[Federal Register Volume 73, Number 165 (Monday, August 25, 2008)]
[Proposed Rules]
[Pages 49965-49981]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-19603]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-143544-04]
RIN 1545-BD84


Regulations Enabling Elections for Certain Transactions Under 
Section 336(e)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations under section 
336(e) of the Internal Revenue Code. These proposed regulations, when 
finalized, would permit taxpayers to make an election to treat certain 
sales, exchanges, and distributions of another corporation's stock as 
taxable sales of that corporation's assets. These proposed regulations 
will affect corporations and their shareholders.

DATES: Written or electronic comments and requests for a public hearing 
must be received by November 24, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-143544-04), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
143544-

[[Page 49966]]

04), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-143544-04).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulation, 
Mark J. Weiss, (202) 622-7750; concerning submissions of comments and 
the hearing, Richard Hurst, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503. Comments on the collection of information should 
be received by October 24, 2008.
    The collection of information in this proposed regulation is in 
proposed Sec. Sec.  1.336-2(h) and 1.336-4(c)(4)). This information is 
required by the IRS to allow certain parties to make a section 336(e) 
election and for certain shareholders to make a gain recognition 
election. The likely recordkeepers are business or other for-profit 
institutions.
    The estimated burden is as follows:
    Estimated total annual reporting and/or recordkeeping burden: 500 
hours.
    Estimated average annual burden per respondent: 2 hours.
    Estimated number of respondents: 250.
    Estimated annual frequency of responses: Once.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be directed to the Office 
of Management and Budget, Attn: Desk Officer for the Department of the 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503, with copies to the Internal Revenue Service, Attn: IRS Reports 
Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Any such 
comments should be submitted not later than October 24, 2008.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by the Office of 
Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background and Explanation of Provisions

    Section 336(e) of the Internal Revenue Code (Code) authorizes the 
issuance of regulations under which a corporation (seller) that owns 
stock in another corporation (target) meeting the requirements of 
section 1504(a)(2) and sells, exchanges, or distributes all of such 
stock may make an election to treat the sale, exchange, or distribution 
of the target stock as a sale of all of target's underlying assets. 
Section 336(e) was enacted as part of the legislation repealing the 
General Utilities rule and, like an election under section 338(h)(10), 
is meant to provide taxpayers relief from a potential multiple taxation 
at the corporate level of the same economic gain which can result when 
a transfer of appreciated corporate stock is taxed to a corporation 
without providing a corresponding step-up in the basis of the assets of 
the corporation. See H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess., 
Vol. II, 198, 204 (1986), 1986-3 C.B., Vol. 4, 198-207.

A. Scope of the Proposed Regulations

    Pursuant to section 336(e), regulations may authorize a section 
336(e) election in a broad set of circumstances. The IRS and Treasury 
Department have limited the scope of these proposed regulations, 
however, in order to provide guidance to a large number of taxpayers in 
the most efficient manner possible. These proposed regulations, when 
finalized, will provide the requirements and mechanics for, and 
consequences of, treating a stock sale, exchange, or distribution that 
would not otherwise be eligible for a section 338 election as a deemed 
asset sale.
    The IRS and Treasury Department do not presently intend to 
authorize the making of section 336(e) elections under all the 
circumstances described within the statutory grant of authority. 
However, the IRS and Treasury Department are interested in comments 
regarding transactions beyond the scope of these proposed regulations 
for which such elections should be allowed and under what terms and 
conditions. For example, these proposed regulations do not apply to 
transactions between related persons. For this purpose, persons are 
related if stock in a corporation owned by one of the persons would be 
attributed to the other person under section 318(a), other than section 
318(a)(4). See proposed Sec.  1.336-1(b)(11). The IRS and Treasury 
Department continue to study the possibility of making a section 336(e) 
election available for such transactions. Accordingly, comments are 
requested regarding dispositions to related persons, including special 
rules needed to prevent the use of net operating losses to offset 
liquidation gains, manipulation of earnings and profits, and changes of 
accounting methods. See H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess., 
Vol. II at 204 (1986).
    Additionally, these proposed regulations do not apply to 
transactions in which either the seller or the target is a foreign 
corporation. The IRS and Treasury Department request comments regarding 
how the rules of the proposed regulations should be modified to take 
into account the policies of international tax provisions if the 
proposed regulations were extended to apply to foreign sellers and/or 
foreign targets. For example, comments are requested regarding: (1) How 
the principles of section 338(h)(16) should apply; (2) how the foreign 
tax allocation rule of Sec.  1.338-9(d) should apply; (3) the 
characterization of the gain recognized on the deemed asset disposition 
for purposes of section 954(c)(1)(B); (4) whether special earnings and 
profits rules are necessary (see, for example, the rules described in 
Prop. Treas. Reg. Sec.  1.367(b)-8); and (5) how the withholding tax 
provisions of section 1445 should apply to the deemed asset disposition 
(if relevant).
    The IRS and Treasury Department continue to study issues related to 
elections made under section 338(g) in the international area. Comments 
are requested on issues in this area, including the interaction of 
section 338(h)(16) with sections 902 and 960.
    Absent the issuance of further guidance, it is intended that these 
regulations would provide the exclusive means of making elections under 
section 336(e). See proposed Sec.  1.336-2(a).

B. General Principles

1. General Adoption of Section 338(h)(10) Principles
    The legislative history to section 336(e) provides that principles 
similar to those of section 338(h)(10) should apply in the case of a 
section 336(e) election. See H.R. Conf. Rep. No. 841, 99th Cong., 2d 
Sess., Vol. II, at 204

[[Page 49967]]

(1986). These proposed regulations implement such principles. 
Accordingly, except to the extent inconsistent with the purposes of 
section 336(e) or as otherwise described, the results of a section 
336(e) election coincide with those of a section 338(h)(10) election. 
Whenever possible, these proposed regulations rely upon and use the 
structure and principles established under section 338(h)(10) and the 
underlying regulations. For example, these regulations refer to 
principles under the section 338 regulations regarding the allocation 
of consideration, application of the asset and stock consistency rules, 
treatment of minority shareholders, and the availability of the section 
453 installment method. In other instances, definitions and concepts 
from section 338 and the underlying regulations have been modified to 
reflect principles applicable to section 336(e). For example, these 
proposed regulations generally use the term ``disposition'' rather than 
``acquisition or purchase'' and the term ``sale, exchange, or 
distribution'' instead of ``sale.'' Thus, a qualified stock disposition 
is defined as any transaction or series of transactions in which stock 
meeting the requirements of section 1504(a)(2) of a domestic 
corporation is either sold, exchanged, or distributed, or any 
combination thereof, by another domestic corporation in a disposition, 
within the meaning of proposed Sec.  1.336-1(b)(4), during the 12-month 
disposition period. See proposed Sec.  1.336-1(b)(5).
    These proposed regulations also provide that a transaction that 
satisfies the definition of both a qualified stock disposition and a 
qualified stock purchase (as defined in section 338(d)(3)) generally 
will be treated only as a qualified stock purchase and thus does not 
qualify for an election under these regulations. See proposed Sec.  
1.336-1(b)(5)(ii)).
2. Requirements for a Section 336(e) Election
    Section 336(e) requires that a seller own stock in another 
corporation meeting the requirements of section 1504(a)(2) and sell, 
exchange, or distribute all of such stock to qualify for a section 
336(e) election. For purposes of these proposed regulations, a seller 
is a domestic corporation that makes a qualified stock disposition and 
includes a transferor and a distributor of target stock. See proposed 
Sec.  1.336-1(b)(1). Generally, all members of a seller's consolidated 
group are treated as a single seller. See proposed Sec.  1.336-2(g)(2). 
Thus, similar to a section 338(h)(10) election, a section 336(e) 
election is available to a seller that directly owns stock of target 
meeting the requirements of section 1504(a)(2) and to sellers which are 
members of a consolidated group for the taxable year that includes the 
disposition date that in the aggregate own stock of target meeting the 
requirements of section 1504(a)(2). Because section 336(e) requires a 
corporate seller, the election is not available with respect to the 
stock of an S corporation. See proposed Sec.  1.336-1(b)(5). Cf. Sec.  
1.338(h)(10)-1(c)(1).
    These proposed regulations interpret section 336(e) as requiring 
only that an amount of stock meeting the requirements of section 
1504(a)(2) be disposed of and not that every share of stock owned by 
the seller be disposed of. Accordingly, the seller, or a member of 
seller's consolidated group, may retain a portion of its target stock. 
See proposed Sec. Sec.  1.336-2(b)(1)(v) and 1.336-2(b)(2)(iv). 
Furthermore, these proposed regulations permit amounts of target stock 
sold, exchanged, and distributed to be aggregated for purposes of 
determining whether there has been a qualified stock disposition. For 
example, a domestic corporation's sale of 50 percent of target's stock 
to an unrelated person and a distribution to its unrelated shareholders 
of the remaining 50 percent within a 12-month period would constitute a 
qualified stock disposition. See proposed Sec.  1.336-1(b)(5).
    In contrast to section 338, which requires a corporate purchaser, 
these proposed regulations define a purchaser as any person or persons 
who receive stock of target in a qualified stock disposition. 
Accordingly, a section 336(e) election is available for sales, 
exchanges, or distributions (or a combination thereof) of target stock 
to both corporate and non-corporate purchasers, provided that the 
target stock is not sold, exchanged, or distributed to a related 
person. See proposed Sec. Sec.  1.336-1(b)(2) and 1.336-1(b)(4)(i)(C).
    Any stock sold, exchanged, or distributed to a related party is not 
considered to be disposed of for purposes of determining whether there 
has been a qualified stock disposition. See proposed Sec. Sec.  1.336-
1(b)(4)(i)(C) and 1.336-1(b)(5)(i). Relatedness generally is determined 
immediately after the sale, exchange, or distribution of target stock 
occurs (see proposed Sec. Sec.  1.336-1(b)(4)(iii), 1.336-1(b)(11), and 
1.338-3(b)(3)).

C. Sales or Exchanges of Target Stock

    In general, if a seller sells or exchanges target stock in a 
qualified stock disposition, the treatment of old target, seller, and 
purchaser are similar to the treatment of old target (old T), S, and P 
under section 338(h)(10). See Sec.  1.338(h)(10)-1. If an election is 
made under section 336(e), the seller disregards the actual sale or 
exchange of target stock. Instead, target (old target) is treated as 
selling all of its assets to an unrelated corporation in a single 
transaction at the close of the disposition date (the deemed asset 
disposition). Old target recognizes the deemed disposition tax 
consequences from the deemed asset disposition before the close of the 
disposition date while it is a subsidiary of seller. After the deemed 
asset disposition, old target is then treated as liquidating into 
seller which in most cases will be treated as a distribution in 
complete liquidation to which section 332 and section 336 or 337 
applies. Additionally, consistent with a section 338 election, the 
deemed purchase of the assets of old target by new target constitutes a 
deemed purchase of any subsidiary stock owned by target. Accordingly, a 
section 336(e) election is available for the deemed purchase of the 
stock of a target subsidiary if it constitutes a qualified stock 
disposition. A section 336(e) election generally does not change the 
tax consequences of the acquisition to a purchaser of target stock.

D. Distributions of Target Stock Not Described in Section 355(d)(2) or 
(e)(2)

    A section 336(e) election can be made for a distribution of target 
stock, and the legislative history to section 336(e) provides that 
``[t]he conferees do not intend this election to affect the manner in 
which a corporation's distribution to its shareholders will be 
characterized for purposes of determining the shareholder level income 
tax consequences.'' H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess., Vol. 
II, at 204 (1986). Accordingly, additional rules are required to 
address distributions and to ensure that the income tax consequences to 
a distributee are generally the same as if a section 336(e) election 
was not made.
    Specifically, these proposed regulations provide that if seller 
(the distributor) distributes old target stock in the qualified stock 
disposition, seller is deemed to purchase from new target on the 
disposition date, immediately after the deemed liquidation of old 
target, the amount of stock distributed in the qualified stock 
disposition and to have distributed such new target stock

[[Page 49968]]

to its shareholders. Seller recognizes no gain or loss on the 
distribution. See proposed Sec.  1.336-2(b)(1)(iv). The distributee's 
tax consequences generally shall be the same as if it received the 
target stock pursuant to the underlying distribution. However, the 
Federal income tax consequences of the deemed asset disposition and 
liquidation of target may affect the distributee's income tax 
consequences. For example, if seller distributes the stock of target to 
its shareholders in a qualified stock disposition for which a section 
336(e) election is made, any increase in seller's earnings and profits 
as a result of old target's deemed asset disposition and liquidation 
into seller may alter the amount of the distribution to the 
shareholders constituting a dividend under section 301(c)(1) from the 
amount that would have resulted if seller recognized gain on the stock 
distribution. See proposed Sec.  1.336-2(c).
    If a seller actually distributed stock of a subsidiary or assets 
under section 301, it generally would be prevented from recognizing any 
loss. See section 311(a). The IRS and Treasury Department believe that 
it would be inconsistent with the general treatment of distributions to 
allow losses to be recognized on the section 336(e) deemed asset 
disposition to the extent the qualified stock disposition was the 
result of a stock distribution. Therefore, under these proposed 
regulations, only a portion of the losses realized on the deemed asset 
disposition may be recognized. The portion of any realized loss that 
may be recognized is based on a fraction equal to the value of the 
target stock sold or exchanged in the qualified stock disposition on or 
before the disposition date over the total value of target stock 
disposed of in the qualified stock disposition on or before the 
disposition date. In the case of a section 336(e) election for a 
subsidiary of target, for purposes of determining the amount of loss 
that may be recognized by the subsidiary on the deemed asset 
disposition, only the percentage of the stock of the target subsidiary 
deemed sold by target equal to the percentage of the stock of target 
sold or exchanged is considered to have been sold or exchanged. See 
proposed Sec. Sec.  1.336-2(b)(1)(i)(B)(2) and (3). Thus, losses 
realized in the deemed asset disposition are not recognized to the 
extent the qualified stock disposition is attributable to the 
distribution of target stock.

