Overview of IRC 338 and 338(h)(10)

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A few amendments were then made but significant changes were made under Tax Reform Act in 1984 (Silverman, 2007). To reflect the changes made in…

Introduction

t consequences which would otherwise result from a Section 338 election, stating that Section 338 does not apply for purposes of determining the source or character of any item in Sections 901 and 908 of the Code (Silverman, 2007; IRS Memorandum No. AM-2007-006). The requirement of information reporting was then added in Section 338 (h)(10)(c) under the Omnibus Budget Reconciliation Act of 1990 (Silverman, 2007). Final regulations were also issued starting 2001 by the Treasury to replace the temporary regulations related to Section 338 (Silverman, 2007).
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 (Silverman, 2007). This election must be not later than the fifteenth day of the ninth month, after the month in which the acquisition date occurs (Silverman, 2007). 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 (Silverman, 2007).
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 targets assets exceeds the current tax cost of such a step-up” (Silverman, 2007). 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 (2007). Hence, election in Section 338 will make economic sense only in limited situations such as in case of a foreign target or where the target corporation has sufficient loss carryovers to offset the section 338 gain (Silverman, 2007).
To determine the present value of future tax savings, the allocation of basis among the target’s assets must be taken into consideration (Silverman, 2007). Thus, as explained by Silverman, ...
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