital identifiers, and your interactions with digital properties.
The “acquisition date” is the date on which the 80% threshold is reached. Clause of subparagraph shall not apply to an acquisition of stock from a related corporation if at least 50 percent in value of the stock of such related corporation was acquired by purchase (within the meaning of subparagraphs and ). The term “purchasing corporation” means any corporation which makes a qualified stock purchase of stock of another corporation. Continuing with the example above, if a section 338 election is made, the buying corporation would acquire a corporation with $200 of tax basis in its assets. If a section 388 is not made, the buying corporation would acquire a corporation with $100 of tax basis in its assets. P and T must jointly make a Section 338 election no later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs.
U S Code § 338
The gain increases A’s basis from $700 to $2,300, and upon liquidation, A recognizes a $400 capital loss, making the net capital gain $700. The ordinary income, at a rate of 40%, continues to generate $200 of tax.
- This Portfolio analyzes in detail the elections under §338 and §338, available when a purchasing corporation makes a “qualified stock purchase” of a target corporation.
- If the parent company then distributes the after-tax liquidation proceeds to its shareholders, the parent shareholders are subject to a dividend tax on the distribution.
- See subsec.
- This article is for educational purposes only.
- Once A can identify what his after-tax cash would have been in a straight stock sale, he can insist that P “gross up” the sales price in conjunction with a Section 338 election so that his after-tax cash is identical to a straight stock sale scenario.
Generally, a 338 election is only advantageous when the target has substantial net operating loss or tax credit carryovers that the acquirer can use to offset any taxable gain triggered by the deemed asset sale. These tax attributes are available only for immediate use and do not survive the acquisition if the target is liquidated. From a tax perspective, the purchasing party is satisfied because now the transaction has been treated as an asset sale which provides a step up in basis for the assets. This increases depreciation deductions which may be used to offset ordinary income in the future. The seller is satisfied because there has only been one level of tax from the sale of the assets. Additionally, if the selling party has any losses, then depending on the character of the gain, these may be offset by the deemed asset sale. The disadvantage of a Section 338 election is that it triggers a taxable gain on the deemed asset sale.
Livingston Machinery Company Acquired By Summit Equity Group In Partnership With Midwest Growth Partners
Under Section 1504, this requires that the subsidiary’s stock be owned at least 80% by other members of the group. Any Section 338 election must be made by the fifteenth day of the ninth month after the month in which 80% control of the target is acquired (within 8.5 months).
Can an LLC make a 338 election?
These investors will often want the investment entity to be a pass-through entity for tax purposes, so that future operating and liquidation profits will be subject to only one level of tax, rather than two. … However, an LLC taxed as a partnership is not eligible to make a 338(h)(10) election.
98–369, § 712, , redesignated former par. As and substituted therein “paragraph ” for “paragraph ”. Former par. 99–514, § 631, struck out par. Relating to applicability of section 337 where target had adopted plan for complete liquidation.
Defining An S Corporation
The selling consolidated group is generally not taxed on the deemed liquidation of the target. Thus, if a section 338 election is made, the selling consolidated group’s tax is based on the gain inherent in the target’s assets; if no section 338 election is made, the group’s tax is based on the gain inherent in its target stock. Section 338 elections require that both the purchaser and the seller be corporations and both parties must agree to make the election (see §338). Unlike section 338 where the purchaser bears the tax burden, here the seller pays the tax from the asset sale so this requires agreement between both of the corporate parties. If an election is made, “old” target is treated as selling all of its assets to itself as “new” target, and “new” target is treated as purchasing those assets. “New target” has a fresh start for most federal income tax purposes, including a fair market value basis in its assets.
