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Discussion of Sections 338 and 338 Election of the Internal Revenue Code
Pages 10 (2510 words)
As part of the government’s aim to have tax equity and fiscal responsibility, Section 338 was enacted in 1982. A few amendments were then made but significant changes were made under Tax Reform Act in 1984. To reflect the changes made in Section 338, repealing the General Utilities Doctrine, the Congress made some changes in 1986…
Under Section 338, if a purchasing corporation acquires 80 percent or more of the stock of the target corporation in a qualified stock purchase then the election in Section 338 may be done to treat the stock purchase as an asset purchase. This election must be not later than the fifteenth day of the ninth month, after the month in which the acquisition date occurs. If however the purchasing corporation decides not to or fails to make such an election, then it will be a carryover basis in the target’s assets. Such an election in Section 338 will benefit or have an economic value to the purchasing corporation only “if the present value of future tax savings resulting from the ‘step-up’ in basis of the target's assets exceeds the current tax cost of such a step-up”. As explained by Silverman, in order to achieve this basis step-up, the target corporation must recognize the full gain or loss inherent in its assets. ...
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