Question

X Corp. owns 98 of the 100 outstanding shares of T Corp. common stock the only class outstanding. The other 2 shares are owned by unrelated shareholders. T has some assets with both gains and losses; assume the amount of the gains exceeds the amount of the losses. In Year 1, X engages in the following transactions. On March 1, it sells 30 shares of T stock to unrelated A for cash; on April 1, it sells 10 shares of T stock to R, a related individual; on July 1, it distributes 50 shares of T stock to X Corp.'s unrelated shareholders; and on December 1, it sells 5 shares of T stock to unrelated B. The value of T stock on July 1 is $100/share.

(a) May a §336(e) election be made and, if so, by whom?

(b) Assuming that a §336(e) election may be made, what are the tax consequences to all relevant parties?

Answer 1

(a) X Corp and its shareholders and T Corp must enter into a binding written agreement to make the election under section 336(e) for taxable acquisition of 100% of the Target’s asset- T corp for tax purpose.

Section 336(e) of the Internal Revenue Code (the “Code”) affords a corporate purchaser the convenience of a stock purchase with the tax benefits of an asset purchase by allowing the purchaser to elect to treat a stock purchase as an asset purchase for federal income tax purposes

(b) 1. The transaction is treated as a taxable acquisition of 100% of T corp assets for tax purpose.
2. It helps in the tax basis of the T corp’s assets to fair market value.
3. A, R, B gets more depreciation and/or amortization deductions.
4.The purchase price allocated to goodwill can be amortized over 15 years.
5. X corp could incur increased tax liability in the gain on ordinary income type assets.

6. Treated as an asset sale of T corp.