On May 10, 2013, the U.S. Treasury Department and Internal Revenue Service (IRS) issued final Treasury regulations under Section 336(e) of the Internal Revenue Code of 1986, as amended (the Code). Section 336(e) of the Code grants the IRS authority to issue regulations providing for the treatment of the sale, exchange or distribution of at least 80 percent of the voting power and value of a corporation’s stock as a sale of all of the assets of the corporation. Similar to an election under Section 338(h)(10) of the Code, Section 336(e) is intended to provide taxpayers relief from a potential multiple taxation of the same economic gain that can result when a transfer of appreciated corporate stock is taxed without providing a corresponding step‐up in the basis of the corporation’s assets. As a result of an election pursuant to Section 336(e), the "new target" may have a stepped up basis in the assets of the corporation.
The final Section 336(e) regulations generally follow the proposed Section 336(e) regulations issued in 2008. However, the final Section 336(e) regulations make certain changes to the proposed regulations, including the following: (i) the final regulations modify the loss disallowance rule in the proposed regulations by allowing target’s realized losses in the deemed asset disposition to offset target’s realized gains in the deemed asset disposition; (ii) the final regulations disallow any net loss attributable to a distribution of any target stock during the 12‐month disposition period; and (iii) the final regulations provide that the Section 336(e) election is made jointly by the seller and target corporation rather than unilaterally by the seller, as had been contemplated by the proposed regulations. Under the final regulations, a Section 336(e) election is made by the seller(s) and the target entering into a written, binding agreement to make the election and a Section 336(e) election statement is attached to the relevant return.
An important addition to the final regulations permits a Section 336(e) election to be made for an S corporation target. In the case of an S corporation, the election is made by all of the S corporation’s shareholders.
The final Section 336(e) regulations incorporate many of the principles set forth in the regulations under Section 338(h)(10). However, the final Section 336(e) regulations provide for treatment of a stock acquisition as a deemed asset sale in certain situations where a Section 338(h)(10) election may not be available. For example, an election under Section 338(h)(10) of the Code is available only if target stock is acquired by a corporate purchaser; however, a transaction may be eligible for a Section 336(e) election even where the acquirer of target stock is not a corporation. In addition, while a single purchasing corporation must generally acquire the stock of a target corporation to be eligible for a Section 338(h)(10) election, the Section 336(e) regulations permit the aggregation of multiple purchasers for purposes of having a “qualified stock disposition” that may be eligible for a Section 336(e) election. The final regulations define a "qualified stock disposition" eligible for the Section 336(e) election as any transaction or series of transactions in which 80 percent of the voting power and value of the target corporation are disposed of (whether by sale, exchange, distribution or any combination thereof) by another domestic corporation (or by S corporation shareholders) within a twelve‐month period to unrelated persons. As a result, a Section 336(e) election may be available in the case of a public offering in which a consolidated group sells a corporate subsidiary to the public.
The final Section 336(e) regulations will become effective for dispositions that take place on or after May 15, 2013.
The preamble to the final regulations states that the IRS continues to study whether related party transactions should qualify for a Section 336(e) election and whether the scope of the regulations should be broadened to include some non‐taxable transactions and transactions in which either the seller or target is a foreign corporation.