IRS allows sec. 338(h) (10) election made during spinoff of selling corporation.

• Author: Keith, Bryan

In Letter Ruling 201220020 the IRS integrated an internal stock sale followed by a spinoff and ruled that the internal stock sale was eligible for a Sec. 338(h)(10) election.

Sec. 338(h)(10) in General

Sec. 338(h)(10) provides that when a target corporation is sold in a "qualified stock purchase" by its parent corporation to a purchasing corporation, the seller and purchaser may make a joint election to treat the stock sale as a deemed asset sale for federal income tax purposes. Under the tax fiction imposed under Sec. 338(h) (10) and its corresponding regulations, the stock sale is disregarded and instead the "old" target corporation is deemed to sell its assets to the "new" target corporation. The "old" target corporation is then deemed to liquidate into the selling corporation. Gain or loss on the deemed asset sale is reported by the "old" target corporation as of the end of the day of the transaction while the target is still a member of the selling group. The "new" target, owned by the purchasing corporation, obtains a cost basis in the acquired assets.

An election under Sec. 338(h)(10) is available only when the target corporation's stock is acquired in a qualified stock purchase. A qualified stock purchase under Sec. 338(d)(3) is any transaction or series of transactions in which the stock of one corporation (meeting the 80% vote and value requirements of Sec. 1504(a)(2)) is acquired by another corporation by purchase during a 12-month acquisition period. A purchase is defined by Sec. 338(h)(3)(A) as any acquisition of stock, but only if (1) the stock's basis does not carry over from the transferors; (2) the stock is not received in a capital contribution or reorganization (exchanges described in Sec. 351, 354, 355, or 356); and (3) the acquired stock was not acquired from a person the ownership of whose stock would be attributed to the purchaser under Sec. 318(a) (other than Sec. 318(a)(4), regarding options).

The Facts in Letter Ruling 201220020

In Letter Ruling 201220020, a publicly traded foreign corporation (Acquirer) owned, indirectly through a chain of other foreign corporations, all of the outstanding stock of a U.S. corporation (Target Parent). Target Parent was the common parent of an affiliated group that elected to file a U.S. consolidated income tax return (the Target Parent Group). Target Parent directly and wholly owned all of the outstanding stock of another U.S. corporation (Target), which was a member of the Target...