09 Oct IRS Issues Final Regulations on IRC Section 336(e) Deemed Asset Sales
The IRS and Department of Treasury have issued final regulations to Internal Revenue Code section 336(e), an alternative to section 338 “deemed asset sale” elections. A deemed asset sale treats the qualified disposition of target company stock as a sale of that company’s underlying assets: the purchaser generally depreciates the assets (including goodwill) from a cost-basis in the coming years, but the seller’s long-term capital gain can turn partially or wholly into “recapture” income taxed at ordinary rates. Thus, the election is generally prudent only when the seller’s added current tax cost is lower than the present value of future tax savings to the purchaser.
Section 336(e) differs from the variations contained in section 338. Under the final section 336(e) regulations, the acquiror is not required to be a corporation or a purchaser, the target is not required to be an S corporation, and all moving target stock can be aggregated in calculating whether a stock disposition is sufficiently large. In addition, the seller can make a section 336(e) election unilaterally, potentially broadsiding unprepared acquirors.
Section 336(e) is an important tool for any transactional lawyer, representing a critical client protection discussion point and a large-scale tax planning opportunity.Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.