E. Section 355 Distributions

1. Availability of Section 336(e) Election for Certain Section 355 
Distributions
    The legislative history to section 336(e) indicates that the 
election is intended to be available for taxable transactions. 
Specifically, the Conference Report provides that, ``principles similar 
to those of section 338(h)(10) may be applied to taxable sales or 
distributions of controlled corporation stock.'' H.R. Conf. Rep. No. 
841, 99th Cong., 2d Sess., Vol. II, at 204 (1986). The legislative 
history to section 355(e) provides that although there is no adjustment 
to the basis of stock or assets as a result of the recognition of gain 
under section 355(e), ``[t]here is no intention to limit the otherwise 
applicable Treasury regulatory authority under section 336(e) of the 
Code.'' H.R. Conf. Rep. 220, 105th Cong., 1st Sess., 531-532, footnote 
13 (1997), 1997-4 C.B. Vol. 4, 531, 532. Accordingly, these proposed 
regulations would allow a corporation that would otherwise recognize 
the full amount of the gain realized with respect to a qualified stock 
disposition resulting, in whole or in part, from a disposition 
described in section 355(d)(2) or (e)(2) to make a section 336(e) 
election. Without a section 336(e) election, such provisions may create 
a triple layer of taxation, one at the controlled corporation level, 
one at the distributing corporation level and, ultimately, one at the 
shareholder level. Allowing a section 336(e) election in these 
circumstances limits taxation to two layers, one at the controlled 
corporation level and one at the shareholder level when the controlled 
corporation stock is disposed of, and thus is consistent with General 
Utilities repeal.
2. Special Rules for Distributions Described in Section 355(d)(2) or 
355(e)(2)
    Generally, a section 336(e) election, like a section 338(h)(10) 
election, results in a deemed sale of old target's assets followed by a 
liquidation of old target into seller, which if made in a transaction 
to which section 381 applied, results in old target's attributes being 
transferred to the seller. Accordingly, consistent with a taxable asset 
acquisition, after the transaction new target generally has no tax 
attributes or earnings and profits, and holds its assets with a cost 
basis. In contrast, a section 355 distribution is generally tax-free to 
the distributing corporation's shareholders, even if the transaction is 
described in section 355(d)(2) or 355(e)(2). Further, following a 
section 355 distribution, the controlled corporation generally retains 
tax attributes and earnings and profits. The IRS and Treasury 
Department believe that, except as necessary to carry out the purposes 
of section 336(e), the section 355 consequences generally should 
continue to apply in such a transaction. For example, if the controlled 
corporation were treated as a new corporation, with no earnings and 
profits, the controlled corporation may be able to distribute its 
assets to its shareholders without recognizing any dividend 
consequences under section 301(c)(1). Therefore, to preserve the 
consequences of section 355 distributions, the proposed regulations 
provide special rules.
    If a section 336(e) election is made for a distribution of the 
controlled corporation stock in a transaction described in section 
355(d)(2) or 355(e)(2), the controlled corporation is treated as if it 
sold its assets to an unrelated person in the deemed asset disposition 
and then it reacquired those assets (sale-to-self treatment). Following 
the deemed asset disposition, the controlled corporation (old target) 
is not deemed to liquidate into the distributing corporation (seller). 
See proposed Sec.  1.336-2(b)(2)(i)(A). Instead, the controlled 
corporation (old target) is treated as acquiring all of its assets from 
an unrelated person in a single, separate transaction at the close of 
the disposition date, and then the distributing corporation is treated 
as distributing the stock of the controlled corporation (old target) to 
its shareholders. See proposed Sec.  1.336-2(b)(2)(ii) and (iii). 
Because no liquidation of old target into seller is deemed to occur, 
the controlled corporation (old target) will generally retain the tax 
attributes it would have had if the section 336(e) election had not 
been made. The proposed regulations further provide that the controlled 
corporation (old target) will take the effects of the deemed asset 
disposition into account and increase or decrease its earnings and 
profits immediately before allocating earnings and profits pursuant to 
Sec.  1.312-10. See proposed Sec.  1.336-2(b)(2)(vi). Finally, the 
deemed sale and reacquisition of target's assets (and, in the case of a 
parent-subsidiary chain of corporations making section 336(e) 
elections, a target subsidiary's assets) pursuant to the deemed asset 
disposition will not cause the transaction to fail to satisfy the 
requirements of section 355. See proposed Sec.  1.336-2(b)(2)(v).
    Similar to a qualified stock disposition resulting from a 
distribution not involving a transaction described in section 355(d)(2) 
or (e)(2), old target's

[[Page 49969]]

losses in the deemed asset disposition will be recognized, but only in 
relation to the amount of stock sold or exchanged in the qualified 
stock disposition on or before the disposition date. See Sec. Sec.  
1.336-2(b)(2)(i)(B)(2) and (3).
    Notwithstanding the fact that the sale-to-self treatment applies to 
a distribution of stock described in section 355(d)(2) or (e)(2), if 
old target has any subsidiaries for which a section 336(e) election is 
made, the general deemed asset disposition methodology shall apply. 
Accordingly, old target subsidiary is treated as though it sold all its 
assets to an unrelated person, new target subsidiary is deemed to 
purchase all its assets from an unrelated person, and old target 
subsidiary is deemed to liquidate into old target. If the sale-to-self 
treatment was applied, target subsidiary's attributes would remain with 
target subsidiary. The IRS and Treasury Department do not believe that 
taxpayers should have the option of whether the attributes become those 
of target, by doing an actual sale of target subsidiary's assets 
followed by a liquidation of target subsidiary, or remain with target 
subsidiary, by making a section 336(e) election for target subsidiary. 
Accordingly, the regulations apply the general deemed asset disposition 
methodology for section 336(e) elections for target subsidiaries in a 
distribution of target stock described in section 355(d)(2) or (e)(2).
3. Intragroup Sales, Exchanges, or Distributions Prior to External 
Sales, Exchanges, or Distributions
    Generally, if the stock of a target is transferred within an 
affiliated group and then is further transferred outside the affiliated 
group, a section 336(e) election is not available for the intragroup 
transfer because a qualified stock disposition may not be made between 
related sellers and purchasers. Thus, stock level gain may be 
recognized on the intragroup transfer. While a section 336(e) election 
may be available for the external transfer, this election would result 
in the affiliated group recognizing gain both on target's assets and 
the target stock, contrary to the intent of these proposed regulations. 
Comments are requested on how to address this concern. Further, because 
section 355(f) provides that section 355 does not apply to an 
intragroup distribution prior to an external distribution described in 
section 355(e)(2), these comments should address the concerns that 
section 355(f) is intended to address for distributions described 
therein.

F. Aggregate Deemed Asset Disposition Price (ADADP) and Adjusted 
Grossed Up Basis (AGUB)

    These proposed regulations create a new term, aggregate deemed 
asset disposition price (ADADP). These proposed regulations retain the 
term adjusted grossed up basis (AGUB) as used in section 338. See Sec.  
1.338-5. In general, these proposed regulations treat ADADP and AGUB 
similarly to the way aggregate deemed sale price (ADSP) and AGUB are 
treated under the section 338 regulations. See proposed Sec. Sec.  
1.336-3 and 1.336-4. Old target recognizes all of the gain realized on 
the deemed transfer of its assets in exchange for the ADADP and 
allocates the ADADP among the assets held as of the disposition date 
(in the same manner as ADSP is allocated under Sec. Sec.  1.338-6 and 
1.338-7). See proposed Sec. Sec.  1.336-2(b)(1)(i) and 1.336-
2(b)(2)(i). ADADP is calculated by adding the grossed-up amount 
realized on the sale, exchange, or distribution of recently disposed 
target stock and the liabilities of old target. See proposed Sec.  
1.336-3(b)(1). These proposed regulations account for the fact that 
there is no actual amount realized in a distribution of stock by 
treating the grossed-up amount realized on the sale, exchange, or 
distribution as including in the amount realized the fair market value 
of recently disposed target stock distributed in the qualified stock 
disposition. See proposed Sec.  1.336-3(c)(1)(i)(B).
    These proposed regulations also create a new term, nonrecently 
disposed stock. The term nonrecently disposed stock has a similar 
meaning to the term nonrecently purchased stock in section 
338(b)(6)(B). In a transaction for which a section 338 election is 
made, there is only one purchasing corporation (or an affiliated group 
treated as a purchasing corporation). Accordingly, in most cases, it 
should be relatively easy to determine the purchaser's basis in 
nonrecently purchased stock in order to determine AGUB. However, in a 
section 336(e) election, there can be multiple purchasers or multiple 
distributees, many of whom may have acquired small amounts of target 
stock prior to the 12-month disposition period. While a more precise 
determination of AGUB would require the determination of the basis of 
all such stockholdings, the IRS and Treasury Department recognize that 
it would often be impractical to require a seller to determine and 
track all the purchasers (and distributees) possessing small amounts of 
nonrecently purchased stock. Generally, purchasers holding at least 10 
percent of the total voting power or value of the stock of target 
should be readily identifiable through mandatory SEC filings and other 
sources. Thus, in order to balance a desire for precision with a 
practical application, nonrecently disposed stock is defined as stock 
in a target corporation which is held on the disposition date by a 
purchaser or a person related to a purchaser who owns, on the 
disposition date, with the application of section 318(a), other than 
section 318(a)(4), at least 10 percent of the total voting power or 
value of the stock of target, and which is not recently disposed stock. 
See proposed Sec.  1.336-1(b)(17).
    In general, proposed Sec.  1.336-4 uses the same principles as 
paragraphs (b) through (g) of Sec.  1.338-5 to determine the amount of 
AGUB for target and the consequences of a gain recognition election. 
Proposed Sec.  1.336-4(b) contains modifications to the principles of 
Sec.  1.338-5 to reflect the principles of section 336(e).
    New target is treated as acquiring all of its assets from an 
unrelated person in a single transaction at the close of the 
disposition date, but before the deemed liquidation (or, in the case of 
a transaction described in section 355(d)(2) or (e)(2), before the 
distribution) in exchange for an amount equal to the AGUB as determined 
under proposed Sec.  1.336-4. New target allocates the consideration 
deemed paid in the same manner as new target would as described in 
Sec. Sec.  1.338-6 and 1.338-7 in order to determine the basis in each 
of the transferred assets. See proposed Sec. Sec.  1.336-2(b)(1)(ii) 
and 1.336-2(b)(2)(ii). In the case of a disposition described in 
section 355(d)(2) or (e)(2), any reference to new target is treated as 
referring to old target in its capacity as the purchaser of assets 
pursuant to the section 336(e) election. See proposed Sec.  1.336-
4(b)(4).
    Consistent with the principles of a section 338(h)(10) election, 
any stock retained by a seller or a member of seller's consolidated 
group after the 12-month disposition period is treated as acquired by 
the seller on the day after the disposition date at its fair market 
value. For this purpose, the fair market value of all the target stock 
equals the grossed-up amount realized on the sale, exchange, or 
distribution of recently disposed stock. See proposed Sec. Sec.  1.336-
2(b)(1)(v) and 1.336-2(b)(2)(iv). A minority shareholder (that is, a 
shareholder that is neither the seller that disposes of 80 percent of 
the voting power and value of target stock nor a member of seller's 
consolidated group) is generally not affected by a section 336(e) 
election. Accordingly, such a minority shareholder that disposes of its

[[Page 49970]]

target stock will recognize gain or loss on the stock without regard to 
the section 336(e) election, and a minority shareholder that retains 
its target stock retains its basis and holding period in its target 
stock. See proposed Sec.  1.336-2(d).
    Under proposed Sec.  1.336-4(c), a holder of nonrecently disposed 
stock may make a gain recognition election, similar to the gain 
recognition election under section 338, which treats the nonrecently 
disposed stock as being sold as of the disposition date. The gain 
recognition election is mandatory if a purchaser owns (after the 
application of the rules of section 318(a), other than section 
318(a)(4)) 80 percent or more of the voting power or value of target 
stock. See proposed Sec. Sec.  1.336-1(b)(15) and 1.336-4(c)(2). Cf. 
Sec. Sec.  1.338(h)(10)-1(d)(1) and 1.338-5(d). Once made, a gain 
recognition election is irrevocable. See proposed Sec.  1.336-4(c)(1). 
The IRS and Treasury Department request comments on whether the rules 
regarding gain recognition elections in these proposed regulations are 
appropriate, and whether the gain recognition election rules in 
regulations promulgated under section 338 should continue to apply. 
Also, see the ``Correction to section 1.338-5'' section of this 
preamble addressing a correction to the definition of the term basis 
amount, the amount used in determining the purchasing corporation's 
gain on the deemed sale of stock pursuant to the gain recognition 
election and in determining AGUB.

