A Survey of the Section 336(e) Regulations
Tax Strategies for Corporate Acquisitions, Dispositions, Spin-Offs, Joint Ventures, Financings, Reorganizations and Restructurings (Practicing Law Institute 2013)
76 Pages Posted: 1 Aug 2013 Last revised: 5 Sep 2013
Date Written: September 2013
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.
Keywords: deemed sale, deemed purchase, 336(e), 338(h)(10)
Suggested Citation: Suggested Citation