[Federal Register Volume 78, Number 94 (Wednesday, May 15, 2013)]
[Rules and Regulations]
[Pages 28467-28490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-11522]



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  Federal Register / Vol. 78, No. 94 / Wednesday, May 15, 2013 / Rules 
and Regulations  

[[Page 28467]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9619]
RIN 1545-BD84


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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

SUMMARY: This document contains final regulations that provide guidance 
under section 336(e) of the Internal Revenue Code (Code), which 
authorizes the issuance of regulations under which an election may be 
made to treat the sale, exchange, or distribution of at least 80 
percent of the voting power and value of the stock of a corporation 
(target) as a sale of all its underlying assets. These regulations 
provide the terms and conditions for making such an election and the 
consequences of the election. These regulations affect domestic 
corporate sellers (seller), S corporation shareholders, and domestic 
targets.

DATES: Effective Date: These regulations are effective on May 15, 2013.
    Applicability Date: These regulations apply to any qualified stock 
disposition for which the disposition date is on or after May 15, 2013.

FOR FURTHER INFORMATION CONTACT: Mark J. Weiss, (202) 622-7930 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under OMB control number 1545-2125. The collection of 
information in these final regulations is in 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.
    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.
    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 section 6103.

Background

    Section 336(e) of the Code authorizes the issuance of regulations 
under which an election may be made to treat the sale, exchange, or 
distribution of at least 80 percent of the voting power and value of 
the stock of a corporation (target) as a sale of all its underlying 
assets. Section 336(e) was enacted as part of General Utilities repeal. 
Similar to an election under section 338(h)(10) available with respect 
to certain purchases of target stock, section 336(e) is meant to 
provide taxpayers relief from a potential multiple taxation of the same 
economic gain that can result when a transfer of appreciated corporate 
stock is taxed 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 CB, Vol. 4, 198- 207.
    On August 25, 2008, the IRS and Treasury Department published a 
notice of proposed rulemaking in the Federal Register (REG-143544-04, 
2008-42 IRB 947 [73 FR 49965-02]) (the proposed regulations) that, when 
finalized, would permit certain 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.

Summary of Proposed Regulations

A. In General

    Under the proposed regulations, an election under section 336(e) is 
available for ``qualified stock dispositions'' of domestic target stock 
by domestic corporate sellers (seller). The proposed regulations 
generally adopt the structure and principles established under section 
338(h)(10) and the underlying regulations. For example, the proposed 
regulations generally incorporate the rules of section 338 governing 
the allocation of consideration in the resulting deemed sale of the 
target's assets and the determination of target's basis in its 
underlying assets resulting from such deemed sale. The proposed 
regulations alter terms or concepts to reflect principles and factual 
circumstances relevant to section 336(e).
    Unlike an election under section 338(h)(10), which is available 
only if target stock is acquired by a corporate purchaser, the proposed 
regulations do not require an acquirer of target stock to be a 
corporation, or even necessarily a purchaser. Also unlike section 
338(h)(10), which generally requires that a single purchasing 
corporation acquire the stock of a target, the proposed regulations 
permit the aggregation of all stock of a target that is sold, 
exchanged, and distributed by a seller to different acquirers for 
purposes of determining whether there has been a qualified stock 
disposition of a target.

B. Two Different Models for Deemed Transactions

    The proposed regulations provide two different models for the 
deemed transactions treated as occurring if a section 336(e) election 
is made. The first model generally follows the same structure used for 
the deemed transactions resulting from the making of a section 
338(h)(10) election (basic model) and is applicable to all qualified 
stock dispositions (including those consisting of taxable distributions 
of target stock) other than distributions described in sections 
355(d)(2) or 355(e)(2) (section 355(d)(2) and (e)(2) transactions). 
Under the basic model, target, while owned by the seller (old target), 
is treated as selling all of its assets to an unrelated person and new 
target is treated as acquiring all of its assets from an unrelated 
person at the close of the date on which the threshold amount of target 
stock is disposed (deemed asset disposition). Old target recognizes the 
Federal income tax consequences from the deemed asset

