Sec. 338(h)(10) checklist.When S corporation shareholders decide to dispose of To determine the fate of; to exercise the power of control over; to fix the condition, application, employment, etc. of; to direct or assign for a use. See also: Dispose their investments in the corporation in a taxable transaction Taxable transaction Any transaction that is not tax-free to the parties involved, such as a taxable acquisition. , they have several methods from which to choose. From a tax perspective, a sale of all of the S stock will result in the S shareholders recognizing the same total gain or loss as they would if the S corporation sold all of its assets and then liquidated DAMAGES, LIQUIDATED, contracts. When the parties to a contract stipulate for the payment of a certain sum, as a satisfaction fixed and agreed upon by them, for the not doing of certain things particularly mentioned in the agreement, the sum so fixed upon is called liquidated damages. (q.v. . However, with an asset sale, some of the gain may be taxed at ordinary income rates; a stock sale generally will generate capital gain or loss. In addition, with an asset sale, the built-in built-in - (Or "primitive") A built-in function or operator is one provided by the lowest level of a language implementation. This usually means it is not possible (or efficient) to express it in the language itself. gain (BIG) tax or passive investment income (PII See Pentium II. ) tax may apply. There may also be state and local tax differences between a stock sale and an asset sale followed by a complete liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts. A type of proceeding pursuant to federal Bankruptcy . Stock or Asset Sale? Tax Issues A stock acquisition will result in a cost basis to the buyer of the stock acquired, but not in a step-up step-up A scheduled increase in the exercise or conversion price at which a warrant, an option, or a convertible security may be used to acquire shares of common stock. (or -down) in the basis of the acquired corporation's assets. The acquired corporation's tax attributes (e.g., net operating loss operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. carryovers and earnings and profits (E&P)) remain with the corporation. If the buyer acquires assets, its asset bases are stepped up (or down) to reflect the purchase price paid. The buyer does not succeed to the acquired corporation's tax attributes. In deciding whether to structure an S corporation sale as a stock sale or as an asset sale followed by a corporate liquidation, the buyer and seller consider their relative costs and benefits. For example, the additional cost of an asset sale from the seller's perspective (e.g., ordinary income taxed at a higher rate and BIG tax) is often compared to the benefit of the basis step-up the buyer receives. Nontax Issues S corporation sales also trigger (1) A mechanism that initiates an action when an event occurs such as reaching a certain time or date or upon receiving some type of input. A trigger generally causes a program routine to be executed. nontax issues, such as determining responsibility for disclosed dis·close tr.v. dis·closed, dis·clos·ing, dis·clos·es 1. To expose to view, as by removing a cover; uncover. 2. To make known (something heretofore kept secret). and undisclosed liabilities, deciding on unwanted assets and addressing dissident shareholders' concerns. In addition, an actual sale of some kinds of assets may not be possible (e.g., certain nontransferable Adj. 1. nontransferable - incapable of being transferred unassignable, untransferable inalienable, unalienable - incapable of being repudiated or transferred to another; "endowed by their Creator with certain unalienable rights" licenses). State transfer taxes can also weigh against an asset sale. Sec. 338(h)(10) Election If the target is an S corporation and a stock purchase is desired for nontax reasons, but an asset purchase sought for tax reasons, it is common for the target S shareholders and the acquiring corporation to agree to make a Sec. 338(h)(10) election. Regs. Sec. 1.338(h)(10)-1 (c) permits corporations making a qualified stock purchase (QSP QSP Relay (amateur radio Q code) QSP Quality Software Products QSP Quality Samples Program QSP Quiet Supersonic Platform QSP Quick Start Package QSP Quality System Procedure QSP Quality Selection Process QSP Quality Seafood Programme ) of a target S corporation to make a Sec. 338(h)(10) election jointly with the S shareholders. If this election is made, the stock sale is ignored for income tax purposes; instead, the S corporation is deemed to have sold its assets to the acquirer (in the form of a new target) and to have liquidated (generally under Secs. 331 and 336). Because the target's S status remains in effect throughout the deemed-sale process, any gains or losses recognized on the deemed sale flow through to the shareholders (and adjust their stock bases for determining gain or loss on the deemed liquidation). The deemed asset sale may cause the BIG or PII tax to apply at the S level. (1) All target shareholders (selling and non-selling) must consent to the Sec. 338(h) (10) election. An S corporation may be the acquiring corporation. If so, it could make a qualified subchapter S Subchapter S IRS regulation that gives a corporation with 35 or fewer shareholders the option of being taxed as a partnership to escape corporate income taxes. subsidiary (QSub) election as to the target, provided it acquires 100% of the target's stock in the QSP and the target is a domestic corporation (other than an ineligible in·el·i·gi·ble adj. 1. Disqualified by law, rule, or provision: ineligible to run for office; ineligible for health benefits. 2. corporation as defined in Sec. 1361(b)(2)). The QSub election would be effective after the effective date of the Sec. 338(h)(10) deemed asset sale. (2) The goal of the following checklist is to make an experienced tax adviser aware of many of the Federal income tax issues arising from a Sec. 338(h)(10) transaction involving an S target. Example: (3) T, an S corporation, has three shareholders, A, B and C, who own 40%, 40% and 20% of T, respectively. A and B each has a $10,000 adjusted basis in T stock; C's adjusted basis is $5,000. T's sole asset is real estate with a $35,000 adjusted basis, $110,000 value and encumbered Encumbered A property owned by one party on which a second party reserves the right to make a valid claim, e.g., a bank's holding of a home mortgage encumbers property. by a $10,000 debt. T does not hold the real estate primarily for sale to customers in the ordinary course of its trade or business. On March 1, 2002, A sold all of his stock to P Corp. for $40,000 cash; B sold all of his stock to P for a $25,000 note (with adequate stated interest) and $15,000 cash. C does not sell his stock. Because P acquired 80% of