Assume that in the state T is located, there is an entity-level tax of 3%. This means that T will pay an extra $48 of entity level tax on the deemed asset sale for which he should be compensated. 98–369, § 712, substituted in heading “under subsection ” for “of stock of subsidiaries” and in text “The term ‘purchase’ includes any deemed purchase under subsection . The corporation making such purchase shall be treated as purchasing stock in the 3rd corporation by reason of the preceding sentence on the first day on which the purchasing corporation is considered under section 318 as owning such stock”. The term “recently purchased stock” means any stock in the target corporation which is held by the purchasing corporation on the acquisition date and which was purchased by such corporation during the 12-month acquisition period.
Stock Purchases Treated As Asset Acquisitions
Total tax is $442. Subtract this from the cash received of $1,967 and the net after-tax cash is $1,525, or exactly what it was in a straight stock sale. In a stock sale, A would have been left with $1,525 of after-tax cash. With a Section 338 election, A would be left with $1,450.
Providing for nonapplication of par. To any acquisition by the purchasing corporation if, to the extent provided in regulations, the property acquired is located outside the United States, redesignated subpar. As , and, in subpar. As redesignated, inserted “and meets such conditions as such regulations may provide”. 99–514, § 631, inserted provision that to the extent provided in regulations, term “selling consolidated group” also includes any affiliated group of corporations which includes the target corporation . Except as otherwise provided in paragraph or in regulations prescribed under this paragraph, the target corporation shall not be treated as a member of an affiliated group with respect to the sale described in subsection . The term “purchase” includes any deemed purchase under subsection .
How Does Bidens $2 Trillion Infrastructure Plan Impact Mergers & Acquisitions In 2021?
The purchase price of $2,100 must be allocated to the Old T assets as it would be for any asset sale, in accordance with each asset’s FMV. Thus, $400 of the purchase price is attributable to the cash, $200 of the purchase price is attributable to the cash-basis receivables, $500 is attributable to the fixed assets, and $1,000 is allocated to the self-created intangibles. In certain situations, however, a buyer cannot purchase a target’s assets because certain non-tax goals or restrictions; for example, when the target has key contracts that are not freely transferable.
Can a section 351 transaction defer the taxable income if that property is contributed?
Whether you’re setting up a new corporation with just yourself or other people, such as partners in a partnership, or getting involved in an existing corporation, under IRC Section 351(a) you can defer (put off) any resulting tax consequence. … You are in CONTROL of the corporation immediately after the exchange.
Sierra’s basis in Tango’s stock is $200 and Tango’s inside asset basis is $200. Also, Sierra has NOLs of $500, of which $70 are attributable to Tango.
However, the buying LLC would receive a tax step-up in the tax basis of Business A . To the contrary, if you purchase the assets of the target, under Section 1012 you take a basis in the acquired assets of $1,000,000. Under Section 1060, you allocate the purchase price among the acquired hard assets, and any amount you paid in excess of the value of the hard assets is allocated to intangible assets like goodwill. This is what is referred to as a “stepped-up” tax basis, because as the buyer, you get to immediately begin depreciating or amortizing the entire $1,000,000 purchase price. In essence, your investment begins immediately paying for itself in the form of tax benefits. So, no gain or loss is recognized by the selling group on its sale of the target subsidiary’s stock, but the target will recognize a gain as if it had sold all of its assets.
While regular Section 338 elections are rare, elections under 338 are quite common. Section 338 elections are available only for targets who are S Corporations or members of an affiliated group of corporations . Regulations providing for the coordination of the provisions of this section with the provision of this title relating to foreign corporations and their shareholders. An election by a purchasing corporation under this section, once made, shall be irrevocable. A shareholder can be a person, company, or organization that holds stock in a given company. A shareholder must own a minimum of one share in a company’s stock or mutual fund to make them a partial owner. Subsections , , and of such section 338, and paragraphs , , , and of subsection of such section 338, shall not apply.
Section 338 Elections, on the other hand, are common. A §338 Election is made jointly by the seller and purchaser and is available only when the target is a subsidiary member of the consolidated or affiliated group or is a S Corporation. A §338 Election avoids the shareholder-level tax by treating the target as having liquidated following the deemed asset sale. The depreciation and amortization of all asset write-ups and intangibles, including goodwill in the purchase price allocation becomes a tax-deductible expense.