[[Page 28468]]

disposition before the close of the date on which its stock was 
disposed. After recognizing the tax consequences of the deemed asset 
disposition, old target is generally treated as liquidating into the 
seller. In addition, to the extent that the qualified stock disposition 
consisted of one or more distributions (rather than sales or exchanges) 
of the stock of a target (other than in section 355(d)(2) and (e)(2) 
transactions), the seller is treated as acquiring directly from new 
target an amount of new target stock equal to the amount of target 
stock distributed. The tax consequences of the purchaser(s) generally 
are unaffected by the section 336(e) election.
    The second model adopted by the proposed regulations for the deemed 
transactions resulting from a section 336(e) election applies to 
section 355(d)(2) and (e)(2) transactions (sale-to-self model). Under 
the sale-to-self model, old target (the controlled corporation) is 
deemed to remain in existence; old target is treated as if it sold its 
assets to an unrelated person and then repurchased those assets. 
Following the deemed asset disposition, old target (the controlled 
corporation) is not deemed to liquidate into seller (the distributing 
corporation). Instead, after old target's deemed repurchase of its own 
assets, seller is treated as distributing the stock of old target to 
its shareholders, with seller recognizing no gain or loss. Because no 
liquidation of old target into seller is deemed to occur, old target 
will generally retain the tax attributes it would have had if the 
section 336(e) election had not been made, adjusted for the creation or 
absorption of attributes resulting from the election.

C. The Disallowed Loss Rule

    The proposed regulations contain a rule that disallows the 
recognition of losses resulting from the deemed asset disposition to 
the extent the qualified stock disposition consisted of one or more 
distributions of target stock (disallowed loss rule). The preamble to 
the proposed regulations explains that the allowance of losses pursuant 
to a deemed asset disposition may be inconsistent with sections 311(a) 
and 355(c) because had the target stock been distributed, any loss in 
the target stock would not have been recognized pursuant to these 
provisions.

D. Time and Manner of Making a Section 336(e) Election

    The time and manner of making a section 336(e) election provided in 
the proposed regulations also differed from those for making an 
election under section 338(h)(10). Noting that a joint election may be 
burdensome in cases with multiple purchasers, the proposed regulations 
provide that a section 336(e) election is unilaterally made by a seller 
attaching a statement to its timely filed Federal income tax return for 
the taxable year that includes the disposition date.

Summary of Comments and Explanation of Provisions

    Written comments were received in response to the proposed 
regulations. A public hearing was not requested and none was held. 
After consideration of all the comments, the proposed regulations are 
adopted as amended by this Treasury decision. In general, the final 
regulations follow the approach of the proposed regulations with some 
modifications. The more significant comments and modifications are 
discussed in this section.

