Asset sale treatment: final treasury regulations under Sec. 336(e).

• Author: Hurok, Jeffrey M.
• Position: Regulatoryupdate

Nearly 30 years at.111v enactment of its enabling legislation, the Treasury Department and IRS published final regulations May 10 under Sec. 336(e) with Treasury Decision (TD) 9619 (78 FR 28467-01). Treas. Reg. secs. 1.336-1 through 1.336-5 (336(e) reg.) permit taxpayers in certain situations to elect to treat sales, exchanges and distributions of at least 80 percent of a target corporation's stock as taxable sales of the target's assets.

These rules are generally favorable to taxpayers in that they permit taxpayers to obtain We benefits or asset sale treatment and apply in many situations in which a similar Sec. 338 election is not available.

This article will consider the potential benefits of asset sale treatment, review the potential advantages and limitations of Sec. 338 elections, and explore the mechanics and potential opportunities of the new Sec. 336(e) election.

Unless otherwise indicated, all section references in this article are to the Internal Revenue Code of 1986, as amended the Code), or the regulations promulgated pursuant to the Code--as the context requires.

Benefits of Asset Sale Treatment

A sale of a corporation's assets can often be more tax efficient than a sale of its stock. For purposes of discussion, assume that basis of the stock of a target corporation (T) equals the basis in its assets and, in both cases, is less than their fair market value.

If a purchaser (P) acquires the T stock in a taxable transaction (there can be multiple transaction Ibrms to achieve a stock acquisition, it will obtain cost basis in the T stock acquired generally equal to cash paid, plus capitalized transaction costs. "T's asset basis will be unaffected by the transaction.

P will not be able to recover any of its purchase price through depreciation or amortization deductions, although it can recover the cost when it ultimately sells the T stock.

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However, if P acquires T's assets, P will obtain a cost basis in the T assets acquired (generally equal to the cash paid, plus assumed liabilities, plus capitalized transaction costs: also, P will not inherit T's tax attributes). See "Success-based Fees" (California CPA, October 2011) fur a discussion of transaction costs.

P will be able to recover its purchase price to the extent of its depreciation and amortization deductions for the T assets. Accordingly, under these facts, the asset deal tends to be more tax efficient for the buyer than die stock deal.

There could be variations that make the choice of an asset sale less desirable for the seller. For example, if the outside stock basis is significantly higher than the inside asset basis, the T side would be less prone to sell assets unless there are tax attributes--such as net operating loss or tax credit carryovers to shield the gain or eliminate the tax. The purchaser may be willing to reimburse the seller additional tax if an asset sale would result in a significantly higher amount of depreciation and amortization deductions than a stock sale.

It's good practice to analyze the numbers to help determine whether the net present value of the depreciation and amortization deductions is greater than any additional costs to the seller in undertaking the asset sale over the stock sale.

Sec. 338(h)(10) Election

Often, particularly from the business perspective of...