On May 10, 2013, Treasury published long-awaited final regulations under Section 336(e) of the Internal Revenue Code of 1986, as amended (the “Code”). Under these new regulations, certain corporations can elect to treat a qualifying sale, exchange or distribution of the stock of its U.S. subsidiary as a deemed disposition by such subsidiary of its assets thereby offering an opportunity to step-up the tax basis in the assets of such subsidiary (the “336(e) Election”). The 336(e) Election is available to qualified stock dispositions (generally taxable transactions that include certain sales, exchanges and/or distributions) of 80-percent of the voting power and value of the target corporation within a twelve-month period to unrelated persons. The 336(e) Election also applies with respect to qualifying dispositions of S-corporation stock. The 336(e) Election can generally be understood to offer the effect of an asset sale when that form of transaction is not pursued while avoiding a second level of tax on the stock disposition.
The 336(e) Election is available for a wider range of transactions than the familiar election under Section 338 of the Code, which provides for deemed asset sale treatment in certain stock purchase transactions involving a single corporate purchaser. The 336(e) Election applies to qualified stock dispositions in the form of sale, exchange, distributions or any combination(s) thereof, including where the stock of the target corporation is acquired or received by multiple acquirers or recipients and regardless of whether such acquirers or recipients are themselves corporations. Careful consideration should be given to the interaction of these new federal rules with applicable state and local tax rules.
Treasury is continuing to consider whether the scope of the 336(e) Elections should be further expanded to apply in the case of related-party transactions, non-recognition transactions (such as Section 351 exchanges or certain tax-free reorganizations) and transactions involving a non-U.S. seller or target corporation.