A. The Disallowed Loss Rule

    The IRS and Treasury Department received several comments that the 
disallowed loss rule of the proposed regulations was too harsh and 
frustrated the intent of mitigating multiple levels of tax as 
envisioned by section 336(e). According to the comments, the result of 
the disallowed loss rule was that the making of a section 336(e) 
election in connection with a stock distribution would be largely 
impractical. One commenter also noted that the rationale for the 
disallowed loss rule, namely, that asset losses should not be allowed 
because a loss in target stock would not be recognized under sections 
311(a) or 355(c), did not extend to a seller's distribution of target 
stock under section 336(a). This is because the seller generally would 
recognize the loss with respect to the target stock in such a case. The 
comments suggested several alternatives, including that realized losses 
in the deemed asset disposition should be netted against the amount of 
realized gains and that to the extent realized losses exceed realized 
gains, the net loss should be deferred by attaching the net loss to the 
basis of the assets in target's hands after the deemed asset 
disposition.
    After consideration of the comments, the IRS and Treasury 
Department have determined that the disallowed loss rule as set forth 
in the proposed regulations is broader in scope than necessary to serve 
the purposes of section 336(e). Accordingly, the final regulations 
modify the rule of the proposed regulations to generally permit 
target's realized losses in the deemed asset disposition to offset the 
amount of target's realized gains. Thus, the proposed regulations 
disallow a net loss of target (that is, losses realized in excess of 
target's realized gains) recognized on a deemed asset disposition, but 
only in proportion to the portion of target stock that was disposed of 
by seller in one or more distributions.
    The loss disallowance rule in the proposed regulations only applied 
to distributions that were taken into account as part of the qualified 
stock disposition on or before the disposition date. Thus, stock 
distributions that occurred after 80 percent of target was disposed of 
were not subject to the loss disallowance rule. The final regulations 
modify the disallowed loss rule of the proposed regulations to take 
into account (1) target stock distributed at any time within the 12-
month disposition period, not just on or before the disposition date, 
and (2) target stock distributed within the 12-month disposition period 
that is not part of the qualified stock disposition, such as stock 
distributed to a related person. The IRS and Treasury Department 
believe that limiting disallowed losses to stock distributed on or 
before the disposition date could lead to manipulation because sellers 
who would otherwise distribute target stock on the disposition date may 
delay the distribution for the sole purpose of decreasing the 
disallowed net loss recognized by target. Further, if stock 
distributions that are not part of the qualified stock disposition, 
such as distributions to a related person, were not taken into account 
by the disallowed loss rule, target would be able to recognize a 
greater portion of its net loss by distributing stock to a related 
person than it would recognize if it distributed the stock to an 
unrelated person, a result that the IRS and Treasury Department believe 
would be improper. Accordingly, under the disallowed loss rule of the 
final regulations, if a section 336(e) election is made and any stock 
of target is distributed during the 12-month disposition period, 
whether or not as part of the qualified stock disposition, any net loss 
attributable to such stock distribution is disallowed.
    The final regulations do not follow the recommendation of some 
commenters that any disallowed losses be applied to increase the basis 
of target's assets after the deemed asset disposition for two reasons. 
First, as discussed elsewhere in this preamble, Congressional intent in 
providing for a section 336(e) election was to prevent multiple 
taxation of gain. Congress was not concerned with the preservation of 
loss. Second, allowing the losses to be deferred by adding the basis to 
target's

[[Page 28469]]

assets would create administrative difficulties far outweighing the 
benefits, and disallowing losses rather than deferring losses is 
consistent with many other provisions within subchapter C. Accordingly, 
to the extent the disallowed loss rule of the final regulations 
applies, losses are allowed up to the amount of gains and any excess 
losses are permanently disallowed.

