College of Law Faculty Scholarship
Source Publication (e.g., journal title)
University of Tennessee Legal Studies Research Paper
Under § 336(e), if one corporation owns an affiliated interest in the stock of a second corporation and sells, exchanges, or distributes all of that stock, Congress has authorized a regulatory election to treat the transfer of the second corporation’s stock as a disposition of its assets, thereby avoiding recognized gain or loss on the sale, exchange, or distribution of that stock. Congress added § 336(e) to the Code in the Tax Reform Act of 1986, intending that it be implemented using "principles similar to those of section 338(h)(10)." Thus, § 336(e) has a purpose similar to § 338(h)(10), offering taxpayers relief from a potential multiple taxation at the corporate level of the same economic gain, which may result when a transfer of appreciated corporate stock is taxed without providing a corresponding step-up in basis of the assets of the corporation.Final regulations, published in the Federal Register on May 15, 2013, apply § 336(e) by employing a structure and principles like those under the § 338(h)(10) regulations, using those regulations as a template. Despite many similarities, the two regulatory regimes differ in several important respects, including the following: First, although both require the transfer of an affiliated interest in target stock by a corporation, § 338(h)(10) looks to the purchase of that stock interest, while § 336(e) focuses on its disposition. Thus, the § 338(h)(10) regulations (as do the § 338 regulations generally) consider what is purchased, while the § 336(e) regulations measure what is sold, exchanged, or distributed. Second, for § 338(h)(10) to apply to a non-S corporation target, on the date that the affiliated interest in the target is first acquired by purchase (the "acquisition" date), the target must be a member of the consolidated group or affiliated with a selling domestic corporation. In contrast, under the § 336(e) regulations, a § 336(e) election may be made for the target even if it is not affiliated with the selling corporation or a member of the selling consolidated group on the corresponding date (the "disposition" date). Finally, if a § 338(h)(10) election is made, a gain recognition election is required, while a gain recognition election for a purchaser may not be required following a § 336(e) election.Those differences raise numerous technical difficulties, which the article describes. It also illustrates those difficulties through examples, focusing on S corporations and consolidated groups. Finally, the article suggests ways to amend the regulations to address those difficulties.
Leatherman, Don, "A Survey of the Section 336(e) Regulations" (2013). College of Law Faculty Scholarship. 335.