Question

On July 22, 2016, Lilac Corporation purchased 25% of the Coffee Corporation stock outstanding. Lilac Corporation purchased an additional 40% of the stock in Coffee on March 24, 2017, and an additional 20% on May 2, 2017. On September 25, 2017, Lilac Corporation purchased the remaining 15% of Coffee Corporation stock outstanding. For purposes of the § 338 election, on what date does a qualified stock purchase occur? What is the due date for making the § 338 election?

Answer 1

There are few general requirements for a Section 338 election:

• A Section 338 election cannot be made in a non-taxable stock deal.
• The buyer must acquire control of the target in a qualified stock purchase (QSP), defined as the purchase of at least 80% of the total voting power and value ("vote and value") of the target's stock within twelve consecutive months of the first purchase of such stock. Preferred stock is not included in computing voting power or value. The "acquisition date" is the date on which the 80% threshold is reached.
• The buyer must be a C corporation. For financial sponsors typically organized as LLCs, therefore, the Section 338 election is not usually an option. Individuals and partnerships cannot make a QSP, and are consequently unable to make a 338 election. However, individuals and partnerships can circumvent this restriction by forming a new corporation ("NewCo") to acquire the target's stock.
• Any Section 338 election must be made by the fifteenth day of the ninth month after the month in which 80% control of the target is acquired (within 8.5 months).

Therefore for the purpose of Section 338 election, date on which qualified stock purchased is May 2, 2017.

Due date for making the Section 338 election is the fifteenth day of the ninth month after the month in which 80% control of the target is acquired (i.e. within 8.5 months).