B. Issues Relating to the Adopted Models

1. Basic Model for Non-Section 355(d)(2) or (e)(2) Transactions
    In general, the final regulations retain the rules of the proposed 
regulations with respect to the deemed transactions under the basic 
model. One commenter expressed concern that in the case of a 
distribution of stock as part of a qualified stock disposition that 
does not consist of section 355(d)(2) or (e)(2) transactions, the step 
in the basic model in which seller is deemed to purchase from new 
target the new target stock actually distributed might be combined with 
old target's deemed sale of its assets to new target resulting in a 
section 351 transaction with boot, which could lead to unintended 
consequences. The commenter also questioned what new target is deemed 
to do with the consideration it is deemed to receive from seller in the 
deemed stock acquisition. The commenter suggested resolving these 
issues by having seller be deemed to purchase new target stock from 
unrelated new target shareholders with cash equal to the fair market 
value of the distributed stock.
    The IRS and Treasury Department agree with the concerns of the 
commenter. Accordingly, the final regulations modify the proposed 
regulations by providing that in a distribution of target stock (and 
also with respect to stock in target that seller retains after the 
distribution date) seller is deemed to purchase the new target stock 
that is distributed or retained not from new target but from an 
unrelated person in a taxable transaction. Seller will not recognize 
any gain or loss on the deemed distribution of new target stock and 
purchaser will have a fair market value basis in new target stock 
received without any possible application of section 351.
2. Sale-to-Self Model for Transactions Described in Section 355(d)(2) 
or (e)(2)
    We received several comments suggesting the removal of the sale-to-
self model and the extension of the provisions of Sec.  1.336-2(b)(1), 
with any necessary adjustments, to section 355(d)(2) or (e)(2) 
transactions. Commenters stated that the sale-to-self model added 
unnecessary complexity and that existing law under section 312(h) and 
Sec.  1.312-10 adequately addresses the concern of having sufficient 
earnings and profits to allocate to the controlled corporation. One 
commenter also suggested that to the extent that the sale-to-self model 
is driven by a desire to have the controlled corporation retain its 
attributes, a special section 381 rule could be created to reach this 
result.
    Although the IRS and Treasury Department agree with the commenters 
who pointed out that even if target was treated as a new corporation 
after the deemed sale of its assets, the rules of section 312(h) and 
Sec.  1.312-10 would typically result in target having some level of 
earnings and profits after the distribution of its stock, the IRS and 
Treasury Department still believe that the sale-to-self model should be 
retained. While the deemed transactions resulting from the making of 
section 336(e) elections with respect to taxable sales, exchanges, or 
distributions of target stock could actually be undertaken in a 
transaction involving the sale, exchange, or distribution of the assets 
of target, a transaction that included an actual sale or distribution 
of all the assets of target could not qualify under section 355. 
Because a deemed sale of assets to a new target cannot actually be 
undertaken in section 355(d)(2) or (e)(2) transactions, and the IRS and 
Treasury Department believe that the predominant feature of the section 
336(e) election with respect to a section 355(d)(2) or (e)(2) 
transaction is the section 355 transaction, the regulations adopt the 
sale-to-self model and treat the transaction as the distribution of old 
target stock.
    Additionally, the IRS and Treasury Department do not believe that 
the sale-to-self model adds significant complexity to the regulation; 
in fact, it may reduce complexity. As the commenters pointed out, if 
the IRS and Treasury Department believe that adjustments to the basic 
model would have to be made to account for a section 355(d)(2) or 
(e)(2) transaction, those adjustments, such as satisfying the five-year 
active trade or business requirement and maintaining all section 381 
attributes with target (not solely earnings and profits), would require 
that exceptions and special rules be added to the basic model. These 
exceptions and special rules would result in a regulation that we 
believe would be more complex than the sale-to-self model. Furthermore, 
because it is likely that only an insubstantial number of section 
336(e) elections will be the result of transactions actually described 
in section 355(d)(2) or (e)(2) (although a substantial number of 
protective elections may be made), we believe that putting the 
exceptions and special rules into the provisions of Sec.  1.336-2(b)(1) 
for this limited number of cases would create complexity or confusion 
for the majority of taxpayers engaging in transactions that are not 
described in section 355(d)(2) or (e)(2). By separating the regulation 
into two separate models, taxpayers whose transaction does not involve 
a section 355(d)(2) or (e)(2) transaction may apply the regulation's 
provisions without having to concern themselves with provisions that do 
not apply to their transaction.
    Commenters have suggested that if the regulations retain the sale-
to-self model, the regulations should address the wash sale rules of 
section 1091 and the anti-churning rules of section 197(f)(9). For 
example, old target's deemed disposition of stock or securities and 
subsequent repurchase of the same stock or securities could be treated 
as a wash sale, which could then be subject to loss disallowance under 
section 1091(a) as well as the disallowed loss rule of these 
regulations. Under the section 336(e) regulations, the basis of the 
stock or security deemed purchased by target should be its fair market 
value, while under section 1091(d), the basis would be the basis of the 
stock or security deemed transferred plus or minus any difference in 
the sale and acquisition price of the stock or security.
    The IRS and Treasury Department do not believe that adoption of the 
sale-to-self model should cause sections 197(f)(9) or 1091 to apply to 
a section 336(e) election with respect to a section 355(d)(2) or (e)(2) 
transaction. Because the deemed transactions resulting from the making 
of a section 336(e) election could not actually be undertaken in the 
context of a section 355(d)(2) or (e)(2) transaction, we do not believe 
that the regulations should cause a section 336(e) election in the 
context of a section 355(d)(2) or (e)(2) transaction to result in the 
application of sections 197(f)(9) or 1091 to the extent that a section 
336(e) election outside the context of a section 355(d)(2) or (e)(2) 
transaction would not result in the application of such sections. 
Accordingly, the final regulations provide that for purposes of section 
197(f)(9), section 1091, and any other provision designated in the 
Internal Revenue Bulletin by the IRS, old target, in its capacity as 
seller of assets in the deemed asset disposition, is treated as a 
separate and distinct taxpayer from, and