The amount determined under paragraphs and shall be allocated among the assets of the target corporation under regulations prescribed by the Secretary. As with all tax codes there are a number of qualifying factors for these elections, which include the need for both parties to be corporations, where the Buyer must be a C-corporation and make a Qualified Stock Purchase (“QSP”). As a result, individuals and partnerships cannot make a 338 election, as they can’t make a QSP, unless they circumvent this restriction by forming a new corporation (“NewCo”) to acquire the Company’s stock. T is deemed to liquidate by passing out the cash deemed received from New T of $1,800 to A in exchange for A’s T stock. Under Section 331, A recognizes capital loss for the difference between the $1,800 deemed received and A’s adjusted $2,200 basis in the T stock. Thus, A recognizes $400 of long-term capitalloss upon liquidation. With that done, gain or loss on the sale of each asset can be computed.
Section 338h Election
Further, the regulation enables a stock sale of an S Corporation to be taxed as if the transaction were an asset sale. Asset sales offer several advantages. For one, the buyer can take a “stepped-up” tax basis, which means it can significantly raise the stated value of the seller’s assets.
Always consult a professional advisor before making any financial decisions. Amendment by sections 1006 and 1018 of Pub.
For purposes of subsection , fair market value may be determined on the basis of a formula provided in regulations prescribed by the Secretary which takes into account liabilities and other relevant items. For purposes of this subparagraph, a corporation is a related corporation if stock owned by such corporation is treated (under section 318 other than paragraph thereof) as owned by the corporation acquiring the stock. The amount described in paragraph shall be adjusted under regulations prescribed by the Secretary for liabilities of the target corporation and other relevant items. Shall be treated as a new corporation which purchased all of the assets referred to in paragraph as of the beginning of the day after the acquisition date. P, if it is prudent, will usually be happy to part with a little additional cash in exchange for immediate tax benefits in the form of depreciation and amortization deductions. Both sides win.
The term “nonrecently purchased stock” means any stock in the target corporation which is held by the purchasing corporation on the acquisition date and which is not recently purchased stock. The denominator of which is the percentage of stock in the target corporation attributable to the purchasing corporation’s recently purchased stock. The basis of the purchasing corporation’s nonrecently purchased stock. Suppose, for example, the selling consolidated group has $150 of tax basis in the stock of a target corporation, the target corporation has $100 of tax basis in its assets and the stock of the target is sold for $200 to a single buying corporation.
The term “affiliated group” has the meaning given to such term by section 1504 (determined without regard to the exceptions contained in section 1504). No election may be made under this section with respect to the second or subsequent such purchase if such an election was not made with respect to the first such purchase. Such acquisition is described in regulations prescribed by the Secretary and meets such conditions as such regulations may provide.
All S Corporations start as a regular or professional corporation, and only by requesting the S Election to the Internal Revenue Service can it act as an S Corporation. Due to the double imposition of the tax, a regular Section 338 election often is unattractive and typically is made only when the target has significant tax attributes (e.g., net operating losses) to offset the gain recognition at the target level. 98–369, § 712, included within 12-month acquisition period the period beginning with the date on which the acquiring corporation is first considered as owning stock owned by corporation from which acquisition was made.
Note, the asset sale does trigger gain to the selling corporation, but there is no subsequent tax from the stock sale, thus eliminating a second level of tax. Treating the sale as a stock purchase may have many benefits to the purchaser such as maintaining certain contracts, permits, licenses and other corporate attributes that could be lost from an asset purchase agreement. There is generally no tremendous incentive for T to make a Section 338 election; in most cases, the seller will be better off simply selling the stock and recognizing all capital gain. To qualify for a 338 election, the target must be either 1) a U.S. corporate subsidiary of a selling consolidated group or selling affiliate or 2) an S corporation on the acquisition date.