the T stock, P has made a QSP. The note issued to B is not payable on demand or readily tradable and is due in flail in 2008. A and B have no selling expenses; P incurs no acquisition costs. Assume Secs. 453A (interest on the deferred tax liability), 1374 (BIG tax), and 1375 (PII tax) do not apply and that A, B, C and P join in making a Sec, 338(h)(10) election. (Although C did not sell his T stock, Regs. Sec. 1.338(h)(10)-1(c)(2) requires his consent to the election because (as illustrated below) he will be affected by it.) According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Regs. Sec. 1.338-4(c)(1)(i), ADSP ADSP - AppleTalk Data Stream Protocol (4) is computed as if A and B (the selling shareholders) were required to use Old T's accounting methods and the installment method installment method The accounting method of treating revenue from the sale of an asset on installments such that profits are recognized in proportion to the percentage of the sale price collected in a given accounting period. were not available: ($100,000 (5) - 0 (6) + 10,000 (7) $110,000 = ADSP AGUB (8) is the amount for which New T is deemed to have purchased its assets from Old T: $100,000 (9) + 0 (10) + 10,000 (11) $110,000 (12) = ADSP For purposes of the Sec. 453 installment-sale rules, the components of the $110,000 ADSP are a $25,000 note (deemed issued by New T), $10,000 in liabilities to which the T assets are subject and $75,000 in cash. (13) Absent a Sec. 453(d) election, Old T reports the gain under the installment method; the gross profit ratio is 75%:
$110,000 (selling price) - $35,000
(adjusted basis)
$110,000 (selling price) - $10,000
(smaller of adjusted basis or liabilities)
Thus, Old T must recognize a $56,250 gain ($75,000 x 0.75) in 2002, allocated 40% to A ($22,500), 40% to B ($22,500) and 20% to C ($11,250). Immediately before Old T's deemed liquidation, the shareholders' outside bases were as follows: A: $32,500 ($10,000 + $22,500) B: $32,500 ($10,000 + $22,500) C: $16,250 ($5,000 + $11,250) Old T is deemed to distribute $75,000 in cash and the $25,000 note in the deemed liquidation resulting from the Sec. 338(h)(10) election. A is treated as receiving $40,000 cash in the deemed liquidation; B is treated as receiving $15,000 cash, plus the $25,000 note (because B actually received the note in exchange for his stock); and C is treated as receiving $20,000 cash. A recognizes $7,500 capital gain ($40,000 - $32,500 outside basis) on the deemed liquidation distribution. As for B, under Sec. 453(h), the distribution of the note is not a payment for B's stock (unless B makes a Sec. 453(d) election). Further, the distribution of the note is not a taxable event Taxable event An event or transaction that has a tax consequence, such as the sale of stock holding that is subject to capital gains taxes. to Old T because of Sec. 453B(h). B's gross profit ratio on the Sec. 453(h) deemed installment sale Installment sale The sale of an asset in exchange for a specified series of payments (the installments). installment sale A sale in which the buyer is scheduled to make a series of payments over a period of time. of his stock is 18.75% ([$40,000 (selling price) - $32,500 (outside basis)]/$40,000 selling price). Thus, B must recognize $2,812.50 (18.75% x $15,000) capital gain on his deemed receipt of $15,000 in the deemed liquidation. B will recognize an additional $4,687.50 gain (18.75% x $25,000) when he receives payment on the note. C recognizes $3,750 capital gain ($20,000 - $16,250 outside basis) on the deemed distribution. Because C did not actually sell any of his T stock, he is treated as acquiring his T stock for $20,000 on the day after the QSP, under Regs. Sec. 1.338(h)(10)-1(d)(5)(ii). T's holding period for the stock begins on that date. Conclusion The checklist and example should aid practitioners advising on Sec. 338(h) (10) elections for S corporation targets. EXECUTIVE SUMMARY * When S corporation shareholders decide to dispose of their stock in a taxable transaction, they have several methods from which to choose. * S corporation sales trigger both tax and nontax issues. * All target shareholders must consent to a Sec. 338(h)(10) election. Editor's note Editor's Note (foaled in 1993 in Kentucky) is an American thoroughbred Stallion racehorse. He was sired by 1992 U.S. Champion 2 YO Colt Forty Niner, who in turn was a son of Champion sire Mr. Prospector and out of the mare, Beware Of The Cat. Trained by D. : The authors are members of the AICPA AICPA See American Institute of Certified Public Accountants (AICPA). Tax Division's S Corporation Taxation Technical Resource Panel's (TRP's) Sec. 338 (h)(10) Project Task Force.
Item Yes
Validity of S status
1. Is the target an S corporation at the
time of the QSP? --
Only certain target corporations can
participate in a Sec. 338(h)(10) election
(i.e., members of a consolidated group,
affiliated corporations and S corpora-
tions). This checklist focuses on S tar-
gets. If stock of a purported S corpora-
tion is purchased in a QSP, it is critical
to ascertain that the target has a valid S
election in effect at the time of acquisi-
tion if a Sec. 338(h)(10) election is
intended.
2. Has the target maintained S status con-
tinuously since its most recent election? --
3. Determine continuous S status by
examining the following documents:
[] Form 2553, Election by a Small Busi-
ness Corporation. Make sure all share-
holders at the time of the corporation's
current S election have signed the
form. Certain other shareholders' con-
sents may be required; see Regs. Sec.
1.1362-6(b)(2). Have appropriate con-
sents been reviewed? --
[] Did both spouses sign the election
form if they live in a community prop-
erty state? --
[] Are both spouses qualified shareholders? --
[] If a qualified subchapter S trust (QSST) was a
shareholder on the date of the S election, did the
current beneficiary (rather than the trustee(s)) sign
the election form? --
[] Did the current beneficiary make a valid QSST
election? --
[] Under Notice 97-12, 1997-1 CB 385, if an electing
small business trust (ESBT) was a shareholder on
the date of the S election, the trustee was required
to consent to the S election. Did the trustee
consent? --
[] Did the trustee make a valid ESBT election? --
[] Examine the corporation's "governing provisions" and
ask the target to provide a distribution schedule
for each of its shareholders on a year-by-year basis.
Do the governing provisions state that each
outstanding share of stock has identical rights to
distribution and liquidation proceeds; were
distributions made on a pro-rata basis? If not,
could the non-pro-rata distributions result in a
second class of stock? See Regs. Sec. 1.1361-1(1)
to determine whether a potential second class of
stock exists. Payment of varying amounts to S
shareholders in a transaction for which a Sec.