[[Page 28470]]

unrelated to, old target in its capacity as acquirer of assets in the 
subsequent deemed purchase and for subsequent periods. For example, if 
one of target's assets immediately before old target's deemed asset 
disposition was stock or securities within the meaning of section 1091, 
old target, as seller of the stock or securities in the deemed asset 
disposition, is not treated for purposes of section 1091 as the same 
taxpayer that acquires substantially identical stock or securities in 
the deemed purchase of assets or that actually acquires substantially 
identical stock or securities in periods after the deemed asset 
disposition. Therefore, section 1091 will not disallow any of old 
target's loss on the deemed sale of the stock or securities as a result 
of either old target's deemed purchase of the same stock or securities 
or an actual purchase of substantially identical stock or securities 
within the 30-day period after the disposition date.

C. Time and Manner for Making the Election

    Commenters requested that the unilateral seller election of the 
proposed regulations be made into a joint election between seller and 
target (acting in a capacity for the purchasers). The commenters 
expressed concern that a unilateral election by seller could result in 
unwanted results or unfair surprise to target or purchaser. The 
proposed regulations were premised on the view that a unilateral 
election is supportable because in sales or exchanges, purchasers 
should be able to protect their interests in any purchase contract; in 
distributions, distributees' interests should generally be protected 
because of the distributing corporation's fiduciary responsibilities to 
its shareholders. However, in response to the comments, the final 
regulations modify the rule of the proposed regulations. Under the 
final regulations, in order to make a section 336(e) election, 
seller(s), or in the case of an S corporation target, all of the S 
corporation shareholders (see section E of this preamble concerning the 
availability of a section 336(e) election for an S corporation target), 
and target must enter into a written, binding agreement to make a 
section 336(e) election and a section 336(e) election statement must be 
attached to the relevant return. If seller(s) and target are members of 
a consolidated group, the election statement is filed on a timely filed 
consolidated return and the common parent of the consolidated group 
must provide a copy of the section 336(e) election statement to target 
on or before the due date (including extensions) of the consolidated 
group's consolidated Federal income tax return. If target is an S 
corporation, the election statement is filed on the S corporation's 
timely filed return. If seller and target are members of an affiliated 
group but do not join in the filing of a consolidated return, the 
election statement is filed with both seller's and target's timely 
filed returns. By (1) requiring seller(s), or all the S corporation 
shareholders, and target to enter into a written, binding agreement, 
(2) in the case of a consolidated group, requiring the common parent of 
the consolidated group to provide a copy of the election statement to 
target, and (3) in the case in which seller and target are members of 
an affiliated group but do not join in the filing of a consolidated 
return, requiring both seller and target to file the election statement 
on their respective returns, the IRS and Treasury Department believe 
that the final regulations significantly reduce the potential for 
unwanted results or unfair surprise.
    Several commenters also requested changing the due date of the 
election from the due date of the seller's return to the 15th day of 
the ninth month after the disposition date, the same time for making a 
section 338 election. The commenters were concerned that the due date 
in the proposed regulations could result in many instances in which 
target's tax return would be due before the due date for the election 
(because target's taxable year will close upon its deemed dissolution), 
and therefore target would be required to file its return without 
knowing whether a section 336(e) election was made. After consideration 
of these comments, the final regulations retain the rule that the 
