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.

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