Abstract

http://ssrn.com/abstract=2304354
 


 



A Survey of the Section 336(e) Regulations


Don Leatherman


University of Tennessee College of Law

September 2013

Tax Strategies for Corporate Acquisitions, Dispositions, Spin-Offs, Joint Ventures, Financings, Reorganizations and Restructurings (Practicing Law Institute 2013)
University of Tennessee Legal Studies Research Paper No. 221

Abstract:     
Under § 336(e), if one corporation owns an affiliated interest in the stock of a second corporation and sells, exchanges, or distributes all of that stock, Congress has authorized a regulatory election to treat the transfer of the second corporation’s stock as a disposition of its assets, thereby avoiding recognized gain or loss on the sale, exchange, or distribution of that stock. Congress added § 336(e) to the Code in the Tax Reform Act of 1986, intending that it be implemented using "principles similar to those of section 338(h)(10)." Thus, § 336(e) has a purpose similar to § 338(h)(10), offering taxpayers relief from a potential multiple taxation at the corporate level of the same economic gain, which may result when a transfer of appreciated corporate stock is taxed without providing a corresponding step-up in basis of the assets of the corporation.

Final regulations, published in the Federal Register on May 15, 2013, apply § 336(e) by employing a structure and principles like those under the § 338(h)(10) regulations, using those regulations as a template. Despite many similarities, the two regulatory regimes differ in several important respects, including the following: First, although both require the transfer of an affiliated interest in target stock by a corporation, § 338(h)(10) looks to the purchase of that stock interest, while § 336(e) focuses on its disposition. Thus, the § 338(h)(10) regulations (as do the § 338 regulations generally) consider what is purchased, while the § 336(e) regulations measure what is sold, exchanged, or distributed. Second, for § 338(h)(10) to apply to a non-S corporation target, on the date that the affiliated interest in the target is first acquired by purchase (the "acquisition" date), the target must be a member of the consolidated group or affiliated with a selling domestic corporation. In contrast, under the § 336(e) regulations, a § 336(e) election may be made for the target even if it is not affiliated with the selling corporation or a member of the selling consolidated group on the corresponding date (the "disposition" date). Finally, if a § 338(h)(10) election is made, a gain recognition election is required, while a gain recognition election for a purchaser may not be required following a § 336(e) election.

Those differences raise numerous technical difficulties, which the article describes. It also illustrates those difficulties through examples, focusing on S corporations and consolidated groups. Finally, the article suggests ways to amend the regulations to address those difficulties.

Number of Pages in PDF File: 76

Keywords: deemed sale, deemed purchase, 336(e), 338(h)(10)

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Date posted: August 1, 2013 ; Last revised: September 5, 2013

Suggested Citation

Leatherman, Don, A Survey of the Section 336(e) Regulations (September 2013). Tax Strategies for Corporate Acquisitions, Dispositions, Spin-Offs, Joint Ventures, Financings, Reorganizations and Restructurings (Practicing Law Institute 2013) ; University of Tennessee Legal Studies Research Paper No. 221. Available at SSRN: http://ssrn.com/abstract=2304354

Contact Information

Don Leatherman (Contact Author)
University of Tennessee College of Law ( email )
1505 West Cumberland Avenue
Knoxville, TN 37996-1810
United States
(865) 974-6838 (Phone)
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