338(h)(10) election has been made will not violate
the one-class-of-stock requirement, if the varying
amounts have been negotiated at arm's length with
the purchaser. Have these things been done? --
[] Review any shareholder, buy-sell or redemption
agreement to determine whether these instruments have
created a second class of stock. --
[] Review the liabilities and equity sections of the
balance sheet to make sure that no instruments,
obligations or arrangements could result in a second
class of stock; see Regs. Sec. 1.1361-1(1)(4). --
[] Review any stock option plans to determine if call
options are outstanding and whether a second class of
stock exists. --
[] Review all trust shareholder agreements to ensure the
trusts are eligible S shareholders. --
[] Review prior-year tax returns for possible
disqualifying transactions (e.g., pre-1997 ownership
of 80% or more of the stock of a domestic or foreign
corporation). --
4. Has there been an inadvertent termination (or an
invalid election) of S status? If so, request a
letter ruling seeking a waiver of the invalid
election or termination. (See Rev. Proc. 98-55, 1998-2
CB 645, for certain automatic waivers.) If
applicable, has this been done? --
Validity of QSub election
5. If the target S corporation has a purported QSub, has
it been verified that the QSub election has been
properly filed and that no event has terminated the
election? --
6. Has making a protective Sec. 338(h)(10) election for a
subsidiary whose Qsub status is uncertain been
considered? --
QSPs
7. Will the QSP requirements be met for the anticipated
acquisition? --
If the acquisition is not a QSP, a Sec. 338 election
cannot be made, nor a cost basis in the target's
assets obtained. --
[] Has 80% or more (by vote and value) of the target's
stock been acquired? --
[] Is the acquirer a C or an S corporation? --
[] Has the acquiring corporation "purchased" the stock
of the target S corporation? --
Sec. 338(d)(3) requires, among other things, that a
QSP be effected through a "purchase." In general,
stock is "purchased" if the acquiring corporation
acquires the stock from an unrelated person and
receives a cost basis in it; see Sec. 338(h)(3) and
Regs. Sec. 1.338-3(b). --
8. Has the equity interest of a shareholder of the target
S corporation been completely terminated during the S
corporation's final taxable year (but prior to the
QSP)? --
[] If so, have the S corporation, the terminated
shareholder and other affected shareholders agreed to
a Sec. 1377(a)(2) closing-of-the-books for income-
allocation purposes? --
[] If so, is the new management of the S corporation
(New T) contractually obligated to effectuate the Sec.
1377(a)(2) election by attaching an appropriate
statement to Old T's timely filed original (or
amended) final return? --
[] If a Sec. 1377(a)(2) election has not been made for a
previous termination of a shareholder's interest, has
it been considered? --
If an S shareholder's entire interest is terminated
during a taxable year, the corporation may elect under
Sec. 1377(a)(2) to "close its books" as to the
affected shareholder(s) at the close of the day of
such termination. All affected shareholders and the
corporation must agree. Regs. Sec. 1.1377-1(b)(5)
requires the election to be attached to a timely filed
or amended return for the taxable year. If the S
corporation is the target of a QSP for which a Sec.
338(h)(10) election is made, New T's management files
the tax return for the target corporation's taxable
year that ends on the date of the QSP. Thus, the "old"
S hareholders may want to contractually require that
New T attach the election to Form 1120S, U.S. Income
Tax Return for an S Corporation. A similar issue
arises in the case of a "qualifying disposition"
under Regs. Sec. 1.1368-1(g). --
9. Will all target shareholders sell their stock to the
acquiring corporation? --
[] If not, have the nonselling shareholders determined
how they will pay tax on asset gains allocated to
them, as well as on gain or loss on the deemed
liquidation, when the Sec. 338(h)(10) election is
made and the S corporation is deemed to have sold its
assets and liquidated? --
Filing requirements
10. Will New T file Old T's final S return? --
[] New T is responsible for filing Old T'S final Form
1120S. The Old T shareholders should negotiate the
content of final Form 1120S with the purchaser before
the QSP. --
[] New T is liable for Old T'S Federal income tax
liabilities, including the tax liability for the
deemed-sale tax consequences, notwithstanding the
deemed liquidation of Old T; see Regs. Secs.
1.338(h)(10)-1(d)(2) and 1.338-1(b)(3)(i). Under Sec.
6011 (a) and Regs. Sec. 1.6011-1 (a), the person
liable for the tax is responsible for the proper
filing of returns. --
[] Although New T and Old T generally are treated as two
separate corporations for purposes of Code subtitle A,
New T generally is treated as a continuation of Old T
for purposes other than subtitle A; see Regs. Sec.
1.338-1(a)(1), (b)(1), (b)(3)."Procedure and
administration" is in subtitle F; thus, New T is a
continuation of Old T for this purpose. --
11. Will Old T's final Form 1120S be filed by the
fifteenth day of the third month following the month
of the QSP? --
12. Will the acquiring corporation and all target S
shareholders (even those who do not sell their stock)
jointly make a Sec. 338(h)(10) election on Form 8023,
Elections Under Section 338 for Corporations Making
Qualified Stock Purchases? --
[] Will Form 8023 be filed by the fifteenth day of the
ninth month following the month of the QSP? --
Penalties for failure to file or pay tax are waived if
Old T's final S return is filed and the tax paid by
the Form 8023 due date. Interest on any underpayment
runs from the original due date of the final return
to the date of payment; see Regs. Sec. 1.338-10(b).
13. Will Form 8023 be ready for signature at the closing
of the acquisition? --
From the buyer's perspective, the target shareholders
should not be allowed to leave the closing table with
cash in hand without having signed Form 8023. If the
parties have not yet decided to actually file the
election form (due by the fifteenth day of the ninth
month following the month of the QSP), the executed
form can be held by either the buyer's or seller's
attorney until such a decision is made. If the selling
shareholders have already agreed to a Sec. 338(h)(10)
election, as a matter of convenience it makes sense
for all selling shareholders to sign the election at
closing.
The preamble to TD 8940 (2/13/01) (on deemed and actual
asset acquisitions under Secs. 338 and 1060) states
that Form 8594, Asset Acquisition Statement Under
Section 1060, will be revised.
For a transaction subject to a Sec. 338 election, the
IRS will require that the form be filed with the Old
T and New T income tax returns for the tax periods
that include the deemed sale and purchase. The form
will require information about the allocation of
aggregate deemed sale price (ADSP) and adjusted
grossed-up basis (AGUB).
Installment sales
14. Did the consideration received for the S stock include
nonmarketable installment obligations not payable on
demand? If yes: --
[] Did the target S corporation, in the deemed asset
sale, recognize the full gain or loss on S assets not
subject to installment-method treatment? --
[] Did the target S corporation properly account for
depreciation recapture under Sec. 453(i)? --
[] Did the target S corporation properly take into
account a deemed payment on the installment obligation
under the liabilities-in-excess-of-basis rule of Temp.
Regs. Sec. 15A.453-1 (b)(3)(i)? --
When some or all of the target stock is sold for an
installment obligation and a Sec. 338(h)(10) election
is made, Regs. Sec. 1.338(h)(10)-1(d)(8) makes the
Sec. 453 installment-sale method of accounting
available to Old T, provided the deemed asset sale
would otherwise qualify for installment-sale
reporting. Sec. 453 generally applies to gain (not
loss) from a property sale when at least one of the
payments will be received in a future year. Property
disqualified from installment treatment includes
inventories of personal property, real property held
for sale to customers in the ordinary course of the
corporation's trade or business and publicly traded
stock or securities. If a sale or other disposition
of the installment note occurs, gain or loss will
generally be recognized.
In general, the installment obligation may not be
payable on demand or readily tradable for Sec. 453 to
apply. If a liquidation occurs within a 12-month
period and Sec. 331 applies, the receipt of certain
installment obligations by a shareholder is not deemed
a liquidation payment. Instead, under Sec. 453(h),
payments made to the shareholder under the installment
obligation are deemed payments for the shareholder's
stock. All amounts distributed along with the
installment obligation (e.g., cash and the fair market
value of other property) are deemed received by the
shareholder as the Sec. 453 selling price for the
stock in the liquidating corporation; see Regs. Sec.