G. Making the Section 336(e) Election

    These proposed regulations provide that a section 336(e) election 
is made by seller attaching a statement to its timely filed Federal 
income tax return for the taxable year that includes the disposition 
date. See proposed Sec.  1.336-2(h). If the seller is a member of a 
consolidated group, the statement is filed with the group's 
consolidated return.
    The IRS and Treasury Department believe that it is appropriate to 
allow the seller (or the common parent of the seller's consolidated 
group) to unilaterally make the section 336(e) election. The IRS and 
Treasury Department believe that in a distribution of target stock, it 
would be impractical to require each distributee, who generally will 
hold relatively small percentages of the target stock, to join in the 
election. Further, the distributees' interests should generally be 
protected because of the distributing corporation's fiduciary 
responsibilities to its shareholders. In the case of a sale or 
exchange, the purchasers should be able to protect their interests in 
any purchase contract. Comments are requested regarding whether it is 
appropriate to allow such unilateral section 336(e) elections in all 
cases.
    The information required on a section 336(e) election statement is 
similar to that required on Form 8023, Elections Under Section 338 for 
Corporations Making Qualified Stock Purchases. In the case of a gain 
recognition election, the section 336(e) election statement must 
include information pertaining to the gain recognition election.
    When finalized, these proposed regulations will permit taxpayers to 
make a protective section 336(e) election if they are unsure of whether 
a transaction constitutes a qualified stock disposition. If such an 
election is made, it will not have any effect if the transaction does 
not constitute a qualified stock disposition but will otherwise be 
binding and irrevocable. See proposed Sec.  1.336-2(j).

H. Correction to Sec.  1.338-5

    Section 338(b)(3)(A) authorizes regulations under which the 
purchasing corporation may elect to step up its basis in nonrecently 
purchased stock (gain recognition election) to a ``basis amount.'' 
Under section 338(b)(3)(B), the basis amount is equal to the grossed-up 
basis of the purchasing corporation's recently purchased stock 
multiplied by a fraction, the numerator of which is the percentage of 
target stock attributable to the purchasing corporation's nonrecently 
purchased stock and the denominator of which is 100 percent minus the 
numerator amount.
    Section 1.338-5(d) provides for the above described gain 
recognition election. Section 1.338-5(d)(3)(ii) provides that the basis 
amount is equal to the amount in Sec.  1.338-5(c)(1) (the purchasing 
corporation's basis in recently purchased target stock determined 
without regard to acquisition costs) multiplied by a fraction, the 
numerator of which is the percentage of target stock (by value, 
determined on the acquisition date) attributable to the purchasing 
corporation's nonrecently purchased target stock and the denominator of 
which is 100 percent minus the numerator amount. Section 1.338-
5(d)(3)(ii) goes on to state, ``[t]hus, if target has a single class of 
outstanding stock, the purchasing corporation's basis in each share of 
nonrecently purchased target stock after the gain recognition election 
is equal to the average price per share of the purchasing corporation's 
recently purchased target stock.''
    However, unless the purchasing corporation purchases all of the 
outstanding stock of target (other than the purchasing corporation's 
nonrecently purchased stock) within the 12-month acquisition period on 
or before the acquisition date, the formula in the regulations will not 
result in the purchasing corporation's basis in each share of 
nonrecently purchased stock equaling the average price of the recently 
purchased stock. Only if the basis in the recently purchased stock is 
grossed-up (as provided by the Code) will such result be achieved. In 
fact, Sec.  1.338-5(g), Example 1, paragraph (v), in demonstrating the 
effect of a gain recognition election, uses the grossed-up basis in the 
recently purchased stock, not the non-grossed-up basis, consistent with 
both the Code and the intent of the regulation. Accordingly, Sec.  
1.338-5(d)(3)(ii) is corrected to use the grossed-up basis of recently 
purchased stock in determining the basis amount, rather than the non-
grossed-up basis.

I. Proposed Effective/Applicability Date

    These proposed regulations are proposed to apply to any qualified 
stock disposition for which the disposition date is on or after the 
date these regulations are published as final regulations in the 
Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. Further, it 
is hereby certified that these proposed regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that these regulations do not 
have a substantial economic impact because they merely provide for an 
election in the context of certain sales, exchanges, and distributions 
of stock of corporations. Moreover, they are expected to apply 
predominantly to transactions involving larger businesses because the 
election is only applicable for certain dispositions of stock of an 
affiliated subsidiary. Accordingly, a Regulatory Flexibility Analysis 
under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not 
required. Pursuant to section 7805(f) of the Code, this notice of 
proposed rulemaking has been submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations,

[[Page 49971]]

consideration will be given to any written comments (a signed original 
and eight copies) or electronic comments that are submitted timely to 
the IRS. In addition to the specific requests for comments made 
elsewhere in this preamble, the IRS and Treasury Department request 
comments on the clarity of the proposed rules and how they can be made 
easier to understand. All comments will be available for public 
inspection and copying. A public hearing may be scheduled if requested 
in writing by any person who timely submits written comments. If a 
public hearing is scheduled, notice of the date, time, and place of the 
hearing will be published in the Federal Register.

Drafting Information

    The principal author of these regulations is Mark J. Weiss of the 
Office of Associate Chief Counsel (Corporate). Other personnel from the 
IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.336-1 is also issued under 26 U.S.C. 336. * * *
    Section 1.336-2 is also issued under 26 U.S.C. 336. * * *
    Section 1.336-3 is also issued under 26 U.S.C. 336. * * *
    Section 1.336-4 is also issued under 26 U.S.C. 336. * * *
    Section 1.336-5 is also issued under 26 U.S.C. 336. * * *

    Par. 2. Sections 1.336-0 through 1.336-5 are added to read as 
follows:

Sec.  1.336-0  Table of Contents.

    This section lists captions contained in Sec. Sec.  1.336-1, 
1.336-2, 1.336-3, 1.336-4, and 1.336-5.
Sec.  1.336-1 General principles, nomenclature, and definitions for 
a section 336(e) election.
    (a) Overview.
    (b) Definitions.
    (1) Seller.
    (2) Purchaser.
    (3) Target; target corporation; old target; new target.
    (4) Disposed of; disposition.
    (i) In general.
    (ii) Exception for disposition of stock in certain section 355 
transactions.
    (iii) Transactions with related persons.
    (iv) No consideration paid.
    (v) Disposed of stock reacquired by certain persons.
    (5) Qualified stock disposition.
    (i) In general.
    (ii) Overlap with qualified stock purchase.
    (A) In general.
    (B) Exception.
    (6) 12-month disposition period.
    (7) Disposition date.
    (8) Disposition date assets.
    (9) Domestic corporation.
    (10) Section 336(e) election.
    (11) Related persons.
    (12) Liquidation.
    (13) Deemed asset disposition.
    (14) Deemed disposition tax consequences.
    (15) 80-percent purchaser.
    (16) Recently disposed stock.
    (17) Nonrecently disposed stock.
    (c) Nomenclature.
Sec.  1.336-2 Availability, mechanics, and consequences of section 
336(e) election.
    (a) Availability of election.
    (b) Deemed transaction.
    (1) Dispositions not described in section 355(d)(2) or (e)(2).
    (i) Old target--deemed asset disposition.
    (A) In general.
    (B) Gains and losses.
    (1) Gains.
    (2) Losses.
    (3) Examples.
    (C) Tiered targets.
    (ii) New target--deemed purchase.
    (iii) Old target and seller--deemed liquidation.
    (A) In general.
    (B) Tiered targets.
    (iv) Seller--distribution of target stock.
    (v) Seller--retention of target stock.
    (2) Dispositions described in section 355(d)(2) or (e)(2).
    (i) Old target--deemed asset disposition.
    (A) In general.
    (B) Gains and losses.
    (1) Gains.
    (2) Losses.
    (3) Example.
    (C) Tiered targets.
    (ii) Old target--deemed purchase.
    (A) In general.
    (B) Tiered targets.
    (iii) Seller--distribution of target stock.
    (A) In general.
    (B) Tiered targets.
    (iv) Seller--retention of target stock.
    (v) Qualification under section 355.
    (vi) Earnings and profits.
    (c) Purchaser.
    (d) Minority shareholders.
    (1) In general.
    (2) Sale, exchange, or distribution of target stock by a 
minority shareholder.
    (3) Retention of target stock by a minority shareholder.
    (e) Treatment consistent with an actual asset disposition.
    (f) Treatment of target under other provisions of the Internal 
Revenue Code.
    (g) Special rules.
    (1) Target as two corporations.
    (2) Treatment of members of a consolidated group.
    (3) Miscellaneous international provisions.
    (i) Source and foreign tax credit.
    (ii) Allocation of foreign taxes.
    (h) Making the section 336(e) election.
    (i) [Reserved].
    (j) Protective section 336(e) election.
    (k) Examples.
Sec.  1.336-3 Aggregate deemed asset disposition price; various 
aspects of taxation of the deemed asset disposition.
    (a) Scope.
    (b) Determination of ADADP.
    (1) General rule.
    (2) Time and amount of ADADP.
    (i) Original determination.
    (ii) Redetermination of ADADP.
    (c) Grossed-up amount realized on the sale, exchange, or 
distribution of recently disposed stock of target.
    (1) Determination of amount.
    (2) Example.
    (d) Liabilities of old target.
    (1) In general.
    (2) Time and amount of liabilities.
    (e) Deemed disposition tax consequences.
    (f) Other rules apply in determining ADADP.
Sec.  1.336-4 Adjusted grossed-up basis.
    (a) Scope.
    (b) Modifications to the principles in Sec.  1.338-5.
    (1) Purchasing corporation; purchaser.
    (2) Acquisition date; disposition date.
    (3) Section 338 election; section 338(h)(10) election; section 
336(e) election.
    (4) New target; old target.
    (5) Recently purchased stock; recently disposed stock.
    (6) Nonrecently purchased stock; nonrecently disposed stock.
    (c) Gain recognition election.
    (1) In general.
    (2) 80-percent purchaser.
    (3) Non-80-percent purchaser.
    (4) Gain recognition election statement.
    (d) Examples.
Sec.  1.336-5 Effective/applicability Date.

Sec.  1.336-1  General principles, nomenclature, and definitions for a 
section 336(e) election.

    (a) Overview. Section 336(e) authorizes the promulgation of 
regulations under which, in certain circumstances, a sale, exchange, or 
distribution of the stock of a subsidiary may be treated as an asset 
sale. This section and Sec. Sec.  1.336-2 through 1.336-5 provide the 
rules for and consequences of making such election. This section 
provides the definitions and nomenclature. Generally, except to the 
extent inconsistent with section 336(e), the results of a section 
336(e) election should coincide with those of a section 338(h)(10) 
election. Accordingly, to the extent not otherwise addressed in these 
regulations nor inconsistent with section 336(e), the principles of 
section 338 and the regulations under section 338 apply for purposes of 
these regulations. For example, Sec.  1.338-8 (concerning asset and 
stock consistency)

