Appendix E: Technical Tax Supplement

• Pages: 369-377

369

I. THE 338 ELECTIONS

A. Deemed Sale of Target Assets to Itself

As noted in the text, target is treated as selling all its assets at fair market value

as of the close of the “acquisition date”: the date as of which purchaser acquires

the requisite control of target. On the day after the acquisition date, target is

treated as purchasing the assets that it is treated as having sold the day before.

Several points to notice:

•

Target recognizes gain or loss as of the end of the acquisition date, when

purchaser has control. So for a 338(g) election, the purchaser bears the tax

burden for net taxable gain.

•

Since, as ctional purchaser, target is treated as a new corporation, differ‑

ent from old target—its guise as seller—old target’s tax year closes as of the

end of the acquisition date, and none of its corporate traits survive in new

target’s hands. Old target can, however, use any NOL carryforwards to the

year ending on the acquisition date to offset net 1231 gain from the deemed

sale. New target, meanwhile, starts with a clean slate, and can—and may

need to—make new elections as to its taxable year, MACRS recovery period

and depreciation method, method of accounting, etc., subject of course to

applicable rules limiting options as to each of these items. Target keeps its

EIN, however; and as to employment tax matters (FICA and FUTA), target is

treated as one continuing entity.

•

By contrast, if a 338(h)(10) election is made, no gain or loss is recognized

on seller’s sale of stock; target recognizes gain or loss on the deemed sale of

its assets to itself as new target while target is still held by its selling parent;

Appendix E

Technical Tax Supplement

Vines_Mergers_20140521_13-42 FINAL.indd 369 6/3/14 1:26 PM