1.453-11(a)(3) and (a)(5), Example 2.
In addition, in such a 12-month liquidation, the
liquidating S corporation does not recognize gain or
loss on the distribution of the installment obliga-
tion, except for purposes of computing taxes under
Secs. 1374 and 1375; see Sec. 453B(h).
15. If the target S corporation is subject to Sec. 1374
and the deemed sale is within the recognition period,
did the target properly take into account the
recognized built-in gain (or more infrequently, loss)
on the deemed distribution of the installment note in
complete liquidation of the target S corporation? See
Sec. 453B(h). A similar rule applies if the target is
subject to Sec. 1375. --
The gain or loss on the distribution of the
installment obligation applies only for purposes of
computing corporate-level tax.
16. Does the face amount of the installment obligation
exceed $5 million? If so, see Sec. 453A. --
For purposes of Sec. 453A (interest charged on taxes
deferred under the installment method), a $5 million
threshold is applied and interest calculations are
made at the shareholder level; see Notice 88-81,
1988-2 CB 397.
17. Is Old T subject to the Sec. 1374 BIG tax? --
The BIG tax is a liability of Old T However, under
Regs. Sec. 1.338(h)(10)-1(d)(2), New T remains
liable for Old T's tax liabilities (including the tax
liability stemming from the deemed sale, particularly
the BIG tax); see Regs. Sec. 1.338-1(b)(3)(i). Because
the BIG tax will be paid out of New T's assets, it
should be included in AGUB; see Regs. Sec.
1.338-5(e)(1). Similarly, it is included in ADSP
(see Regs. Sec. 1.338-4(d); see also Regs. Sec.
1.338-5(g), Example 1, and 1.338-4(g), Example 1
(Old T's tax liability resulting from T's deemed
asset sale included in AGUB and ADSP)). Under Sec.
1366(f)(2), the amount of the BIG tax flows through
as a loss to Old T's shareholders.
18. Have contingent liabilities arisen from the QSP? --
Regs. Sec. 1.338-7(a) states that ADSP and AGUB are
redetermined when an increase or decrease would be
required under general principles of tax law for the
elements of ADSP or AGUB; see Regs. Sec.
1.338-4(b)(2)(ii) and -5(b)(2)(ii). Under Regs.
Sec. 1.338-7(c)(3), any changes in the deemed-sale
tax consequences of a Sec. 338(h)(10) transaction
caused by an increase or decrease in ADSP are accoun-
ted for in determining the taxable income of the S
(i.e., Old T) shareholders for the taxable year in
which it is taken into account. See Regs. Sec.
1.338-7(d) for the effect of a contingent payment
on acquisition-date assets disposed of, depreciated,
amortized or depleted by New T.
19. Have assumed liabilities been considered (including
compensation liabilities)? --
20. Has the proper treatment of transaction costs been
considered? --
Transaction costs are not taken into account in
allocating ADSP or AGUB to assets, except indirectly
through their effect on the computation of ADSP and
AGUB; see Regs. Sec. 1.338-60)(2)(ii).
The proper treatment (as nondeductible capital items,
deductible expenses or amortizable expenses) of the
acquiring corporation's and target S corporation's
expenditures to effect the Sec. 338(h)(10) election
is unclear. The law is developing and authorities
sometimes conflict.
Item No
Validity of S status
1. Is the target an S corporation at the
time of the QSP? --
Only certain target corporations can
participate in a Sec. 338(h)(10) election
(i.e., members of a consolidated group,
affiliated corporations and S corpora-
tions). This checklist focuses on S tar-
gets. If stock of a purported S corpora-
tion is purchased in a QSP, it is critical
to ascertain that the target has a valid S
election in effect at the time of acquisi-
tion if a Sec. 338(h)(10) election is
intended.
2. Has the target maintained S status con-
tinuously since its most recent election? --
3. Determine continuous S status by
examining the following documents:
[] Form 2553, Election by a Small Busi-
ness Corporation. Make sure all share-
holders at the time of the corporation's
current S election have signed the
form. Certain other shareholders' con-
sents may be required; see Regs. Sec.
1.1362-6(b)(2). Have appropriate con-
sents been reviewed? --
[] Did both spouses sign the election
form if they live in a community prop-
erty state? --
[] Are both spouses qualified shareholders? --
[] If a qualified subchapter S trust (QSST) was a
shareholder on the date of the S election, did the
current beneficiary (rather than the trustee(s)) sign
the election form? --
[] Did the current beneficiary make a valid QSST
election? --
[] Under Notice 97-12, 1997-1 CB 385, if an electing
small business trust (ESBT) was a shareholder on
the date of the S election, the trustee was required
to consent to the S election. Did the trustee
consent? --
[] Did the trustee make a valid ESBT election? --
[] Examine the corporation's "governing provisions" and
ask the target to provide a distribution schedule
for each of its shareholders on a year-by-year basis.
Do the governing provisions state that each
outstanding share of stock has identical rights to
distribution and liquidation proceeds; were
distributions made on a pro-rata basis? If not,
could the non-pro-rata distributions result in a
second class of stock? See Regs. Sec. 1.1361-1(1)
to determine whether a potential second class of
stock exists. Payment of varying amounts to S
shareholders in a transaction for which a Sec.
338(h)(10) election has been made will not violate
the one-class-of-stock requirement, if the varying
amounts have been negotiated at arm's length with
the purchaser. Have these things been done? --
[] Review any shareholder, buy-sell or redemption
agreement to determine whether these instruments have
created a second class of stock. --
[] Review the liabilities and equity sections of the
balance sheet to make sure that no instruments,
obligations or arrangements could result in a second
class of stock; see Regs. Sec. 1.1361-1(1)(4). --
[] Review any stock option plans to determine if call
options are outstanding and whether a second class of
stock exists. --
[] Review all trust shareholder agreements to ensure the
trusts are eligible S shareholders. --
[] Review prior-year tax returns for possible
disqualifying transactions (e.g., pre-1997 ownership
of 80% or more of the stock of a domestic or foreign
corporation). --
4. Has there been an inadvertent termination (or an
invalid election) of S status? If so, request a
letter ruling seeking a waiver of the invalid
election or termination. (See Rev. Proc. 98-55, 1998-2
CB 645, for certain automatic waivers.) If
applicable, has this been done? --
Validity of QSub election
5. If the target S corporation has a purported QSub, has
it been verified that the QSub election has been
properly filed and that no event has terminated the
election? --
6. Has making a protective Sec. 338(h)(10) election for a
subsidiary whose Qsub status is uncertain been
considered? --
QSPs
7. Will the QSP requirements be met for the anticipated
acquisition? --
If the acquisition is not a QSP, a Sec. 338 election
cannot be made, nor a cost basis in the target's
assets obtained. --
[] Has 80% or more (by vote and value) of the target's
stock been acquired? --
[] Is the acquirer a C or an S corporation? --
[] Has the acquiring corporation "purchased" the stock
of the target S corporation? --
Sec. 338(d)(3) requires, among other things, that a
QSP be effected through a "purchase." In general,
stock is "purchased" if the acquiring corporation
acquires the stock from an unrelated person and
receives a cost basis in it; see Sec. 338(h)(3) and
Regs. Sec. 1.338-3(b). --
8. Has the equity interest of a shareholder of the target
S corporation been completely terminated during the S
corporation's final taxable year (but prior to the
QSP)? --
[] If so, have the S corporation, the terminated
shareholder and other affected shareholders agreed to
a Sec. 1377(a)(2) closing-of-the-books for income-
allocation purposes? --
[] If so, is the new management of the S corporation
(New T) contractually obligated to effectuate the Sec.
