Section 44 Consistency Provisions

• Library: Bus Trans 2005

The consistency rules of I.R.C. § 338(e) and (f) were aimed at preventing selective acquisitions of assets—in order to obtain a stepped-up tax basis—of a target corporation that are preceded or followed by a purchase of the target corporation’s stock. The final consistency rules are set forth in Treas. Reg. § 1.338-8 (Final Consistency Rules).

The Final Consistency Rules allow a purchasing corporation to selectively step up the basis for assets acquired from the target affiliated group provided that the target affiliated group recognizes both the gain that is inherent in the assets and the gain that is inherent in the stock of the target corporation. The Final Consistency Rules generally apply only when the target corporation is a consolidated group subsidiary or it pays dividends eligible for a 100% dividends received deduction. Treas. Reg. § 1.338-8(a)(2) and (4).

Under these circumstances, a carryover basis results for all “tainted assets.” Treas. Reg. § 1.338-8(d). This carryover basis requirement applies unless:

• the purchasing corporation has made an I.R.C. § 338 election, Treas. Reg. § 1.338-8(a)(2); or

• the transaction meets an exception provided in Treas. Reg. § 1.338-8(d)(2)

An asset is tainted if:

• the asset is disposed of during the target corporation’s consistency period as defined in I.R.C. § 338(h)(4)

• the asset is owned, immediately after its acquisition and on the target acquisition date, by the purchasing...