[[Page 49972]]

and Sec.  1.338(h)(10)-1(d)(8) (concerning the availability of the 
section 453 installment method) may apply with respect to a section 
336(e) election.
    (b) Definitions. For purposes of Sec. Sec.  1.336-1 through 1.336-5 
(except as otherwise provided):
    (1) Seller. The term seller means any domestic corporation that 
makes a qualified stock disposition of stock of another corporation. A 
seller includes both a transferor and a distributor of target stock. 
Generally, all members of a consolidated group that dispose of target 
stock are treated as a single seller. See Sec.  1.336-2(g)(2).
    (2) Purchaser. The term purchaser means one or more persons that 
receive the stock of another corporation in a qualified stock 
disposition. A purchaser includes both a transferee and a distributee 
of target stock.
    (3) Target; target corporation; old target; new target. The term 
target or target corporation means any domestic corporation the stock 
of which is sold, exchanged, or distributed by another domestic 
corporation in a qualified stock disposition. In the case of a 
transaction not described in section 355(d)(2) or (e)(2), ``old 
target'' refers to target for periods ending on or before the close of 
target's disposition date and ``new target'' refers to target for 
subsequent periods. In the case of a transaction described in section 
355(d)(2) or (e)(2), ``old target'' refers to target for periods ending 
on or before the disposition date as well as for subsequent periods.
    (4) Disposed of; disposition--(i) In general. The term disposed of 
refers to a transfer of stock in a disposition. The term disposition 
means any sale, exchange, or distribution of stock, but only if--
    (A) The basis of the stock in the hands of the purchaser is not 
determined in whole or in part by reference to the adjusted basis of 
such stock in the hands of the person from whom acquired or under 
section 1014(a) (relating to property acquired from a decedent),
    (B) Except as provided in paragraph (b)(4)(ii) of this section, the 
stock is not sold, exchanged, or distributed in a transaction to which 
section 351, 354, 355, or 356 applies and is not sold, exchanged, or 
distributed in any transaction described in regulations in which the 
transferor does not recognize the entire amount of the gain or loss 
realized in the transaction, and
    (C) The stock is not sold, exchanged, or distributed to a related 
person.
    (ii) Exception for disposition of stock in certain section 355 
transactions. Notwithstanding paragraph (b)(4)(i)(B) of this section, a 
distribution of stock to a person who is not a related person in a 
transaction in which the full amount of stock gain would be recognized 
pursuant to section 355(d)(2) or (e)(2) shall be considered a 
disposition.
    (iii) Transactions with related persons. In determining whether 
stock is sold, exchanged, or distributed to a related person, the 
principles of section 338(h)(3)(C) and Sec.  1.338-3(b)(3) shall apply.
    (iv) No consideration paid. Stock in a target may be considered 
disposed of if, under general principles of tax law, the seller is 
considered to sell, exchange, or distribute stock of the target 
notwithstanding that no amount may be paid for (or allocated to) the 
stock.
    (v) Disposed of stock reacquired by certain persons. Stock disposed 
of to another person under this section which is reacquired by the 
seller or a member of the seller's consolidated group within the 12-
month disposition period shall not be considered as disposed of.
    (5) Qualified stock disposition--(i) In general. The term qualified 
stock disposition means any transaction or series of transactions in 
which stock meeting the requirements of section 1504(a)(2) of a 
domestic corporation is either sold, exchanged, or distributed, or any 
combination thereof, by another domestic corporation in a disposition, 
within the meaning of paragraph (b)(4) of this section, during the 12-
month disposition period.
    (ii) Overlap with qualified stock purchase--(A) In general. Except 
as provided in paragraph (b)(5)(ii)(B) of this section, a transaction 
satisfying the definition of a qualified stock disposition under 
paragraph (b)(5)(i) of this section which also qualifies as a qualified 
stock purchase (as defined in section 338(d)(3)) will not be treated as 
a qualified stock disposition.
    (B) Exception. If, as a result of the deemed sale of old target's 
assets pursuant to a section 336(e) election, there would be, but for 
paragraph (b)(5)(ii)(A) of this section, a qualified stock disposition 
of the stock of a subsidiary of target, then paragraph (b)(5)(ii)(A) 
shall not apply.
    (6) 12-month disposition period. The term 12-month disposition 
period means the 12-month period beginning with the date of the first 
sale, exchange, or distribution of stock included in a qualified stock 
disposition.
    (7) Disposition date. The term disposition date means, with respect 
to any corporation, the first day on which there is a qualified stock 
disposition with respect to the stock of such corporation.
    (8) Disposition date assets. Disposition date assets are the assets 
of the target held at the beginning of the day after the disposition 
date (but see Sec.  1.338-1(d) (regarding certain transactions on the 
disposition date)).
    (9) Domestic corporation. The term domestic corporation has the 
same meaning as in Sec.  1.338-2(c)(9).
    (10) Section 336(e) election. A section 336(e) election is an 
election to apply section 336(e) to target. A section 336(e) election 
is made by making an election for target under Sec.  1.336-2(h).
    (11) Related persons. Two persons are related if stock of a 
corporation owned by one of the persons would be attributed under 
section 318(a), other than section 318(a)(4), to the other.
    (12) Liquidation. Any reference to a liquidation is treated as a 
reference to the transfer described in Sec.  1.336-2(b)(1)(iii) 
notwithstanding its ultimate characterization for Federal income tax 
purposes.
    (13) Deemed asset disposition. The deemed sale of old target's 
assets is, without regard to its characterization for Federal income 
tax purposes, referred to as the deemed asset disposition.
    (14) Deemed disposition tax consequences. Deemed disposition tax 
consequences refers to, in the aggregate, the Federal income tax 
consequences (generally, the income, gain, deduction, and loss) of the 
deemed asset disposition. Deemed disposition tax consequences also 
refers to the Federal income tax consequences of the transfer of a 
particular asset in the deemed asset disposition.
    (15) 80-percent purchaser. An 80-percent purchaser is any purchaser 
that, after application of the attribution rules of section 318(a), 
other than section 318(a)(4), owns 80 percent or more of the voting 
power or value of the target corporation stock.
    (16) Recently disposed stock. The term recently disposed stock 
means any stock in the target corporation which is not held by a seller 
or a member of the seller's consolidated group immediately after the 
close of the disposition date and which was sold, exchanged, or 
distributed by a seller during the 12-month disposition period. If, 
within the 12-month disposition period, stock is sold, exchanged, or 
distributed, then reacquired by a seller, and then sold, exchanged, or 
distributed again, only the last sale, exchange, or distribution of the 
reacquired stock in the 12-month disposition period may be recently 
disposed stock.
    (17) Nonrecently disposed stock. The term nonrecently disposed 
stock means stock in the target corporation which is held on the 
disposition date by a

[[Page 49973]]

purchaser or a person related (as described in Sec.  1.336-1(b)(11)) to 
the purchaser who owns, on the disposition date, with the application 
of section 318(a), other than section 318(a)(4), at least 10 percent of 
the total voting power or value of the stock of target and which is not 
recently disposed stock.
    (c) Nomenclature. For purposes of Sec. Sec.  1.336-1 through 1.336-
5, except as otherwise provided, Parent, Seller, Target, Target 
Subsidiary, and Sub are domestic corporations and A, B, C, and D are 
individuals, none of whom are related to Parent, Seller, Target, Target 
Subsidiary, Sub, or each other.


Sec.  1.336-2  Availability, mechanics, and consequences of section 
336(e) election.

    (a) Availability of election. A section 336(e) election is 
available if a seller makes a disposition of stock of another 
corporation (target) in a qualified stock disposition (as defined in 
Sec.  1.336-1(b)(5)). A section 336(e) election is irrevocable. A 
section 336(e) election is not available for transactions described in 
section 336(e) that do not constitute qualified stock dispositions, as 
defined in Sec.  1.336-1(b)(5).
    (b) Deemed transaction--(1) Dispositions not described in section 
355(d)(2) or (e)(2)--(i) Old target-deemed asset disposition--(A) In 
general. This paragraph (b)(1) provides the Federal income tax 
consequences of a section 336(e) election made with respect to a 
qualified stock disposition not described, in whole or in part, in 
section 355(d)(2) or (e)(2). For the Federal income tax consequences of 
a section 336(e) election made with respect to a qualified stock 
disposition described, in whole or in part, in section 355(d)(2) or 
(e)(2), see paragraph (b)(2) of this section. In general, if a section 
336(e) election is made, the seller is treated as not having sold, 
exchanged, or distributed the stock disposed of in the qualified stock 
disposition. Instead, old target is treated as selling its assets to an 
unrelated person in a single transaction at the close of the 
disposition date (but before the deemed liquidation described in 
paragraph (b)(1)(iii) of this section) in exchange for the aggregate 
deemed asset disposition price (ADADP) as determined under Sec.  1.336-
3. ADADP is allocated among the disposition date assets in the same 
manner as ADSP is allocated under Sec. Sec.  1.338-6 and 1.338-7 in 
order to determine the amount realized from each of the sold assets. 
Old target realizes the deemed disposition tax consequences from the 
deemed asset disposition before the close of the disposition date while 
old target is owned by seller.
    (B) Gains and losses--(1) Gains. Except as provided in Sec.  
1.338(h)(10)-1(d)(8) (regarding the installment method), old target 
shall recognize all of the gain realized on the deemed asset 
disposition.
    (2) Losses. Old target shall recognize loss, if any, on the deemed 
sale of each of its assets with respect to the amount of stock sold or 
exchanged in the qualified stock disposition on or before the 
disposition date. Old target shall not recognize loss on the deemed 
sale of each of its assets with respect to the amount of stock 
distributed in the qualified stock disposition on or before the 
disposition date. The amount of loss recognized by old target with 
respect to an asset is the amount of loss realized on the deemed sale 
of the asset multiplied by a fraction (loss recognition fraction). The 
numerator of the loss recognition fraction is the value of the target 
stock, determined on the disposition date, sold or exchanged in the 
qualified stock disposition on or before the disposition date. The 
denominator of the loss recognition fraction is the total value of the 
target stock, determined on the disposition date, disposed of in the 
qualified stock disposition on or before the disposition date. For 
purposes of determining the amount of loss recognized by a subsidiary 
of old target for which a section 336(e) election is made, only the 
fraction of the old target subsidiary stock deemed sold in the deemed 
asset disposition of old target's assets that is equal to the loss 
recognition fraction is considered to have been sold or exchanged. In 
addition, to the extent old target or a subsidiary of old target 
otherwise recognizes losses from the deemed asset disposition, such 
losses may be disallowed under other provisions of the Internal Revenue 
Code or general principles of tax law, in the same manner as if such 
assets were actually sold to an unrelated person.
    (3) Examples. The following examples illustrate this paragraph 
(b)(1)(i)(B).

    Example 1. (i) Facts. Seller owns 98 of the 100 outstanding 
shares of Target common stock, the only class of Target stock 
outstanding. On March 1 of Year 1, Seller sells 30 shares of Target 
stock to A for cash. On April 1 of Year 1, Seller sells 10 shares of 
Target stock to R, a related individual. On July 1 of Year 1, Seller 
distributes 50 shares of target stock to its unrelated shareholders. 
On December 1 of Year 1, Seller sells 5 shares of Target stock to B. 
Seller retains its remaining 3 shares of Target stock. The value of 
the Target stock on July 1 equals $100 per share. A section 336(e) 
election is made.
    (ii) Consequences. Because at least 80 percent of the Target 
stock ((30 + 50 + 5)/100) was disposed of by Seller within the 12-
month disposition period, a qualified stock disposition has 
occurred. July 1 of Year 1, the first date on which there was a 
qualified stock disposition with respect to the Target stock, is the 
disposition date. Old Target recognizes all of its gain on the 
deemed asset disposition. However, only 30 shares of Target stock 
were sold or exchanged in the qualified stock disposition on or 
before the disposition date. Therefore, only a portion of the loss, 
if any, on the deemed sale of each of Target's assets is recognized 
for Federal income tax purposes. The portion of the loss recognized 
is equal to a fraction, the numerator of which is $3,000, the value, 
determined on July 1, the disposition date, of the 30 shares sold by 
Seller in the qualified stock disposition on or before the 
disposition date, and the denominator of which is $8,000, the value 
of the Target stock on July 1, the disposition date, that was 
disposed of in the qualified stock disposition on or before the 
disposition date. Accordingly, only 37.5 percent ($3,000/$8,000) of 
Old Target's loss (if any) with respect to each asset sold in the 
deemed asset disposition is recognized.

    Example 2. (i) Facts. The facts are the same as in Example 1 
with the following additional facts: Target also owns 80 shares of 
Target Subsidiary common stock, the only class of Target Subsidiary 
common stock outstanding, and Seller owns the remaining 20 shares of 
Target Subsidiary stock. Seller, Target, and Target Subsidiary file 
a consolidated Federal income tax return. Also on July 1 of Year 1, 
Seller distributes 15 shares of Target Subsidiary stock to its 
unrelated shareholders and sells 5 shares of Target Subsidiary stock 
to C for cash. The Target Subsidiary stock is worth $10 a share on 
July 1. A section 336(e) election is also made with respect to the 
Target Subsidiary stock.
    (ii) Consequences. The consequences with respect to the Target 
stock are the same as described in Example 1 except that no gain or 
loss is recognized by Target on the deemed sale of its Target 
Subsidiary stock. With respect to Target Subsidiary, because at 
least 80 percent of the Target Subsidiary stock ((80 + 15 +5)/100) 
was disposed of (or deemed disposed of) by members of Seller's 
consolidated group within the 12-month disposition period, a 
qualified stock disposition of Target Subsidiary has occurred. Old 
Target Subsidiary recognizes all of its gain on the deemed asset 
disposition. Notwithstanding that all 80 of Target's shares in 
Target Subsidiary were deemed sold in the deemed asset disposition 
of Target, only 37.5 percent of such shares were deemed sold as a 
result of a sale or exchange of Target stock. Accordingly, in 
determining the amount of loss on each of Target Subsidiary's assets 
that is recognized in the deemed sale of its assets, only 37.5 
percent of the 80 shares of Target Subsidiary deemed sold by Target, 
30 shares, are considered to have been sold or exchanged by Target. 
Therefore, the amount of loss recognized by Target Subsidiary is 
equal to a fraction, the numerator of which is the sum of $300, the 
value, determined on July 1, the disposition date, of the 30 shares 
of Target Subsidiary deemed sold by Target in the

[[Page 49974]]

qualified stock disposition, and $50, the value, determined on July 
1, the disposition date, of the 5 shares of Target Subsidiary stock 
sold by Seller on or before the disposition date, and the 
denominator of which is $1,000, the value of the Target Subsidiary 
stock on July 1, the disposition date, that was disposed of in the 
qualified stock disposition of Target Subsidiary on or before the 
disposition date. Accordingly, only 35 percent (($300 + $50)/
($1,000)) of Old Target Subsidiary's loss (if any) with respect to 
each asset sold in the deemed asset disposition is recognized.

