Chapter 8

Question 1

What does §338 do? (3 things)

Answer 1

1. The seller receives capital gain treatment consistent with the actual form of the transaction- a stock sale.
2. The buyer received a step-up in the basis of the assets held by the corporation as through the transaction were an asset acquisition.
3. The corporation recognized no gain on the sale under the general utilities doctrine.

Question 2

What did the 1986 Tax Act eliminate?

Answer 2

The “General Utilities Doctrine”, which provided tax-free distributions at the corporate level. The repeal of this doctrine dramatically changed the “planning landscape” post-1986.

Question 3

What does the buyer prefer?

Answer 3

The buyer wants to purchase assets so that they will have a basis of FMV. Also assets are typically appreciated. The buyer gets basis of the stock they buy but it doesn’t change the basis of the assets inside the corporation.

Question 4

What does the seller prefer?

Answer 4

The seller wants to sell stock so that they only have to pay on one gain- the difference between the fair market value of the stock and the basis they have in the stock. Only exception is if the seller is a securities dealer, then the stocks are inventory.

Question 5

What happened in the Kimbell-Diamond Milling Case?

Answer 5

KDM purchased 100% of Whaley Mill stock for $210k but Whaley had assets with a basis of $329k.

Question 6

What was the issue in the Kimbell-Diamond Milling Case?

Answer 6

What basis does KDM take in the assets of Whaley?

Question 7

What was the holding in the Kimbell-Diamond Milling Case?

Answer 7

The court held that the stock and asset purchase was all part of one transaction, so even though the form was a stock purchase, the substance was an asset purchase. KDM was forced to step-down the asset basis to the assets’ FMV.

Question 8

What problem did the Kimbell-Diamond Milling Case cause for the IRS?

Answer 8

It opened the door for stock acquisitions to be treated as asset acquisitions if the acquired corporation was quickly liquidated. This means the seller is treated as having sold stock and the buyer would be treated as having bought assets.

Question 9

What did §334(b)(2) say and what replaced it?

Answer 9

It said that if a corporation acquired 80% or more of a subsidiary and such subsidiary was liquidated within two years, the transaction was treated as the sale of stock for the seller and an asset purchase for the buyer. It was replaced by §338.

Question 10

What are the 2 types of a §338 transaction?

Answer 10

1. A straight 338
2. An H10

Question 11

Straight §338 Election Requirement #1

Answer 11

There must be a “qualified stock purchase” – meaning that the acquiring corporation must acquire 80% or more of the target corporation’s stock within a 12 month acquisition period.

Question 12

Straight §338 Requirement #2

Answer 12

An election must be made to treat the stock purchase as an asset purchase under §338

Question 13

Straight §338 Requirement #3

Answer 13

As it relates to the buyer, the buyer is treated as though it formed a new corporation to acquire the assets from the old corporation in a taxable asset sale. The buyer files a “one-day” return for the old corporation. This one-day return reports the gain on the sale of assets to the new corporation. Prior to the repeal of General Utilities in 1986, this gain was not taxable!! Post-1986, the gain may be offset by any NOLs the “old” corporation possessed. Note that the formation of the new corporation and the asset sale are a fiction (no new corporation is formed and no assets are sold).

Question 14

Straight §338 Requirement #4

Answer 14

The basis of the assets “purchased” in the stock acquisition are equal to the:

1. Purchase price paid for the stock
2. Grossed-up for any minority stock held by other shareholders
3. Grossed-up by the basis of any stock acquired by the 80% corporate shareholder prior to the 12 month acquisition period and
4. Grossed-up for liabilities assumed by the buyer’s “new” corporation

Question 15

Straight §338 Requirement #5

Answer 15

Note that the “new” corporation does not need to liquidate (as under old §334(b)(2))

Question 16

When might you see a straight §338 today?

Answer 16

If the seller has sufficient net operating losses or tax credits to offset the gain from the deemed asset sale- such a sale is taxed to the buyer not the seller.

Question 17

What is the most common situation that you’ll see a §338(h)(10)?

Answer 17

The stock sale of a controlled subsidiary in a consolidated return, or an S corp after 1986.

Question 18

What are the two cases in which the sale of stock and the sale of assets have identical tax impacts to the seller?

Answer 18

1. The sale of a subsidiary by the parent where both entities are included in the same consolidated return.
2. The sale of S corp stock

Question 19

What are the 4 requirements of a §338(h)(10) transaction?

Answer 19

1. If buyer enters into a qualified stock purchase and the buyer and seller elect to have the purchase/sale treated as an (h)(10) then:
2. The transaction is treated as an asset sale for both the buyer and the seller (though still a stock transaction in form)
3. No one-day return is filed (as in a straight §338)
4. Seller reports the gain on the final return of the sub (in the consolidated return) or on the final S Corp return