Appendix E: Technical Tax Supplement

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
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