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Ganda Dakurah 

2 posts

Re: Topic 3 DQ 2

Hi Prof. Forney & Class.

The acquiring parent corporation might make a Sec. 338 election if it desires to step up the basis of the target corporation’s assets. However, the election should not be made when the basis of target corporation assets would be stepped down. Few corporations will want to pay additional tax now to get a tax saving later from a stepped-up basis. “The acquiring corporation makes a Sec. 338 election by filing Form 8023 (Elections Under Section 338 for Corporations Making Qualified Stock Purchases) with the IRS.” (Anderson et al., 2020). Most corporations that choose a Sec. 338 elections have other tax losses that will significantly reduce the tax burden of the gain they must recognize under Sec. 338. The Sec. 338 elections should not be made when the basis of target corporation assets would be stepped-down, or substantial tax attributes (e.g., loss carryovers) would be lost as a result of the deemed liquidation. “There are two types of Sec. 338 elections. We’ll call the first type the “regular” Sec. 338 elections. This election can be made when the acquiring corporation (the buyer) makes a qualifying purchase of 80% or more of the target company’s stock.” Corporate M&A (2020). The availability of the loss carryovers is an advantage since the gain recognized on the deemed sale of target assets can be offset by the loss carryovers to reduce or eliminate the tax cost of stepping up the assets’ bases.

Sincerely,

-Ganda! 

References Anderson, K. E, Hulse, D. S., & Rupert, T. J. (Eds.). (2020). Pearson’s federal taxation 2020: Corporations, partnerships, estates, and trusts (33rd ed.). Pearson. ISBN-13: 978-0-13-519736-3.

Corporate M&A (2020): Is a Section 338 Election Right for Your Deal? DS+B Journal articles. Retrieved from, https://www.dsb-cpa.com/section-338-election-right-deal/

Douglas Stephens  

1 posts

Re: Topic 3 DQ 2

HI Everyone,

I believe Sec 338 would be prudent in a situation when the new parent company would want to step up the basis in the target stock. However, in a situation where the stock value would be adjusted below the purchase price, it would not be prudent to employ Sec 338. From that standpoint, if the basis is adjusted negatively, then the acquiring company would be incurring a loss, which in turn if the stock is sold, they have a loss. In other words, writing down the stock would basically be admitting that the acquiring company paid too much for the stock.

Thanks

Doug

 Anderson, K. E., Hulse, D. S., & Rupert, T. J. (2020). Pearson's federal taxation 2020 corporations, partnerships, estates & trusts. Pearson.