1377(a)(2) election by attaching an appropriate
statement to Old T's timely filed original (or
amended) final return? --
[] If a Sec. 1377(a)(2) election has not been made for a
previous termination of a shareholder's interest, has
it been considered? --
If an S shareholder's entire interest is terminated
during a taxable year, the corporation may elect under
Sec. 1377(a)(2) to "close its books" as to the
affected shareholder(s) at the close of the day of
such termination. All affected shareholders and the
corporation must agree. Regs. Sec. 1.1377-1(b)(5)
requires the election to be attached to a timely filed
or amended return for the taxable year. If the S
corporation is the target of a QSP for which a Sec.
338(h)(10) election is made, New T's management files
the tax return for the target corporation's taxable
year that ends on the date of the QSP. Thus, the "old"
S hareholders may want to contractually require that
New T attach the election to Form 1120S, U.S. Income
Tax Return for an S Corporation. A similar issue
arises in the case of a "qualifying disposition"
under Regs. Sec. 1.1368-1(g). --
9. Will all target shareholders sell their stock to the
acquiring corporation? --
[] If not, have the nonselling shareholders determined
how they will pay tax on asset gains allocated to
them, as well as on gain or loss on the deemed
liquidation, when the Sec. 338(h)(10) election is
made and the S corporation is deemed to have sold its
assets and liquidated? --
Filing requirements
10. Will New T file Old T's final S return? --
[] New T is responsible for filing Old T's final Form
1120S. The Old T shareholders should negotiate the
content of final Form 1120S with the purchaser before
the QSP. --
[] New T is liable for Old T's Federal income tax
liabilities, including the tax liability for the
deemed-sale tax consequences, notwithstanding the
deemed liquidation of Old T; see Regs. Secs.
1.338(h)(10)-1(d)(2) and 1.338-1(b)(3)(i). Under Sec.
6011 (a) and Regs. Sec. 1.6011-1 (a), the person
liable for the tax is responsible for the proper
filing of returns. --
[] Although New T and Old T generally are treated as two
separate corporations for purposes of Code subtitle A,
New T generally is treated as a continuation of Old T
for purposes other than subtitle A; see Regs. Sec.
1.338-1(a)(1), (b)(1), (b)(3)."Procedure and
administration" is in subtitle F; thus, New T is a
continuation of Old T for this purpose. --
11. Will Old T's final Form 1120S be filed by the
fifteenth day of the third month following the month
of the QSP? --
12. Will the acquiring corporation and all target S
shareholders (even those who do not sell their stock)
jointly make a Sec. 338(h)(10) election on Form 8023,
Elections Under Section 338 for Corporations Making
Qualified Stock Purchases? --
[] Will Form 8023 be filed by the fifteenth day of the
ninth month following the month of the QSP? --
Penalties for failure to file or pay tax are waived if
Old T's final S return is filed and the tax paid by
the Form 8023 due date. Interest on any underpayment
runs from the original due date of the final return
to the date of payment; see Regs. Sec. 1.338-10(b).
13. Will Form 8023 be ready for signature at the closing
of the acquisition? --
From the buyer's perspective, the target shareholders
should not be allowed to leave the closing table with
cash in hand without having signed Form 8023. If the
parties have not yet decided to actually file the
election form (due by the fifteenth day of the ninth
month following the month of the QSP), the executed
form can be held by either the buyer's or seller's
attorney until such a decision is made. If the selling
shareholders have already agreed to a Sec. 338(h)(10)
election, as a matter of convenience it makes sense
for all selling shareholders to sign the election at
closing.
The preamble to TD 8940 (2/13/01) (on deemed and actual
asset acquisitions under Secs. 338 and 1060) states
that Form 8594, Asset Acquisition Statement Under
Section 1060, will be revised.
For a transaction subject to a Sec. 338 election, the
IRS will require that the form be filed with the Old
T and New T income tax returns for the tax periods
that include the deemed sale and purchase. The form
will require information about the allocation of
aggregate deemed sale price (ADSP) and adjusted
grossed-up basis (AGUB).
Installment sales
14. Did the consideration received for the S stock include
nonmarketable installment obligations not payable on
demand? If yes: --
[] Did the target S corporation, in the deemed asset
sale, recognize the full gain or loss on S assets not
subject to installment-method treatment? --
[] Did the target S corporation properly account for
depreciation recapture under Sec. 453(i)? --
[] Did the target S corporation properly take into
account a deemed payment on the installment obligation
under the liabilities-in-excess-of-basis rule of Temp.
Regs. Sec. 15A.453-1 (b)(3)(i)? --
When some or all of the target stock is sold for an
installment obligation and a Sec. 338(h)(10) election
is made, Regs. Sec. 1.338(h)(10)-1(d)(8) makes the
Sec. 453 installment-sale method of accounting
available to Old T, provided the deemed asset sale
would otherwise qualify for installment-sale
reporting. Sec. 453 generally applies to gain (not
loss) from a property sale when at least one of the
payments will be received in a future year. Property
disqualified from installment treatment includes
inventories of personal property, real property held
for sale to customers in the ordinary course of the
corporation's trade or business and publicly traded
stock or securities. If a sale or other disposition
of the installment note occurs, gain or loss will
generally be recognized.
In general, the installment obligation may not be
payable on demand or readily tradable for Sec. 453 to
apply. If a liquidation occurs within a 12-month
period and Sec. 331 applies, the receipt of certain
installment obligations by a shareholder is not deemed
a liquidation payment. Instead, under Sec. 453(h),
payments made to the shareholder under the installment
obligation are deemed payments for the shareholder's
stock. All amounts distributed along with the
installment obligation (e.g., cash and the fair market
value of other property) are deemed received by the
shareholder as the Sec. 453 selling price for the
stock in the liquidating corporation; see Regs. Sec.