    (C) Tiered targets. In the case of parent-subsidiary chains of 
corporations making section 336(e) elections, the deemed asset 
disposition of a higher-tier subsidiary is considered to precede the 
deemed asset disposition of a lower-tier subsidiary.
    (ii) New target--deemed purchase. New target is treated as 
acquiring all of its assets from an unrelated person in a single 
transaction at the close of the disposition date (but before the deemed 
liquidation) in exchange for an amount equal to the adjusted grossed up 
basis (AGUB) as determined under Sec.  1.336-4. New target shall 
allocate the consideration deemed paid in the transaction in the same 
manner as new target would under Sec. Sec.  1.338-6 and 1.338-7 in 
order to determine the basis in each of the purchased assets. 
Notwithstanding paragraph (b)(1)(iii) of this section (deemed 
liquidation of old target), new target remains liable for the tax 
liabilities of old target (including the tax liability for the deemed 
disposition tax consequences). For example, new target remains liable 
for the tax liabilities of the members of any consolidated group that 
are attributable to taxable years in which those corporations and old 
target joined in the same consolidated return. See Sec.  1.1502-6(a).
    (iii) Old target and seller--deemed liquidation--(A) In general. 
Old target and seller are treated as if, before the close of the 
disposition date, after the deemed asset disposition described in 
paragraph (b)(1)(i)(A) of this section, and while owned by seller, old 
target transferred all of its assets to seller and ceased to exist. The 
transfer from old target to seller is characterized for Federal income 
tax purposes in the same manner as if the parties had actually engaged 
in the transactions deemed to occur because of this section and taking 
into account other transactions that actually occurred or are deemed to 
occur. For example, the transfer may be treated as a distribution in 
pursuance of a plan of reorganization, a distribution in complete 
cancellation or redemption of all its stock, one of a series of 
distributions in complete cancellation or redemption of all its stock 
in accordance with a plan of liquidation, or part of a circular flow of 
cash. In most cases, the transfer will be treated as a distribution in 
complete liquidation to which section 332 and section 336 or 337 
applies.
    (B) Tiered targets. In the case of parent-subsidiary chains of 
corporations making section 336(e) elections, the deemed liquidation of 
a lower-tier subsidiary corporation is considered to precede the deemed 
liquidation of a higher-tier subsidiary.
    (iv) Seller--distribution of target stock. In the case of a 
distribution of target stock in the qualified stock disposition, seller 
(the distributor) is deemed to purchase from new target on the 
disposition date, immediately after the deemed liquidation of old 
target, the amount of stock distributed in the qualified stock 
disposition and to have distributed such new target stock to its 
shareholders. Seller recognizes no gain or loss on the distribution of 
stock.
    (v) Seller--retention of target stock. If a seller retains any 
target stock after the 12-month disposition period, the seller is 
treated as purchasing the stock so retained from new target (new target 
stock) on the day after the disposition date for its fair market value. 
The holding period for the retained stock starts on the day after the 
disposition date. For purposes of this paragraph (b)(1)(v), the fair 
market value of all of the target stock equals the grossed-up amount 
realized on the sale, exchange, or distribution of recently disposed 
stock of target (see Sec.  1.336-3(c)).
    (2) Dispositions described in section 355(d)(2) or (e)(2)--(i) Old 
target--deemed asset disposition--(A) In general. This paragraph (b)(2) 
provides the Federal income tax consequences of a section 336(e) 
election made with respect to a qualified stock disposition resulting, 
in whole or in part, from a disposition described in section 355(d)(2) 
or (e)(2). Old target is treated as selling its assets to an unrelated 
person in a single transaction at the close of the disposition date in 
exchange for the ADADP as determined under Sec.  1.336-3. ADADP is 
allocated among the disposition date assets in the same manner as ADSP 
is allocated under Sec. Sec.  1.338-6 and 1.338-7 in order to determine 
the amount realized from each of the sold assets. Old target realizes 
the deemed disposition tax consequences from the deemed asset 
disposition before the close of the disposition date while old target 
is owned by seller. Unlike a section 338(h)(10) election or a section 
336(e) election made with respect to a qualified stock disposition not 
described, in whole or in part, in section 355(d)(2) or (e)(2), old 
target is not deemed to liquidate.
    (B) Gains and losses--(1) Gains. Except as provided in Sec.  
1.338(h)(10)-1(d)(8) (regarding the installment method), old target 
shall recognize all of the gain realized on the deemed asset 
disposition.
    (2) Losses. Old target shall recognize loss, if any, on the deemed 
sale of each of its assets with respect to the amount of stock sold or 
exchanged in the qualified stock disposition on or before the 
disposition date. Old target shall not recognize loss on the deemed 
sale of each of its assets with respect to the amount of stock 
distributed in the qualified stock disposition on or before the 
disposition date. The amount of loss recognized by old target with 
respect to an asset is the amount of loss realized on the deemed sale 
of the asset multiplied by a fraction (loss recognition fraction). The 
numerator of the loss recognition fraction is the value of the target 
stock, determined on the disposition date, sold or exchanged in the 
qualified stock disposition on or before the disposition date. The 
denominator of the loss recognition fraction is the total value of the 
target stock, determined on the disposition date, disposed of in the 
qualified stock disposition on or before the disposition date. In 
addition, to the extent old target otherwise recognizes losses from the 
deemed asset disposition, such losses may be disallowed under other 
provisions of the Internal Revenue Code or general principles of tax 
law, in the same manner as if such assets were actually sold to an 
unrelated person.
    (3) Example. The following example illustrates this paragraph 
(b)(2)(i)(B).

    Example. (i) Facts. Seller owns 95 of the 100 outstanding shares 
of Target common stock, the only class of Target stock outstanding. 
On January 1 of Year 1, Seller sells 4 shares of Target stock to A 
for cash. On February 1 of Year 1, Seller sells 5 shares of Target 
stock to R, a related individual. On May 1 of Year 1, Seller 
distributes 6 shares of Target stock to its unrelated shareholders 
in a distribution not described in section 355(d)(2) or (e)(2). In 
an unrelated transaction, on July 1 of Year 1, Seller distributes 
its remaining 80 shares of Target stock to its unrelated 
shareholders in a distribution described in section 355(d)(2) or 
(e)(2). The value of the Target stock on July 1 equals $100 per 
share. A section 336(e) election is made.
    (ii) Consequences. Because at least 80 percent of the Target 
stock ((4 + 6 + 80)/100) was disposed of by Seller within the 12-
month disposition period, a qualified stock disposition has 
occurred. July 1 of Year 1, the first date on which there was a 
qualified stock disposition with respect to the Target stock, is the 
disposition date. Old Target

[[Page 49975]]

recognizes all of its gain on the deemed asset disposition. However, 
only 4 shares of Target stock were sold or exchanged in the 
qualified stock disposition on or before the disposition date. 
Therefore, only a portion of the loss, if any, on the deemed sale of 
each of Target's assets is recognized for Federal income tax 
purposes. The portion of the loss recognized is equal to a fraction, 
the numerator of which is $400, the value, determined on July 1, the 
disposition date, of the 4 shares sold by Seller in the qualified 
stock disposition on or before the disposition date, and the 
denominator of which is $9,000 ($400 + $600 + $8,000), the total 
value of the Target stock determined as of July 1, that was disposed 
of in the qualified stock disposition on or before the disposition 
date. Accordingly, only $400/$9,000 of Old Target's loss (if any) 
with respect to each asset sold in the deemed asset disposition is 
recognized.

    (C) Tiered targets. In the case of parent-subsidiary chains of 
corporations making section 336(e) elections, the deemed asset 
disposition of a higher-tier subsidiary is considered to precede the 
deemed asset disposition of a lower-tier subsidiary.
    (ii) Old target--deemed purchase--(A) In general. Immediately after 
the deemed asset disposition described in paragraph (b)(2)(i)(A) of 
this section, old target is treated as acquiring all of its assets from 
an unrelated person in a single, separate transaction at the close of 
the disposition date (but before the distribution described in 
paragraph (b)(2)(iii)(A) of this section) in exchange for an amount 
equal to the AGUB as determined under Sec.  1.336-4. Old target shall 
allocate the consideration deemed paid in the transaction in the same 
manner as new target would under Sec. Sec.  1.338-6 and 1.338-7 in 
order to determine the basis in each of the purchased assets.
    (B) Tiered targets. In the case of parent-subsidiary chains of 
corporations making section 336(e) elections with respect to a 
qualified stock disposition described, in whole or in part, in section 
355(d)(2) or (e)(2), old target's deemed purchase of all its assets is 
considered to precede the deemed asset disposition of a lower-tier 
subsidiary.
    (iii) Seller--distribution of target stock--(A) In general. 
Immediately after old target's deemed purchase of its assets described 
in paragraph (b)(2)(ii) of this section, seller is treated as 
distributing the stock of old target actually distributed to its 
shareholders in the qualified stock disposition. No gain or loss is 
recognized by seller on the distribution. Additionally, if stock of 
target is sold or exchanged as part of a qualified stock disposition 
described, in whole or in part, in section 355(d)(2) or (e)(2), no gain 
or loss is recognized by seller on the sale or exchange.
    (B) Tiered targets. In the case of parent-subsidiary chains of 
corporations making section 336(e) elections with respect to a 
qualified stock disposition described, in whole or in part, in section 
355(d)(2) or (e)(2), the Federal income tax consequences of the section 
336(e) election for a subsidiary of target shall be determined under 
paragraph (b)(1) of this section. The deemed liquidation of a lower-
tier subsidiary corporation pursuant to paragraph (b)(1)(iii) of this 
section is considered to precede the deemed liquidation of a higher-
tier subsidiary. The deemed liquidation of the highest tier subsidiary 
of target is considered to precede the distribution of old target stock 
described in paragraph (b)(2)(iii)(A) of this section.
    (iv) Seller--retention of target stock. If a seller retains any 
target stock after the 12-month disposition period, the seller is 
treated as having disposed of the old target stock so retained, on the 
disposition date, in a transaction in which no gain or loss is 
recognized, and then, on the day after the disposition date, purchasing 
the stock so retained from old target for its fair market value. The 
holding period for the retained stock starts on the day after the 
disposition date. For purposes of this paragraph (b)(2)(iv), the fair 
market value of all of the target stock equals the grossed-up amount 
realized on the sale, exchange, or distribution of recently disposed 
stock of target (see Sec.  1.336-3(c)).
    (v) Qualification under section 355. Old target's deemed sale of 
all its assets to an unrelated person and old target's deemed purchase 
of all its assets from an unrelated person will not cause the 
distribution of old target to fail to satisfy the requirements of 
section 355. Similarly, the deemed sale of all of the assets of a 
subsidiary of target to an unrelated person and the subsidiary's deemed 
purchase of all its assets from an unrelated person will not cause the 
distribution of old target to fail to satisfy the requirements of 
section 355. For purposes of applying section 355(a)(1)(D), seller is 
treated as having disposed of any stock disposed of in the qualified 
stock disposition on the date seller actually sold, exchanged, or 
distributed such stock. Further, seller's deemed disposition of 
retained old target stock under paragraph (b)(2)(iv) of this section is 
disregarded for purposes of applying section 355(a)(1)(D).
    (vi) Earnings and profits. The earnings and profits of seller and 
target shall be determined pursuant to Sec.  1.312-10 and, if 
applicable, Sec.  1.1502-33(e). For this purpose, target will not be 
treated as a newly created controlled corporation and any increase or 
decrease in target's earnings and profits pursuant to the deemed asset 
disposition will increase or decrease, as the case may be, target's 
earnings and profits immediately before the allocation described in 
Sec.  1.312-10.
    (c) Purchaser. Generally, the making of a section 336(e) election 
will not affect the Federal income tax consequences to which the 
purchaser would have been subject with respect to the acquisition of 
the target stock if a section 336(e) election was not made. Thus, 
notwithstanding Sec. Sec.  1.336-2(b)(1)(i)(A), 1.336-2(b)(1)(iv), and 
1.336-2(b)(2)(iii)(A), the purchaser will still be treated as having 
purchased, received in an exchange, or received in a distribution, the 
stock of target so acquired on the date actually acquired. However, see 
section 1223(1)(B) with respect to the holding period for stock 
acquired pursuant to a distribution qualifying under section 355 (or so 
much of section 356 that relates to section 355). The Federal income 
tax consequences of the deemed asset disposition and liquidation of 
target may affect the purchaser's consequences. For example, if seller 
distributes the stock of target to its shareholders in a qualified 
stock disposition for which a section 336(e) election is made, any 
increase in seller's earnings and profits as a result of old target's 
deemed asset disposition and liquidation into seller may increase the 
amount of the distribution to the shareholders constituting a dividend 
under section 301(c)(1).
    (d) Minority shareholders--(1) In general. This paragraph (d) 
describes the treatment of shareholders of old target other than the 
seller (or a member of seller's consolidated group), whether or not 
they sell, exchange, or distribute their stock of target. A shareholder 
to which this paragraph (d) applies is referred to as a minority 
shareholder.
    (2) Sale, exchange, or distribution of target stock by a minority 
shareholder. A minority shareholder recognizes gain or loss (as 
permitted under the general principles of tax law) on its sale, 
exchange, or distribution of target stock.
    (3) Retention of target stock by a minority shareholder. A minority 
shareholder who retains its target stock does not recognize gain or 
loss under this section with respect to its shares of target stock. The 
minority shareholder's basis and holding period for that target stock 
are not affected by the section 336(e) election. Notwithstanding the 
treatment to the minority shareholder, if a section 336(e) election is 
made, target will still be treated as disposing of all of its assets in 
the deemed asset disposition.

