Final regs. under secs. 338 and 1060 reflect significant changes.

• Author: Zarzar, Robert
• Position: Deemed and actual asset acquisitions

Final regulations issued earlier this year for deemed and actual asset acquisitions under Sets. 338 and 1060 apply to any qualified stock purchase (QSP) or asset acquisition (constituting a trade or business) occurring after March 15, 2001 .While the final rules are similar in organization and substance to proposed regulations issued in August 1999 and temporary regulations issued in January 2000, significant changes were made in several areas, largely in response to comments received from taxpayers and practitioners.

History

The purpose of the proposed regulations was to simplify application of prior regulations and provide taxpayers with guidance on uncertainties created by the earlier regulations. Some of the more important items in the proposed regulations included:

* Installment-sale clarification;

* Increase in asset classes from five to seven;

* Specific-transaction cost allocation;

* De-linking adjusted deemed sales price (ADSP) and adjusted grossed-up basis (AGUB);

* Disallowing gross-up of selling and acquisition costs;

* New anti-abuse provision; * Contingent liabilities conform to general principles of tax law; and

* Shareholder consent for S targets increased to 100%.

The January 2000 temporary regulations were substantially the same as the proposed regulations and were issued in temporary form because of the lack of comment the IRS received on the earlier proposed regulations. These regulations were effective for any QSP or asset acquisition occurring after Jan. 5, 2000.

Changes in Final Regs.

Anti-abuse rule. The temporary regulations included a new anti-abuse rule allowing the Service to reallocate values assigned to target assets when the target corporation transferred an asset (within two years of the QSP) that also was acquired by the purchaser in the QSP and continued to be "held or used to more than an insignificant extent" with one or more of the activities of the new target.

The final regulations change the standard for invoking the anti-abuse rule to "held or used primarily" with one or more of the activities of the new target. The change is intended to allow taxpayers to transfer assets in the ordinary course of business without triggering the anti-abuse rule in a later QSP. The anti-abuse rule is intended to apply only to transactions that manipulate operation of the general residual method of asset allocation.

Stock in lower-tier subsidiaries. The temporary regulations classified the stock of a lower-tier...