1.453-11(a)(3) and (a)(5), Example 2.
In addition, in such a 12-month liquidation, the
liquidating S corporation does not recognize gain or
loss on the distribution of the installment obliga-
tion, except for purposes of computing taxes under
Secs. 1374 and 1375; see Sec. 453B(h).
15. If the target S corporation is subject to Sec. 1374
and the deemed sale is within the recognition period,
did the target properly take into account the
recognized built-in gain (or more infrequently, loss)
on the deemed distribution of the installment note in
complete liquidation of the target S corporation? See
Sec. 453B(h). A similar rule applies if the target is
subject to Sec. 1375. --
The gain or loss on the distribution of the
installment obligation applies only for purposes of
computing corporate-level tax.
16. Does the face amount of the installment obligation
exceed $5 million? If so, see Sec. 453A. --
For purposes of Sec. 453A (interest charged on taxes
deferred under the installment method), a $5 million
threshold is applied and interest calculations are
made at the shareholder level; see Notice 88-81,
1988-2 CB 397.
17. Is Old T subject to the Sec. 1374 BIG tax? --
The BIG tax is a liability of Old T However, under
Regs. Sec. 1.338(h)(10)-1(d)(2), New T remains
liable for Old T's tax liabilities (including the tax
liability stemming from the deemed sale, particularly
the BIG tax); see Regs. Sec. 1.338-1(b)(3)(i). Because
the BIG tax will be paid out of New T's assets, it
should be included in AGUB; see Regs. Sec.
1.338-5(e)(1). Similarly, it is included in ADSP
(see Regs. Sec. 1.338-4(d); see also Regs. Sec.
1.338-5(g), Example 1, and 1.338-4(g), Example 1
(Old T's tax liability resulting from T's deemed
asset sale included in AGUB and ADSP)). Under Sec.
1366(f)(2), the amount of the BIG tax flows through
as a loss to Old T's shareholders.
18. Have contingent liabilities arisen from the QSP? --
Regs. Sec. 1.338-7(a) states that ADSP and AGUB are
redetermined when an increase or decrease would be
required under general principles of tax law for the
elements of ADSP or AGUB; see Regs. Sec.
1.338-4(b)(2)(ii) and -5(b)(2)(ii). Under Regs.
Sec. 1.338-7(c)(3), any changes in the deemed-sale
tax consequences of a Sec. 338(h)(10) transaction
caused by an increase or decrease in ADSP are accoun-
ted for in determining the taxable income of the S
(i.e., Old T) shareholders for the taxable year in
which it is taken into account. See Regs. Sec.
1.338-7(d) for the effect of a contingent payment
on acquisition-date assets disposed of, depreciated,
amortized or depleted by New T.
19. Have assumed liabilities been considered (including
compensation liabilities)? --
20. Has the proper treatment of transaction costs been
considered? --
Transaction costs are not taken into account in
allocating ADSP or AGUB to assets, except indirectly
through their effect on the computation of ADSP and
AGUB; see Regs. Sec. 1.338-60)(2)(ii).
The proper treatment (as nondeductible capital items,
deductible expenses or amortizable expenses) of the
acquiring corporation's and target S corporation's
expenditures to effect the Sec. 338(h)(10) election
is unclear. The law is developing and authorities
sometimes conflict.
Item Comments
Validity of S status
1. Is the target an S corporation at the
time of the QSP?
Only certain target corporations can
participate in a Sec. 338(h)(10) election
(i.e., members of a consolidated group,
affiliated corporations and S corpora-
tions). This checklist focuses on S tar-
gets. If stock of a purported S corpora-
tion is purchased in a QSP, it is critical
to ascertain that the target has a valid S
election in effect at the time of acquisi-
tion if a Sec. 338(h)(10) election is
intended.
2. Has the target maintained S status con-
tinuously since its most recent election?
3. Determine continuous S status by
examining the following documents:
[] Form 2553, Election by a Small Busi-
ness Corporation. Make sure all share-
holders at the time of the corporation's
current S election have signed the
form. Certain other shareholders' con-
sents may be required; see Regs. Sec.
1.1362-6(b)(2). Have appropriate con-
sents been reviewed?
[] Did both spouses sign the election
form if they live in a community prop-
erty state?
[] Are both spouses qualified shareholders?
[] If a qualified subchapter S trust (QSST) was a
shareholder on the date of the S election, did the
current beneficiary (rather than the trustee(s)) sign
the election form?
[] Did the current beneficiary make a valid QSST
election?
[] Under Notice 97-12, 1997-1 CB 385, if an electing
small business trust (ESBT) was a shareholder on
the date of the S election, the trustee was required
to consent to the S election. Did the trustee
consent?
[] Did the trustee make a valid ESBT election?
[] Examine the corporation's "governing provisions" and
ask the target to provide a distribution schedule
for each of its shareholders on a year-by-year basis.
Do the governing provisions state that each
outstanding share of stock has identical rights to
distribution and liquidation proceeds; were
distributions made on a pro-rata basis? If not,
could the non-pro-rata distributions result in a
second class of stock? See Regs. Sec. 1.1361-1(1)
to determine whether a potential second class of
stock exists. Payment of varying amounts to S
shareholders in a transaction for which a Sec.
338(h)(10) election has been made will not violate
the one-class-of-stock requirement, if the varying
amounts have been negotiated at arm's length with
the purchaser. Have these things been done?
[] Review any shareholder, buy-sell or redemption
agreement to determine whether these instruments have
created a second class of stock.
[] Review the liabilities and equity sections of the
balance sheet to make sure that no instruments,
obligations or arrangements could result in a second
class of stock; see Regs. Sec. 1.1361-1(1)(4).
[] Review any stock option plans to determine if call
options are outstanding and whether a second class of
stock exists.
[] Review all trust shareholder agreements to ensure the
trusts are eligible S shareholders.
[] Review prior-year tax returns for possible
disqualifying transactions (e.g., pre-1997 ownership
of 80% or more of the stock of a domestic or foreign
corporation).
4. Has there been an inadvertent termination (or an
invalid election) of S status? If so, request a
letter ruling seeking a waiver of the invalid
election or termination. (See Rev. Proc. 98-55, 1998-2
CB 645, for certain automatic waivers.) If
applicable, has this been done?
Validity of QSub election
5. If the target S corporation has a purported QSub, has
it been verified that the QSub election has been
properly filed and that no event has terminated the
election?
6. Has making a protective Sec. 338(h)(10) election for a
subsidiary whose Qsub status is uncertain been
considered?
QSPs
7. Will the QSP requirements be met for the anticipated
acquisition?
If the acquisition is not a QSP, a Sec. 338 election
cannot be made, nor a cost basis in the target's
assets obtained.