[[Page 49976]]

    (e) Treatment consistent with an actual asset disposition. Except 
as otherwise provided, no provision in this section shall produce a 
Federal income tax result under subtitle A of the Internal Revenue Code 
that would not occur if the parties had actually engaged in the 
transactions deemed to occur because of this section, taking into 
account other transactions that actually occurred or are deemed to 
occur. See Sec.  1.338-1(a)(2) regarding the application of other rules 
of law.
    (f) Treatment of target under other provisions of the Internal 
Revenue Code. The provisions Sec.  1.338-1(b) apply with respect to the 
treatment of new target after a section 336(e) election, treating any 
reference to section 338 or 338(h)(10) as a reference to section 
336(e).
    (g) Special rules--(1) Target as two corporations. Although the 
target is a single corporation under corporate law, if a section 336(e) 
election is made, then, except with respect to a distribution described 
in section 355(d)(2) or (e)(2) and as provided in Sec.  1.338-1(b)(2), 
two separate corporations, old target and new target, generally are 
considered to exist for purposes of subtitle A of the Internal Revenue 
Code.
    (2) Treatment of members of a consolidated group. For purposes of 
Sec. Sec.  1.336-1 through 1.336-5, all members of the seller's 
consolidated group are treated as a single seller, regardless of 
whether the member actually disposes of any stock. Accordingly, any 
dispositions of stock made by members of the same consolidated group 
shall be treated as made by one corporation, and any stock owned by 
members of the same consolidated group and not disposed of will be 
treated as stock retained by the seller.
    (3) Miscellaneous international provisions--(i) Source and foreign 
tax credit. The principles of section 338(h)(16) apply to section 
336(e) elections for target corporations with foreign operations to 
ensure that the source and foreign tax credit limitation are properly 
determined.
    (ii) Allocation of foreign taxes. If a section 336(e) election is 
made for target and target's taxable year under foreign law (if any) 
does not close at the end of the disposition date, foreign income taxes 
attributable to the foreign taxable income earned by the target during 
such foreign taxable year are allocated to old target and new target 
under the principles of Sec.  1.1502-76(b).
    (h) Making the section 336(e) election. A section 336(e) election 
is made by the seller attaching a section 336(e) election statement to 
its timely filed (including extensions) Federal income tax return for 
the taxable year which includes the disposition date entitled ``THIS IS 
AN ELECTION UNDER SECTION 336(e) TO TREAT THE DISPOSITION OF THE STOCK 
OF [insert name and employer identification number of target] AS A 
DEEMED SALE OF SUCH CORPORATION'S ASSETS.'' If the seller is a member 
of a consolidated group, the statement is filed with the Federal income 
tax return of the consolidated group. The seller must provide a copy of 
the statement to the target. The relevant information for each 
consolidated group member that disposes of target stock and each member 
that retains target stock must be set forth individually, not in the 
aggregate. In the case of a section 336(e) election for lower-tier 
targets, an additional statement must be filed for each lower-tier 
target. However, in preparing the statement, the seller of the directly 
disposed of target shall be treated as the seller of the lower-tier 
target. The section 336(e) election statement must include:
    (1) The name, address, employer identification number (EIN), tax 
year, and state of incorporation of the target corporation;
    (2) The name, address, EIN, tax year, and state of incorporation of 
the seller(s);
    (3) The name, address, EIN (or Social Security number), tax year, 
and state of incorporation (if any) of any 80-percent purchaser;
    (4) The disposition date;
    (5) The percentage of target stock that was disposed of by each 
seller in the qualified stock disposition;
    (6) The percentage of target stock that was disposed of on the 
disposition date by each seller in the qualified stock disposition;
    (7) The percentage of target stock that was sold or exchanged by 
each seller in the qualified stock disposition on or before the 
disposition date;
    (8) The percentage of target stock that was distributed by each 
seller in the qualified stock disposition on or before the disposition 
date;
    (9) The percentage of target stock that was retained by each seller 
immediately after the 12-month disposition period; and
    (10) Whether any purchaser made a gain recognition election 
pursuant to Sec.  1.336-4(c). A copy of the gain recognition election 
statement must be attached to the section 336(e) election statement.
    (i) [Reserved]
    (j) Protective section 336(e) election. Taxpayers may make a 
protective election under section 336(e) in connection with a 
transaction. Such an election will have no effect if the transaction 
does not constitute a qualified stock disposition, as defined in Sec.  
1.336-1(b)(5), but will otherwise be binding and irrevocable.
    (k) Examples. The following examples illustrate the provisions of 
this section.

    Example 1. Sale of 100 percent of target stock. (i) Facts. 
Parent owns all 100 shares of Target's only class of stock. The 
stock has a basis of $80 per share. Target's only assets are two 
parcels of land. Parcel 1 has a basis of $5,000 and Parcel 2 has a 
basis of $4,000. Target has no liabilities. On July 1 of Year 1, 
Parent sells all 100 shares of Target stock to A for $100 per share. 
Parent incurs no selling costs and A incurs no acquisition costs. On 
July 1, the value of Parcel 1 is $7,000 and the value of Parcel 2 is 
$3,000. Parent makes a section 336(e) election.
    (ii) Consequences. The sale of Target stock constitutes a 
qualified stock disposition. July 1 of Year 1 is the disposition 
date. Accordingly, pursuant to the section 336(e) election, for 
Federal income tax purposes, rather than treating Parent as selling 
the stock of Target to A, the following events are deemed to occur. 
Target is treated as if, on July 1, it sold all of its assets to an 
unrelated person in exchange for the ADADP, $10,000, which is 
allocated $7,000 to Parcel 1 and $3,000 to Parcel 2 (see Sec.  
1.336-3 for the determination and allocation of ADADP). Target 
recognizes gain of $2,000 on Parcel 1 and loss of $1,000 on Parcel 
2. New Target is then treated as acquiring all its assets from an 
unrelated person in a single transaction in exchange for the AGUB, 
$10,000 (see Sec.  1.336-4 for the determination of AGUB). Old 
Target is treated as liquidating into Parent immediately thereafter, 
distributing the $10,000 deemed received in exchange for its assets 
in a transaction qualifying under section 332. Parent recognizes no 
gain or loss on the liquidation. A's basis in New Target stock 
equals $100 per share, the amount paid for the stock.

    Example 2. Sale of 80 percent of target stock. (i) Facts. The 
facts are the same as in Example 1 except that Parent only sells 80 
shares of its Target stock to A and retains the other 20 shares.
    (ii) Consequences. The results are the same as in Example 1 
except that Parent also is treated as purchasing from New Target on 
July 2, the day after the disposition date, the 20 shares of Target 
stock (New Target stock) not actually sold to A, for their fair 
market value as determined under Sec.  1.336-2(b)(1)(v), $2,000 
($100 per share).

    Example 3. Distribution of 100 percent of target stock. (i) 
Facts. The facts are the same as in Example 1 except that instead of 
Parent selling 100 shares of Target stock to A, Parent distributes 
100 shares to its shareholders, all of whom are unrelated to Parent, 
in a transaction that does not qualify under section 355.
    (ii) Consequences. The results are the same as in Example 1 
except that Target does not recognize the $1,000 of loss realized 
with respect to Parcel 2 (see Sec.  1.336-

[[Page 49977]]

2(b)(1)(i)(B)(2)) and on July 1, immediately after the deemed 
liquidation of Target, Parent is deemed to purchase from New Target 
100 shares of New Target stock and distribute those New Target 
shares to its shareholders. Parent recognizes no gain or loss on the 
deemed distribution of the shares under Sec.  1.336-2(b)(1)(iv). The 
shareholders receive the New Target stock as a distribution pursuant 
to section 301 and their basis in the New Target stock received is 
its fair market value pursuant to section 301(d).

    Example 4. Distribution of 80 percent of target stock. (i) 
Facts. The facts are the same as in Example 3 except that Parent 
distributes only 80 shares of Target stock to its shareholders and 
retains the other 20 shares.
    (ii) Consequences. The results are the same as in Example 3 
except that Parent is treated as purchasing on July 1 only 80 shares 
of New Target stock and as distributing only 80 shares of New Target 
stock to its shareholders and then as purchasing (and retaining), on 
July 2, the day after the disposition date, 20 shares of New Target 
stock at their fair market value as determined under Sec.  1.336-
2(b)(1)(v), $2,000 ($100 per share).

    Example 5. Part sale, part distribution. (i) Facts. Parent owns 
all 100 shares of Target's only class of stock. The stock has a 
basis of $80 per share. Target has two assets, both of which are 
buildings used in its business. Building 1 has a basis of $6,000 and 
Building 2 has a basis of $5,100. Target has no liabilities. On 
January 1 of Year 1, Parent sells 50 shares of Target to A for $88 
per share. Parent incurred no selling costs with respect to the sale 
of Target stock and A incurred no acquisition costs with respect to 
the purchase. On July 1 of Year 1, when the value of the Target 
stock is $120 per share, Parent distributes 30 shares of Target to 
its unrelated shareholders. Parent retains the remaining 20 shares. 
On July 1, the value of Building 1 is $7,800 and the value of 
Building 2 is $4,200. A section 336(e) election is made.
    (ii) Consequences. Because the sale of the 50 shares and the 
distribution of the 30 shares occurred within a 12-month disposition 
period, the 80 shares of Target stock sold and distributed were 
disposed of in a qualified stock disposition. July 1 of Year 1 is 
the disposition date. On July 1, Target is treated as if it sold its 
assets to an unrelated person in exchange for the ADADP, $10,000, 
which is allocated $6,500 to Building 1 and $3,500 to Building 2 
(see Sec.  1.336-3 for the determination and allocation of ADADP). 
Target realizes and recognizes gain of $500 on the deemed sale of 
Building 1 ($6,500-$6,000). Target realizes loss of $1,600 on the 
deemed sale of Building 2 ($3,500-$5,100). However, pursuant to 
Sec.  1.336-2(b)(1)(i)(B)(2), because only a portion of the stock 
disposed of in the qualified stock disposition was sold or 
exchanged, only a portion of the loss on Building 2 is recognized. 
The amount of loss recognized on Building 2 is the $1,600 loss 
realized multiplied by a fraction, the numerator of which is $6,000, 
the value on July 1, of the 50 shares that were sold in the 
qualified stock disposition on or before the disposition date and 
the denominator of which is $9,600, the value on July 1, of all of 
the Target shares disposed of in the qualified stock disposition on 
or before the disposition date. Thus, only $1,000 ($1,600 x ($6,000/
$9,600)) of the loss on the deemed sale of Building 2 is recognized 
by Old Target. New Target is then treated as acquiring all its 
assets from an unrelated person in a single transaction in exchange 
for the AGUB, $10,000 (see Sec.  1.336-4 for the determination of 
AGUB). Old Target is treated as liquidating into Parent immediately 
after the deemed asset disposition, distributing the $10,000 deemed 
received in exchange for its assets in a transaction qualifying 
under section 332. Parent recognizes no gain or loss on the 
liquidation. Parent is then deemed to purchase 30 shares of New 
Target stock from New Target on July 1, and distribute those 30 New 
Target shares to its shareholders. Parent recognizes no gain or loss 
on the deemed distribution of the 30 shares under Sec.  1.336-
2(b)(1)(iv). Parent is then deemed to purchase (and retain), on July 
2, the day after the disposition date, 20 shares of New Target stock 
at their fair market value as determined under Sec.  1.336-
2(b)(1)(v), $2,000 ($100 per share). A is treated as having 
purchased the 50 shares of New Target stock on January 1 of Year 1 
at a cost of $88 per share, the same as if no section 336(e) 
election had been made. Parent's shareholders are treated as 
receiving the New Target stock on July 1 of Year 1 as a distribution 
pursuant to section 301 and their basis in the New Target stock 
received is its fair market value pursuant to section 301(d), the 
same as if no section 336(e) election had been made.

