Final sec. 336(e) regulations: election for qualified stock dispositions.

AuthorMittman, Matthew J.

On May 10, 2013, the IRS issued final regulations (T.D. 9619) under Sec. 336(e) allowing a domestic corporation (S) to make an irrevocable unilateral election to treat the sale, exchange, or distribution of a domestic corporation's (T's) stock meeting the 80% vote and value requirements of Sec. 1504(a)(2) within a 12-month disposition period (a qualified stock disposition, or QSD) as a deemed sale of T's underlying assets. The election provides relief from potential multiple levels of taxation at the corporate level by providing a corresponding basis step-up of T's assets.

Similar to the Sec. 338 election, the Sec. 336(e) election can be advantageous when S's basis in the T stock is lower than T's basis in its underlying assets. However, unlike Sec. 338, which requires a corporate purchaser, the Sec. 336(e) election is available for stock transfers to noncorporate purchasers. The Sec. 336(e) election is available to both domestic C corporation and S corporation shareholders for qualifying transactions occurring on or after May 15, 2013.

Background

Sec. 336(e) was enacted as part of the repeal of the General Utilities doctrine in 1986 (see General Utilities & Operating Co. v, Helvering, 296 U.S. 200 (1935)) to authorize the issuance of regulations that, under certain circumstances, would allow an election to treat the disposition of a corporation's stock meeting the 80% vote and value requirements as a deemed sale of all of its underlying assets. The IRS and Treasury issued proposed regulations under Sec. 336(e) in 2008 (REG-143544-04), which were modified in the final regulations.

The Sec. 336(e) election generally is comparable to the election under Sec. 338(h)(10) for purchases of T stock. However, unlike a transaction qualifying for the Sec. 338(h)( 10) election, the Sec. 336(e) election is also available for the sale of T's stock to noncorporate purchasers, including individuals, private-equity funds, and partnerships. The election also is available even if there is not a sale or exchange. For example, the Sec. 336(e) election is available for a distribution by S of T stock to S's shareholders.

Also, unlike Sec. 338(h)(10), the disposition of T stock can be made to a number of purchasers aggregated over 12 months to determine qualification for the election instead of a disposition to a single purchasing corporation. However, T stock sold, exchanged, or distributed to a related person, as determined under the principles of Sec. 338(h)(3)(C) and Regs. Sec. 1.338-3(b)(3), is not counted as a disposition. Also, a transaction that qualifies both as a QSD and as a qualified stock purchase (QSP) as defined under Sec. 338(d)(3) is not treated as a QSD. Furthermore, the final regulations do not permit an election in a nontaxable transfer of T stock under Secs. 351, 354, 355 (other than Secs. 355(d)(2) and (e)(2)), or 356, or in a transaction where S or T is a foreign corporation.

The overall tax effect to all parties of a QSD with a Sec. 336(e) election depends on whether: (1) the stock of T is sold or exchanged, (2) S distributes T stock to which Sec. 355 doesn't otherwise apply, or (3) S distributes T's stock to its...

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