[] Has 80% or more (by vote and value) of the target's
stock been acquired?
[] Is the acquirer a C or an S corporation?
[] Has the acquiring corporation "purchased" the stock
of the target S corporation?
Sec. 338(d)(3) requires, among other things, that a
QSP be effected through a "purchase." In general,
stock is "purchased" if the acquiring corporation
acquires the stock from an unrelated person and
receives a cost basis in it; see Sec. 338(h)(3) and
Regs. Sec. 1.338-3(b).
8. Has the equity interest of a shareholder of the target
S corporation been completely terminated during the S
corporation's final taxable year (but prior to the
QSP)?
[] If so, have the S corporation, the terminated
shareholder and other affected shareholders agreed to
a Sec. 1377(a)(2) closing-of-the-books for income-
allocation purposes?
[] If so, is the new management of the S corporation
(New T) contractually obligated to effectuate the Sec.
1377(a)(2) election by attaching an appropriate
statement to Old T's timely filed original (or
amended) final return?
[] If a Sec. 1377(a)(2) election has not been made for a
previous termination of a shareholder's interest, has
it been considered?
If an S shareholder's entire interest is terminated
during a taxable year, the corporation may elect under
Sec. 1377(a)(2) to "close its books" as to the
affected shareholder(s) at the close of the day of
such termination. All affected shareholders and the
corporation must agree. Regs. Sec. 1.1377-1(b)(5)
requires the election to be attached to a timely filed
or amended return for the taxable year. If the S
corporation is the target of a QSP for which a Sec.
338(h)(10) election is made, New T's management files
the tax return for the target corporation's taxable
year that ends on the date of the QSP. Thus, the "old"
S hareholders may want to contractually require that
New T attach the election to Form 1120S, U.S. Income
Tax Return for an S Corporation. A similar issue
arises in the case of a "qualifying disposition"
under Regs. Sec. 1.1368-1(g).
9. Will all target shareholders sell their stock to the
acquiring corporation?
[] If not, have the nonselling shareholders determined
how they will pay tax on asset gains allocated to
them, as well as on gain or loss on the deemed
liquidation, when the Sec. 338(h)(10) election is
made and the S corporation is deemed to have sold its
assets and liquidated?
Filing requirements
10. Will New T file Old T's final S return?
[] New T is responsible for filing Old T's final Form
1120S. The Old T shareholders should negotiate the
content of final Form 1120S with the purchaser before
the QSP.
[] New T is liable for Old T's Federal income tax
liabilities, including the tax liability for the
deemed-sale tax consequences, notwithstanding the
deemed liquidation of Old T; see Regs. Secs.
1.338(h)(10)-1(d)(2) and 1.338-1(b)(3)(i). Under Sec.
6011 (a) and Regs. Sec. 1.6011-1 (a), the person
liable for the tax is responsible for the proper
filing of returns.
[] Although New T and Old T generally are treated as two
separate corporations for purposes of Code subtitle A,
New T generally is treated as a continuation of Old T
for purposes other than subtitle A; see Regs. Sec.
1.338-1(a)(1), (b)(1), (b)(3)."Procedure and
administration" is in subtitle F; thus, New T is a
continuation of Old T for this purpose.
11. Will Old T's final Form 1120S be filed by the
fifteenth day of the third month following the month
of the QSP?
12. Will the acquiring corporation and all target S
shareholders (even those who do not sell their stock)
jointly make a Sec. 338(h)(10) election on Form 8023,
Elections Under Section 338 for Corporations Making
Qualified Stock Purchases?
[] Will Form 8023 be filed by the fifteenth day of the
ninth month following the month of the QSP?
Penalties for failure to file or pay tax are waived if
Old T's final S return is filed and the tax paid by
the Form 8023 due date. Interest on any underpayment
runs from the original due date of the final return
to the date of payment; see Regs. Sec. 1.338-10(b).
13. Will Form 8023 be ready for signature at the closing
of the acquisition?
From the buyer's perspective, the target shareholders
should not be allowed to leave the closing table with
cash in hand without having signed Form 8023. If the
parties have not yet decided to actually file the
election form (due by the fifteenth day of the ninth
month following the month of the QSP), the executed
form can be held by either the buyer's or seller's
attorney until such a decision is made. If the selling
shareholders have already agreed to a Sec. 338(h)(10)
election, as a matter of convenience it makes sense
for all selling shareholders to sign the election at
closing.
The preamble to TD 8940 (2/13/01) (on deemed and actual
asset acquisitions under Secs. 338 and 1060) states
that Form 8594, Asset Acquisition Statement Under
Section 1060, will be revised.
For a transaction subject to a Sec. 338 election, the
IRS will require that the form be filed with the Old
T and New T income tax returns for the tax periods
that include the deemed sale and purchase. The form
will require information about the allocation of
aggregate deemed sale price (ADSP) and adjusted
grossed-up basis (AGUB).
Installment sales
14. Did the consideration received for the S stock include
nonmarketable installment obligations not payable on
demand? If yes:
[] Did the target S corporation, in the deemed asset
sale, recognize the full gain or loss on S assets not
subject to installment-method treatment?
[] Did the target S corporation properly account for
depreciation recapture under Sec. 453(i)?
[] Did the target S corporation properly take into
account a deemed payment on the installment obligation
under the liabilities-in-excess-of-basis rule of Temp.
Regs. Sec. 15A.453-1 (b)(3)(i)?
When some or all of the target stock is sold for an
installment obligation and a Sec. 338(h)(10) election
is made, Regs. Sec. 1.338(h)(10)-1(d)(8) makes the
Sec. 453 installment-sale method of accounting
available to Old T, provided the deemed asset sale
would otherwise qualify for installment-sale
reporting. Sec. 453 generally applies to gain (not
loss) from a property sale when at least one of the
payments will be received in a future year. Property
disqualified from installment treatment includes
inventories of personal property, real property held
for sale to customers in the ordinary course of the
corporation's trade or business and publicly traded
stock or securities. If a sale or other disposition
of the installment note occurs, gain or loss will
generally be recognized.
In general, the installment obligation may not be
payable on demand or readily tradable for Sec. 453 to
apply. If a liquidation occurs within a 12-month
period and Sec. 331 applies, the receipt of certain
installment obligations by a shareholder is not deemed
a liquidation payment. Instead, under Sec. 453(h),
payments made to the shareholder under the installment
obligation are deemed payments for the shareholder's
stock. All amounts distributed along with the
installment obligation (e.g., cash and the fair market
value of other property) are deemed received by the
shareholder as the Sec. 453 selling price for the
stock in the liquidating corporation; see Regs. Sec.
1.453-11(a)(3) and (a)(5), Example 2.