    Example 6. Sale of Target stock by consolidated group members. 
(i) Facts. Parent owns all the stock of Sub and 50 of the 100 
outstanding shares of Target stock. Sub owns the remaining 50 shares 
of Target stock. Parent and Sub each hold their Target stock with a 
basis of $80 per share. Target's assets have an aggregate basis of 
$9,000. Target has no liabilities. Parent, Sub, and Target file a 
consolidated Federal income tax return. On February 1 of Year 1, 
Parent sells 30 shares of its Target stock to A for $2,400. On March 
1 of Year 1, Sub sells all 50 shares of its Target stock to B for 
$5,600. Neither Parent nor Sub incurred any selling costs. Neither A 
nor B incurred any acquisition costs. A section 336(e) election is 
made. Assume that if the sale of the Target stock constitutes a 
qualified stock disposition, the value allocated to each of Target's 
assets under Sec.  1.336-3 will exceed the asset's basis.
    (ii) Consequences. Because Parent and Sub are members of the 
same consolidated group, their sale of Target stock is treated as 
made by one seller (see paragraph (g)(2) of this section), and the 
sales of Target stock constitute a qualified stock disposition. 
March 1 of Year 1 is the disposition date. For Federal income tax 
purposes, Parent and Sub are not treated as selling the stock of 
Target to A and B, respectively. Instead, the following events are 
deemed to occur. Target is treated as if, on March 1, it sold all 
its assets to unrelated person in exchange for the ADADP, $10,000 
(see Sec.  1.336-3 for determination of ADADP), recognizing gain of 
$1,000. New Target is then treated as acquiring all its assets from 
an unrelated person in a single transaction in exchange for the 
AGUB, $10,000 (see Sec.  1.336-4 for the determination of AGUB). Old 
Target is treated as liquidating into Parent and Sub immediately 
thereafter, distributing the $10,000 deemed received in exchange for 
its assets in a transaction qualifying under section 332 (see Sec.  
1.1502-34). Neither Parent nor Sub recognize gain or loss on the 
liquidation. Parent is then treated as purchasing from New Target on 
March 2, the day after the disposition date, the 20 shares of Target 
stock (New Target stock) not actually sold, for its fair market 
value as determined under Sec.  1.336-2(b)(1)(v), $2,000 ($100 per 
share). A is treated as having purchased 30 shares of New Target 
stock on February 1 of Year 1 at a cost of $2,400 ($80 per share), 
the same as if no section 336(e) election had been made. B is 
treated as having purchased 50 shares of New Target stock on March 1 
of Year 1 at a cost of $5,600 ($112 per share), the same as if no 
section 336(e) election had been made.

    Example 7. Sale of target stock by non-consolidated group 
members. (i) Facts. The facts are the same as in Example 6 except 
that Parent, Sub, and Target do not join in the filing of a 
consolidated Federal income tax return. A section 336(e) election is 
made.
    (ii) Consequences. Because Parent and Sub do not join in a 
consolidated Federal income tax return and no single seller sells, 
exchanges, or distributes Target stock meeting the requirements of 
section 1504(a)(2), the transaction does not constitute a qualified 
stock disposition. The section 336(e) election made with respect to 
the disposition of Target stock has no effect.

    Example 8. Distribution of 80 percent of Target stock in 
complete redemption of a greater-than-50-percent shareholder. (i) 
Facts. A and B own 51 and 49 shares, respectively, of Seller's only 
class of stock. Seller owns all 100 shares of Target's only class of 
stock. Seller distributes 80 shares of Target stock to A in complete 
redemption of A's 51 shares of Seller in a transaction that does not 
qualify under section 355. A section 336(e) election is made.
    (ii) Consequences. Prior to the redemption, Seller and A would 
be related persons because, under section 318(a)(2)(C), any stock of 
a corporation that is owned by Seller would be attributed to A 
because A owns 50 percent or more of the value of the stock of 
Seller. However, for purposes of Sec. Sec.  1.336-1 through 1.336-5, 
the determination of whether Seller and A are related is made 
immediately after the redemption of A's stock. See Sec. Sec.  1.336-
1(b)(4)(iii) and 1.338-3(b)(3)(ii)(A). After the redemption, A no 
longer owns any stock of Seller. Accordingly, A and Seller are not 
related persons, as defined in Sec.  1.336-1(b)(11), and the 
distribution of Target stock constitutes a qualified stock 
disposition. For Federal income tax purposes, rather than Seller 
distributing the stock of Target to A, the following is deemed to 
occur. Target is treated as if it sold its assets to an unrelated 
person. New Target is then treated as acquiring all its assets from 
an unrelated person in a single transaction. Immediately thereafter, 
Old Target is liquidated into Seller

[[Page 49978]]

in a transaction qualifying under section 332. Seller recognizes no 
gain or loss on the liquidation. Seller is then treated as 
purchasing 80 shares of New Target stock from New Target and then 
distributing the stock of New Target to A in exchange for A's 51 
shares of Seller stock. Seller recognizes no gain or loss on the 
distribution of New Target stock pursuant to Sec.  1.336-
2(b)(1)(iv). Seller is then treated as purchasing from New Target, 
on the day after the disposition date, the 20 shares of Target stock 
(New Target stock) not actually distributed, for its fair market 
value as determined under Sec.  1.336-2(b)(1)(v). The Federal income 
tax consequences to A are the same as if no section 336(e) election 
had been made.

    Example 9. Pro-rata distribution of 80 percent of target stock. 
(i) Facts. A and B own 60 and 40 shares, respectively, of Seller's 
only class of stock. Seller owns all 100 shares of Target's only 
class of stock. Seller distributes 48 shares of Target stock to A 
and 32 shares of Target stock to B in a transaction that does not 
qualify under section 355. A section 336(e) election is made.
    (ii) Consequences. Any stock of a corporation that is owned by 
Seller would be attributed to A under section 318(a)(2)(C) because, 
after the distribution, A owns 50 percent or more of the value of 
the stock of Seller. Therefore, after the distribution, A and Seller 
are related persons, as defined in Sec.  1.336-1(b)(11), and the 
distribution of Target stock to A is not a disposition. Because only 
32 percent of the Target stock was sold, exchanged, or distributed 
to nonrelated persons, there has not been a qualified stock 
disposition. Accordingly, the section 336(e) election made with 
respect to the distribution of the Target stock has no effect.

    Example 10. Distribution of target stock described in section 
355(e)(2). (i) Facts. Seller owns all 100 shares of Target's only 
class of stock. Target owns all 100 shares of Target Subsidiary's 
only class of stock. Seller distributes all 100 shares of Target 
stock to its shareholders, all of whom are unrelated to Seller, in a 
distribution that qualifies under section 355 (see paragraph (iv) of 
this Example 10). As part of the plan involving the distribution of 
the Target stock, the shareholders of Seller sell all of the stock 
of Seller, and section 355(e)(2) applies to the distribution. 
Section 336(e) elections are made with respect to Target and Target 
Subsidiary.
    (ii) Consequences--Old Target deemed asset sale. Because the 
Target stock was distributed to persons who are unrelated to Seller, 
and the distribution is described in section 355(e)(2), the 
distribution constitutes a qualified stock disposition. See proposed 
Sec. Sec.  1.336-1(b)(4) and 1.336-1(b)(5). Target's deemed 
disposition of the stock of Target Subsidiary as a result of the 
section 336(e) election also constitutes a qualified stock 
disposition. See Sec.  1.336-1(b)(5)(ii). For Federal income tax 
purposes, rather than Seller distributing the stock of Target to 
unrelated shareholders, the following is deemed to occur. Old Target 
is treated as if it sold all of its assets to an unrelated person 
for the ADADP, determined under Sec.  1.336-3. Old Target recognizes 
gain, but not loss, on the deemed sale of each of its assets, other 
than the stock of Target Subsidiary. See Sec.  1.336-
2(b)(2)(i)(B)(2). Old Target is then treated as acquiring all of its 
assets from an unrelated person in a single transaction in exchange 
for an amount equal to the AGUB, as determined under Sec.  1.336-4.
    (iii) Consequences--Old Target Subsidiary deemed asset sale and 
liquidation. After Old Target's deemed purchase of all of its 
assets, Old Target Subsidiary is then treated as if it sold all of 
its assets to an unrelated person for the ADADP, determined under 
Sec.  1.336-3. Old Target Subsidiary recognizes gain, but not loss, 
on the deemed sale of each of its assets. See Sec.  1.336-
2(b)(1)(i)(B)(2). New Target Subsidiary is then treated as acquiring 
all of its assets from an unrelated person in a single transaction 
in exchange for an amount equal to the AGUB, as determined under 
Sec.  1.336-4. Old Target Subsidiary is then deemed to liquidate 
into Old Target immediately thereafter, distributing the amount 
deemed received in exchange for its assets, in a transaction 
qualifying under section 332. Old Target recognizes no gain or loss 
on the liquidation of Old Target Subsidiary.
    (iv) Consequences--Seller distribution of Old Target. After the 
deemed liquidation of Old Target Subsidiary, Seller is then treated 
as distributing the stock of Old Target to the unrelated 
shareholders. Pursuant to paragraph (b)(2)(v) of this section, 
neither Old Target's and Old Target Subsidiary's deemed sales of all 
their assets to unrelated persons nor Old Target's and New Target 
Subsidiary's deemed purchases of all their assets from unrelated 
persons will cause the distribution of Old Target to fail to satisfy 
the requirements of section 355. The distributee shareholders have 
the same Federal income tax consequences with respect to the receipt 
of the Target stock as if a section 336(e) election had not been 
made.


Sec.  1.336-3  Aggregate deemed asset disposition price; various 
aspects of taxation of the deemed asset disposition.

    (a) Scope. This section provides rules under section 336(e) to 
determine the aggregate deemed asset disposition price (ADADP) for 
target. ADADP is the amount for which old target is deemed to have sold 
all of its assets in the deemed asset disposition. ADADP is allocated 
among target's assets in the same manner as ADSP is allocated under 
Sec.  1.338-6 to determine the amount for which each asset is deemed to 
have been sold. When a subsequent increase or decrease is required 
under general principles of tax law with respect to an element of 
ADADP, the redetermined ADADP is allocated among target's assets in the 
same manner as redetermined ADSP is allocated under Sec.  1.338-7.
    (b) Determination of ADADP--(1) General rule. ADADP is the sum of--
    (i) The grossed-up amount realized on the sale, exchange, or 
distribution of recently disposed stock of target; and
    (ii) The liabilities of old target.
    (2) Time and amount of ADADP--(i) Original determination. ADADP is 
initially determined at the beginning of the day after the disposition 
date of target. General principles of tax law apply in determining the 
timing and amount of the elements of ADADP.
    (ii) Redetermination of ADADP. ADADP is redetermined at such time 
and in such amount as an increase or decrease would be required, under 
general principles of tax law, for the elements of ADADP. For example, 
ADADP is redetermined because of an increase or decrease in the amount 
realized on the sale or exchange of recently disposed stock of target 
or because liabilities not originally taken into account in determining 
ADADP are subsequently taken into account. Increases or decreases with 
respect to the elements of ADADP result in the reallocation of ADADP 
among target's assets in the same manner as ADSP under Sec.  1.338-7.
    (c) Grossed-up amount realized on the sale, exchange, or 
distribution of recently disposed stock of target--(1) Determination of 
amount. The grossed-up amount realized on the sale, exchange, or 
distribution of recently disposed stock of target is an amount equal 
to--
    (i) The sum of (A) the amount realized on the sale or exchange of 
recently disposed stock of target, determined as if the seller(s) were 
required to use old target's accounting methods and characteristics and 
the installment method were not available and determined without regard 
to the selling costs taken into account under paragraph (c)(1)(iii) of 
this section and (B) the fair market value of recently disposed stock 
of target, determined on the date of each distribution, distributed in 
the qualified stock disposition;
    (ii) Divided by the percentage of target stock (by value, 
determined on the disposition date) attributable to the recently 
disposed stock;
    (iii) Less the selling costs incurred by the seller in connection 
with the sale or exchange of recently disposed stock that reduce its 
amount realized on the sale or exchange of the stock (for example, 
brokerage commissions and any similar costs to sell the stock).
    (2) Example. The following example illustrates this paragraph (c):

    Example. Target has two classes of stock outstanding, voting 
common stock and preferred stock described in section 1504(a)(4). 
Seller owns all 100 shares of each class of stock. On March 1 of 
Year 1, Seller sells 10 shares of Target voting common stock to A 
for $75. On April 1 of Year 2, Seller distributes 15 shares of 
voting common stock with a fair market value of $120 to B.

[[Page 49979]]

On May 1 of Year 2, Seller distributes 10 shares of voting common 
stock with a fair market value of $110 to C. On July 1 of Year 2, 
Seller sells 55 shares of Target voting common stock to D for $550. 
On July 1 of Year 2, the fair market value of all the Target voting 
common stock is $1,000 ($10 per share) and the fair market value of 
the preferred stock is $600. Seller incurs $20 of selling costs with 
respect to the sale to A and $60 of selling costs with respect to 
the sale to D. The grossed-up amount realized on the sale, exchange, 
or distribution of recently disposed stock of Target corporation is 
calculated as follows: The sum of the amount realized on the sale or 
exchange of recently disposed stock sold or exchanged (without 
regard to selling costs) and the fair market value of the recently 
disposed stock distributed is $780 ($120 + $110 + $550) (the 10 
shares sold to A on March 1 of Year 1 is not recently disposed stock 
because it was not disposed of during the 12-month disposition 
period). The percentage of Target stock by value on the disposition 
date attributable to recently disposed stock equals 50% ($800/
($1,000 + $600). The grossed-up amount realized equals $1,500 
(($780/.50) - $60 selling costs).

