Using sec. 338 to avoid antichurning rules.

• Author: Smith, Annette B.

When assets are sold in a taxable transaction, the buyer must be aware of limitations placed on amortizing certain acquired intangibles under the antichurning rules in Sec. 197(f)(9). A recent letter ruling highlights the ability to use a Sec. 338 election to create the effect of an asset sale while avoiding the antichurning rules.

Letter Ruling

In Letter Ruling 201203004, Distributing owned Sub 1, which owned Sub 7 and other Sub 1 Subsidiaries. Sub 7 owned Sub 7 Subsidiaries. Sub1, Sub 1 Subsidiaries, Sub 7, and Sub 7 Subsidiaries had built-in losses. The following steps were taken pursuant to a plan:

* Distributing entered into a binding agreement to sell all the nonvoting preferred stock of newly formed Corp 1 to certain insiders and investors.

* Distributing transferred Sub 1 to Corp 1 in exchange for Corp 1 common stock and nonvoting preferred stock (the contribution).

* Distributing transferred all the Corp 1 common stock to Controlled and distributed Controlled to the public in a Sec. 355 spinoff.

* Distributing sold all the Corp 1 preferred stock to the insiders and investors pursuant to the binding obligation.

* Distributing and Corp 1 made Sec. 338(h)(10) elections with respect to Sub 1, Sub 1 Subsidiaries, Sub 7, and Sub 7 Subsidiaries. The IRS ruled that the contribution followed by the prearranged sale of the preferred stock was a taxable sale of the Sub 1 stock under Sec. 1001. The letter ruling also concluded that assuming a Sec. 338(h)(10) election is made with respect to Sub 1, Sub 1 Subsidiaries, Sub 7, and Sub 7 Subsidiaries, any goodwill, goingconcern value, and other Sec. 197 intangibles (for which amortization would not have been allowable but for Sec. 197) of Sub 1, Sub 1 Subsidiaries, Sub 7, and Sub 7 Subsidiaries are not subject to the antchurning rules of Sec. 197(f)(9).

Qualified Stock Purchase

A Sec. 338 election is permitted only if there is a qualified stock purchase (QSP). A QSP is a transaction, or series of transactions within a 12-month period, in which a corporation purchases at least 80% of the voting power and value of the stock of another corporation (Sec. 338(d)(3)).

Stock is not considered purchased if it is acquired in a Sec. 351 or Sec. 354 transaction (Sec. 338(h)(3)(A)(ii)). In the letter ruling, the contribution was not a Sec. 351 transaction because immediately after the contribution, taking into account the binding obligation, Distributing did not own any Corp 1 preferred stock and thus was not...