In addition, in such a 12-month liquidation, the
liquidating S corporation does not recognize gain or
loss on the distribution of the installment obliga-
tion, except for purposes of computing taxes under
Secs. 1374 and 1375; see Sec. 453B(h).
15. If the target S corporation is subject to Sec. 1374
and the deemed sale is within the recognition period,
did the target properly take into account the
recognized built-in gain (or more infrequently, loss)
on the deemed distribution of the installment note in
complete liquidation of the target S corporation? See
Sec. 453B(h). A similar rule applies if the target is
subject to Sec. 1375.
The gain or loss on the distribution of the
installment obligation applies only for purposes of
computing corporate-level tax.
16. Does the face amount of the installment obligation
exceed $5 million? If so, see Sec. 453A.
For purposes of Sec. 453A (interest charged on taxes
deferred under the installment method), a $5 million
threshold is applied and interest calculations are
made at the shareholder level; see Notice 88-81,
1988-2 CB 397.
17. Is Old T subject to the Sec. 1374 BIG tax?
The BIG tax is a liability of Old T However, under
Regs. Sec. 1.338(h)(10)-1(d)(2), New T remains
liable for Old T's tax liabilities (including the tax
liability stemming from the deemed sale, particularly
the BIG tax); see Regs. Sec. 1.338-1(b)(3)(i). Because
the BIG tax will be paid out of New T's assets, it
should be included in AGUB; see Regs. Sec.
1.338-5(e)(1). Similarly, it is included in ADSP
(see Regs. Sec. 1.338-4(d); see also Regs. Sec.
1.338-5(g), Example 1, and 1.338-4(g), Example 1
(Old T's tax liability resulting from T's deemed
asset sale included in AGUB and ADSP)). Under Sec.
1366(f)(2), the amount of the BIG tax flows through
as a loss to Old T's shareholders.
18. Have contingent liabilities arisen from the QSP?
Regs. Sec. 1.338-7(a) states that ADSP and AGUB are
redetermined when an increase or decrease would be
required under general principles of tax law for the
elements of ADSP or AGUB; see Regs. Sec.
1.338-4(b)(2)(ii) and -5(b)(2)(ii). Under Regs.
Sec. 1.338-7(c)(3), any changes in the deemed-sale
tax consequences of a Sec. 338(h)(10) transaction
caused by an increase or decrease in ADSP are accoun-
ted for in determining the taxable income of the S
(i.e., Old T) shareholders for the taxable year in
which it is taken into account. See Regs. Sec.
1.338-7(d) for the effect of a contingent payment
on acquisition-date assets disposed of, depreciated,
amortized or depleted by New T.
19. Have assumed liabilities been considered (including
compensation liabilities)?
20. Has the proper treatment of transaction costs been
considered?
Transaction costs are not taken into account in
allocating ADSP or AGUB to assets, except indirectly
through their effect on the computation of ADSP and
AGUB; see Regs. Sec. 1.338-60)(2)(ii).
The proper treatment (as nondeductible capital items,
deductible expenses or amortizable expenses) of the
acquiring corporation's and target S corporation's
expenditures to effect the Sec. 338(h)(10) election
is unclear. The law is developing and authorities
sometimes conflict.
(1) However, in deciding whether the PII tax applies, liquidating distributions are taken into account in determining whether the corporation has E&P at the close of the tax year; thus, generally, the PII tax will not apply in the liquidation year. (2) See Regs. Secs. 1.338-3(c)(1)(i) and 1.1361-4(b)(4). (3) Adapted from Regs. Sec. 1.338(h)(10)-1(e), Example 10. (4) See Regs. Sec. 1.338-4. Because T is an S corporation, the first addend ad·dend n. Any of a set of numbers to be added. [Short for addendum.] addend A number that is added to another number. Noun 1. in the ADSP definition is simplified sim·pli·fy tr.v. sim·pli·fied, sim·pli·fy·ing, sim·pli·fies To make simple or simpler, as: a. To reduce in complexity or extent. b. To reduce to fundamental parts. c. as indicated. For purposes of this example, the stock sold by A and B represents 80 % of the value of all T stock (i.e., no control premium). (5) This is $80,000 (amount realized “Amount Realized” is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes. The Amount Realized – Adjusted Basis tells the amount of Realized Gain (if positive) or Realized Loss (if negative). by shareholder on stock sale)/0.80 (fraction, by value, of target stock purchased). (6) This is A's and B's selling expenses. (7) This is Old T's liabilities; see Regs. Sec. 1.338-4(d). (8) See Regs. Sec. 1.338-5. Because T is an S corporation, the AGUB definition is simplified. For example, there is no nonrecently purchased T stock (Sec. 338(b)(6)(B)); T's S election previously would have terminated ter·mi·nate v. ter·mi·nat·ed, ter·mi·nat·ing, ter·mi·nates v.tr. 1. To bring to an end or halt: if and when P had acquired such stock. For purposes of this example, the stock A and B sold represents 80% of the value of all T stock. (9) This is $80,000 (P's basis in stock purchased)/0.80 (fraction, by value, of target stock purchased). (10) This is P's capitalized Capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives longer than one year. acquisition cost. (11) This is New T's liabilities; see Regs. Sec. 1.338-5(e). (12) The current regulations "de-link" ADSP and AGUB; the two amounts are equal in the example by coincidence Coincidence is the noteworthy alignment of two or more events or circumstances without obvious causal connection. The word is derived from the Latin co- ("in", "with", "together") and incidere ("to fall on"). . (13) The $75,000 amount is a plug figure ($110,000 ADSP - $25,000 note - $10,000 in liabilities) and is deemed to be cash; see Regs. Sec. 1.338(h)(10)1 (d)(8)(i). Author's Note: All of the TRP Trp tryptophan. TRP traumatic reticuloperitonitis. Trp tryptophan. members made useful comments incorporated into the final manuscript manuscript, a handwritten work as distinguished from printing. The oldest manuscripts, those found in Egyptian tombs, were written on papyrus; the earliest dates from c.3500 B.C. . The authors wish to specially thank Laura M. MacDonough, the TRP's Chair, for her many technical contributions and leadership. Kenneth N. Orbach, Ph.D., CPA Professor of Accountancy Florida Atlantic University Boca Raton, FL Stewart S. Karlinsky, Ph.D., CPA Graduate Tax Director San Jose State University San Jose, CA Greg W. Smith, CPA Senior Tax Manager Middle Market Advisory Services PricewaterhouseCoopers LLP Washington, DC Samuel P. Starr, LL.M., CPA Tax Partner Washington National Tax Services Pricewaterhouse Coopers LLP Washington, DC Marc A. Hyman, MST, CPA Technical Manager AICPA Washington, DC Dr. Orbach Orbach may refer to:
adj. Retired but retaining an honorary title corresponding to that held immediately before retirement: a professor emeritus. n. pl. . |
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