Press Room: Tax Release
Final Regulations Provide Flexibility to Treat Stock Sales as Asset Sales
IRS Finalizes Regulations Under Section 336(e)
IRS recently finalized regulations, effective on May 15, 2013, under Section 336(e) which provide additional flexibility (over and above so-called Section 338 and Section 338(h)(10) elections) to treat certain stock sale and/or distribution transactions as asset sale transactions for federal income tax purposes. Under the final regulations, a Section 336(e) election is available for a Qualified Stock Disposition (QSD) of stock of a domestic corporation (domestic target) by a domestic corporate seller or by the shareholders of an S Corporation. A QSD is a transaction or series of aggregated transactions (which can involve multiple persons that acquire stock of the domestic target or stock of an S corporation) occurring over a 12-month period where 80% or more of the stock (both vote and value) of a domestic target is disposed of (sold, exchanged or distributed in taxable transactions with persons that are considered (as defined) unrelated persons) by a domestic corporate owner or the shareholders of an S Corporation. Unlike in Section 338 or Section 338(h)(10) transaction where there must be a corporate purchaser, a Section 336(e) election may be made where, for example, an acquisition of 80% or more of the stock of a domestic target in a QSD is made by an individual or a partnership (or combinations thereof), thus simplifying the execution of the transaction whereby previously a corporate purchaser would have been required to be established by an individual or partnership (or combinations thereof) to make a Section 338 or Section 338(h)(10) election. Further, a Section 336(e) election may be made when, for example, 80% or more of the stock of a domestic target is distributed by a domestic corporation in certain taxable distributions to its shareholders in a QSD or in certain combined transactions where, for example, a portion of the stock of the domestic target is distributed to shareholders in a taxable transaction and a portion of the stock is sold to an unrelated third party in a combined transaction which qualifies as a QSD.
The detailed mechanical rules of the Section 336(e) election generally reference many of the same principles found in the Section 338 and Section 338(h)(10) regulations for determining the deemed sale price and deemed purchase price where less than 100% of the stock of a domestic target is disposed of in a QSD, where the QSD occurs over a period of time during the 12-month period, where the assumption of liabilities are involved, where tiered domestic targets are involved in a QSD, or where parties in the QSD transaction had acquired shares of the domestic target outside of the 12 month QSD window. In contrast to elections under Section 338 and Section 338(h)(10) regulations, however, the time and manner of making a Section 336(e) election is modified in certain key respects, with IRS stating its intention to modify Form 8883, currently used to make a Section 338 or Section 338(h)(10) election, to accommodate the making of a Section 336(e) election.
The ability to make a Section 336(e) election for a QSD provides additional flexibility and opportunities in tax efficient structuring for corporate transactions, in both a closely-held private and public transaction environment. In evaluating a Section 336(e) election in a particular corporate transaction, it is important to consider the state income tax implications, including whether a relevant state will follow the new federal rules in permitting a Section 336(e) election. It is important that the parties to a Section 336(e) election carefully consider the income tax consequences thereof and include appropriate provisions in the transactional documents to protect their respective positions.