The Treasury and the IRS released final regulations under Section 336(e), which permits a domestic corporation or S corporation shareholders (“Seller”) to make an irrevocable election to treat a sale, exchange or distribution of at least 80% (by vote and value) of a domestic target corporation’s (“Target”) stock to unrelated parties within a 12-month period as a sale of Target’s assets (a “336(e) Election”). The benefit of a 336(e) Election is a step-up in the basis of Target’s assets.
To make the 336(e) Election, the Seller (in the case of an S corporation Target, all of the S corporation shareholders, including any shareholders who do not dispose of stock in the transaction) and Target must enter into a written, binding agreement to make the 336(e) Election, attach a 336(e) Election statement to the applicable tax return and file the applicable asset allocation statement.
The 336(e) Election will expand the number of sales of stock of S corporations where asset sale treatment can be elected. Asset sale treatment has been available on the sale of the shares of an S corporation under Section 338(h)(10), but only where the buyer was a corporation. The Section 338(h)(10) election cannot be made if the buyer is an individual. The new 336(e) Election can be made even if the buyer is an individual. Where the company being sold is a C corporation, only a shareholder that is itself a domestic corporation can make the election. It cannot be made by a selling shareholder who is an individual.
A 336(e) Election only requires consent of Seller and Target. Seller and Target can potentially make the 336(e) Election without the knowledge or consent of the buyer(s). Buyers should be sure to deal with this issue contractually in transactions where a 336(e) Election could potentially be made.