    (d) Liabilities of old target--(1) In general. In general, the 
liabilities of old target are measured as of the beginning of the day 
after the disposition date. However, if a target for which a section 
336(e) election is made engages in a transaction outside the ordinary 
course of business on the disposition date after the event resulting in 
the qualified stock disposition of the target or a higher-tier 
corporation, the target and all persons related thereto (either before 
or after the qualified stock disposition) under section 267(b) or 
section 707 must treat the transaction for all Federal income tax 
purposes as occurring at the beginning of the day following the 
transaction and after the deemed disposition by old target. In order to 
be taken into account in ADADP, a liability must be a liability of 
target that is properly taken into account in an amount realized under 
general principles of tax law that would apply if old target had sold 
its assets to an unrelated person for consideration that included the 
discharge of its liabilities. See Sec.  1.1001-2(a). Such liabilities 
may include liabilities for the tax consequences resulting from the 
deemed asset disposition.
    (2) Time and amount of liabilities. The time for taking into 
account liabilities of old target in determining ADADP and the amount 
of the liabilities taken into account is determined as if old target 
had sold its assets to an unrelated person for consideration that 
included the discharge of the liabilities by the unrelated person. For 
example, if no amount of a target liability is properly taken into 
account in an amount realized as of the beginning of the day after the 
disposition date, the liability is not initially taken into account in 
determining ADADP (although it may be taken into account at some later 
date).
    (e) Deemed disposition tax consequences. Gain or loss on each asset 
in the deemed asset disposition is computed by reference to the ADADP 
allocated to that asset. ADADP is allocated in the same manner as is 
ADSP under Sec.  1.338-6. Although deemed disposition tax consequences 
may increase or decrease ADADP by creating or reducing a tax liability, 
the amount of the tax liability itself may be a function of the size of 
the deemed disposition tax consequences. Thus, these determinations may 
require trial and error computations.
    (f) Other rules apply in determining ADADP. ADADP may not be 
applied in such a way as to contravene other applicable rules. For 
example, a capital loss cannot be applied to reduce ordinary income in 
calculating the tax liability on the deemed asset disposition for 
purposes of determining ADADP.


Sec.  1.336-4  Adjusted grossed-up basis.

    (a) Scope. Except as provided in paragraphs (b) and (c) of this 
section or as the context otherwise requires, the principles of 
paragraphs (b) through (g) of Sec.  1.338-5 apply in determining the 
adjusted gross-up basis (AGUB) for target and the consequences of a 
gain recognition election. AGUB is the amount for which new target is 
deemed to have purchased all of its assets in the deemed purchase under 
Sec.  1.336-2(b)(1)(ii), or the amount for which old target is deemed 
to have purchased all of its assets in the deemed purchase under Sec.  
1.336-2(b)(2)(ii). AGUB is allocated among target's assets in 
accordance with Sec.  1.338-6 to determine the price at which the 
assets are deemed to have been purchased. When a subsequent increase or 
decrease with respect to an element of AGUB is required under general 
principles of tax law, redetermined AGUB is allocated among target's 
assets in accordance with Sec.  1.338-7.
    (b) Modifications to the principles in Sec.  1.338-5. Solely for 
purposes of applying Sec. Sec.  1.336-1 through 1.336-4, the principles 
of Sec.  1.338-5 are modified as follows--
    (1) Purchasing corporation; purchaser. Any reference to the 
``purchasing corporation'' shall be treated as a reference to a 
purchaser, as defined in Sec.  1.336-1(b)(2).
    (2) Acquisition date; disposition date. Any reference to the 
``acquisition date'' shall be treated as a reference to the disposition 
date, as defined in Sec.  1.336-1(b)(7).
    (3) Section 338 election; section 338(h)(10) election; section 
336(e) election. Any reference to a ``section 338 election'' or a 
``section 338(h)(10) election'' shall be treated as a reference to a 
section 336(e) election, as defined in Sec.  1.336-1(b)(10).
    (4) New target; old target. In the case of a disposition described 
in section 355(d)(2) or (e)(2), any reference to ``new target'' shall 
be treated as a reference to ``old target'' in its capacity as the 
purchaser of assets pursuant to the section 336(e) election.
    (5) Recently purchased stock; recently disposed stock. Any 
reference to recently purchased stock shall be treated as a reference 
to recently disposed stock, as defined in Sec.  1.336-1(b)(16). In the 
case of a distribution of stock, for purposes of determining the 
purchaser's grossed-up basis of recently disposed stock, the 
purchaser's basis in recently disposed stock shall be deemed to be such 
stock's fair market value on the date it was acquired.
    (6) Nonrecently purchased stock; nonrecently disposed stock. Any 
reference to nonrecently purchased stock shall be treated as a 
reference to nonrecently disposed stock, as defined in Sec.  1.336-
1(b)(17).
    (c) Gain recognition election--(1) In general. Any holder of 
nonrecently disposed stock of target may make a gain recognition 
election. The gain recognition election is irrevocable. Each owner of 
nonrecently disposed stock determines its basis amount, and therefore, 
the gain recognized pursuant to the gain recognition election, by 
applying Sec. Sec.  1.338-5(c) and 1.338-5(d)(3)(ii) by reference to 
its own recently disposed stock and nonrecently disposed stock, and not 
by reference to all recently disposed stock and nonrecently disposed 
stock.
    (2) 80-percent purchaser. If a section 336(e) election is made for 
target, any 80-percent purchaser and all persons related to the 80-
percent purchaser are automatically deemed to have made a gain 
recognition election for its nonrecently disposed target stock.
    (3) Non-80-percent purchaser. A gain recognition election is 
actually made by a non-80-percent purchaser by providing to the seller, 
and seller including with the section 336(e) election statement, a gain 
recognition election statement, as described in paragraph (c)(4) of 
this section. If a non-80-percent purchaser makes a gain recognition 
election, all related persons to the non-80-percent purchaser must also 
make a gain recognition election. Otherwise, the gain recognition 
election

[[Page 49980]]

for the non-80-percent purchaser will have no effect.
    (4) Gain recognition election statement. A gain recognition 
election statement must include the following declarations (or 
substantially similar declarations):
    (i) [Insert name, address, and taxpayer identifying number of 
person for whom gain recognition election is actually being made] has 
elected to recognize gain under Sec.  1.336-4(c) with respect to [his, 
hers, or its] nonrecently disposed stock.
    (ii) [Insert name of person for whom gain recognition election is 
actually being made] agrees to report any gain under the gain 
recognition election on [his, hers, or its] Federal income tax return 
(including an amended return, if necessary) for the taxable year that 
includes the disposition date of [insert name and EIN of target 
corporation].
    (d) Examples. The following examples illustrate the provisions of 
this section.

    Example 1. On January 1 of Year 1, Seller owns 85 shares of 
Target stock, A owns 8 shares, B owns 4 shares, and C owns the 
remaining 3 shares. Each of A's 8 shares, B's 4 shares, and C's 3 
shares have a $5 basis. Assume that Target has no liabilities. On 
July 1 of Year 2, Seller sells 70 shares of Target stock to A for 
$10 per share. On September 1 of Year 2, Seller sells 5 shares of 
Target stock to B and 5 shares of Target stock to C for $14 per 
share. A incurs $25 of acquisition costs, and B and C each incur $10 
of acquisition costs in connection with their respective Year 2 
purchases. These costs are capitalized in the basis of the Target 
stock. September 1 of Year 2 is the disposition date. Because A owns 
at least 10 percent of the Target stock on September 1, the 
disposition date, and A's original 8 shares of Target stock owned on 
January 1 of Year 1 were not disposed of in the qualified stock 
disposition, A's original 8 shares of Target stock are nonrecently 
disposed stock. Although B's original 4 shares and C's original 3 
shares were not disposed of in the qualified stock disposition, 
because neither B nor C owns, with the application of section 
318(a), other than section 318(a)(4), at least 10 percent of the 
total voting power or value of Target stock on the disposition date, 
their original shares are not nonrecently disposed stock. The 
grossed-up basis of recently disposed Target stock is $1011, 
determined as follows: The purchasers' (A, B, and C) aggregate basis 
in the recently disposed target stock, determined without regard to 
acquisition costs, is $840 ((70 x $10) + (5 x $14) + (5 x $14)). 
This amount is multiplied by a fraction, the numerator of which is 
100 minus 8, the percentage of the Target stock which is nonrecently 
disposed stock, and the denominator of which is 80, the percentage 
of Target stock disposed of in the qualified stock disposition ($840 
x 92/80 = $966). This amount is then increased by the $45 of 
acquisition costs incurred by A, B, and C to arrive at the $1011 
grossed-up basis of recently disposed Target stock ($966 + $45 = 
$1011). New Target's AGUB is $1051, the sum of $1011, the grossed-up 
basis of recently disposed Target stock and $40 (8 x $5), A's basis 
in his nonrecently disposed Target stock.
    Example 2. The facts are the same as in Example 1 except that A 
makes a gain recognition election. Pursuant to the gain recognition 
election, A is treated as if it sold on September 1 of Year 2, the 
disposition date, its 8 shares of nonrecently disposed target stock 
for the basis amount, and A's basis in nonrecently disposed target 
stock immediately after the deemed sale is the basis amount. A's 
basis amount equals his basis in his recently disposed Target stock 
without regard to acquisition costs, $700 (70 x $10), multiplied by 
a fraction, the numerator of which is 100 minus 8, the percentage of 
the Target stock, by value, determined on the disposition date, 
which is A's nonrecently disposed Target stock, and the denominator 
of which is 70, the percentage of the Target stock, by value, 
determined on the disposition date, disposed of to A in the 
qualified stock disposition, which is then multiplied by a fraction, 
the numerator of which is 8, the percentage of target stock, by 
value, determined on the disposition date, attributable to A's 
nonrecently disposed Target stock and the denominator of which is 
100 minus the numerator amount. Accordingly, A's basis amount is $80 
($700 x 92/70 x 8/92). A therefore recognizes gain of $40 under the 
gain recognition election ($80 basis amount minus A's $40 basis in 
his nonrecently disposed stock prior to the gain recognition 
election). New Target's AGUB is $1091, the sum of $1011, the 
grossed-up basis of all recently disposed Target stock and $80, A's 
basis in his nonrecently disposed Target stock pursuant to the gain 
recognition election.


Sec.  1.336-5  Effective/Applicability date.

    The provisions of Sec. Sec.  1.336-1 through 1.336-4 apply to any 
qualified stock disposition for which the disposition date is on or 
after the date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register.
    Par. 3. Section 1.338-0 is amended by adding entries for Sec. Sec.  
1.338-1(e) and 1.338-5(h) to read as follows:


Sec.  1.338-0  Outline of topics.

* * * * *


Sec.  1.338-1  General principles; status of old target and new target.

* * * * *
    (e) Effective/applicability date.
* * * * *


Sec.  1.338-5  Adjusted grossed-up basis.

* * * * *
    (h) Effective/applicability date.
    Par. 4. Section 1.338-1 is amended by adding two new sentences 
after the parenthetical that follows the third sentence of paragraph 
(a)(1), by revising the first sentence in paragraph (c)(1), and adding 
a new paragraph (e) to read as follows:


Sec.  1.338-1  General principles; status of old target and new target.

    (a) * * *
    (1) * * * However, if, as a result of the deemed purchase of old 
target's assets pursuant to a section 336(e) election, there would be 
both a qualified stock purchase and a qualified stock disposition of 
the stock of a subsidiary of the target, neither a section 338(g) 
election nor a section 338(h)(10) election may be made with respect to 
the qualified stock purchase of the subsidiary. Instead, a section 
336(e) election may be made with respect to such purchase. See Sec.  
1.336-1(b)(5)(ii). * * *
* * * * *
    (c) * * *
    (1) In general. The rules of this paragraph (c) apply for purposes 
of applying the regulations under sections 336(e), 338, and 1060. * * *
* * * * *
    (e) Effective/applicability date. Paragraphs (a)(1) and (c)(1) of 
this section are applicable to any qualified stock disposition for 
which the disposition date is on or after the date of publication of 
the Treasury decision adopting these rules as final regulations in the 
Federal Register.
    Par. 5. Section 1.338-5 is amended by revising the first sentence 
in paragraph (d)(3)(ii) and by adding a new paragraph (h) to read as 
follows:


Sec.  1.338-5  Adjusted grossed-up basis.

* * * * *
    (d) * * *
    (3) * * *
    (ii) Basis amount. The basis amount is equal to the amount 
determined by applying paragraphs (c)(1) and (2) of this section (the 
purchasing corporation's grossed-up basis in recently purchased target 
stock at the beginning of the day after the acquisition date determined 
without regard to the acquisition costs taken into account in paragraph 
(c)(3) of this section) multiplied by a fraction the numerator of which 
is the percentage of target stock (by value, determined on the 
acquisition date) attributable to the purchasing corporation's 
nonrecently purchased target stock and the denominator of which is 100 
percent minus the numerator amount. * * *
* * * * *
    (h) Effective/applicability date. Paragraph (d)(3)(ii) of this 
section is applicable to any qualified stock disposition for which the 
disposition date is on or after the date of publication of the Treasury 
decision adopting these

[[Page 49981]]

rules as final regulations in the Federal Register.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E8-19603 Filed 8-22-08; 8:45 am]
BILLING CODE 4830-01-P