election must be made by the due date of the relevant tax return. The 
IRS and Treasury Department believe that a due date of the 15th day of 
the ninth month after the disposition date will add administrative 
burden to both taxpayers and the IRS. Such due date would generally 
require that the election be made prior to the filing of the tax 
return, rather than on a tax return. It is administratively beneficial 
for the IRS to have the election made with the filing of a return 
rather than in some manner outside of the return. Additionally, an 
accelerated due date would give taxpayers less time in which to decide 
whether an election is beneficial or detrimental. The experience of the 
IRS in administering section 338 has shown that some taxpayers miss the 
due date for making a section 338 election because they wrongly believe 
that the election is due with the income tax return of the taxpayer. 
Further, except with respect to the election statement filed by seller 
if seller and target are members of the same affiliated group but do 
not join in the filing of a consolidated return, the due date for 
filing the election statement now coincides with the due date of the 
return that includes the deemed disposition tax consequences. 
Accordingly, the final regulations do not adopt this suggestion.
    Because the general requirements for who must file a section 336(e) 
election statement have been modified from the proposed regulations, 
these final regulations provide detailed requirements to assist 
taxpayers in making a section 336(e) election for an eligible 
subsidiary of target (target subsidiary). See Sec.  1.336-2(h)(4) and 
(5). Some of these requirements are different than those for making a 
section 336(e) election for target subsidiaries under the proposed 
regulations, which treated the seller of the directly disposed of 
target (ultimate seller) as the seller of the target subsidiary for 
purposes of the additional election statement to be attached to the 
ultimate seller's return. Some of these requirements also differ from 
those for making a section 338 election for target subsidiaries on Form 
8023, which treats the purchasing corporation(s) of the directly 
purchased target as the purchasing corporation(s) of any target 
subsidiary for purposes of completing and signing a Form 8023 for a 
target subsidiary that is filed outside of any return. For example, if 
seller and target are members of the seller consolidated group but 
target subsidiary is not, a section 336(e) election for target 
subsidiary now requires that target subsidiary be a party to either the 
agreement entered into by seller and target, or that target and target 
subsidiary enter into a separate agreement to make such election. 
Because target subsidiary is not a member of the same consolidated 
group as target, the section 336(e) election for target subsidiary 
requires that a section 336(e) election statement be attached to both 
seller's timely filed consolidated Federal income tax return and the 
timely filed Federal income tax return of the target subsidiary.
    The IRS intends to modify Form 8883, which is currently entitled 
``Asset Allocation Statement Under Section 338,'' or create a new form, 
to include an election under section 336(e). However, until Form 8883 
is modified or a new form is created, old target and new target should 
file Form 8883 to report the results of the deemed asset disposition, 
making appropriate adjustments as necessary to account for a section 
336(e) election. Examples of

[[Page 28471]]

appropriate adjustments include treating a reference to Form 8023, a 
qualified stock purchase, the acquisition date, the 12-month 
acquisition period, or the aggregate deemed sales price on Form 8883 or 
the instructions thereto as a reference to the section 336(e) election 
statement, a qualified stock disposition, the disposition date, the 12-
month disposition period, or the aggregate deemed asset disposition 
price, respectively. In the case of a section 336(e) election as the 
result of a transaction described in section 355(d)(2) or (e)(2), old 
target should file two Forms 8883 (or successor forms), one in its 
capacity as the seller of assets in the deemed asset disposition and 
one in its capacity as the purchaser of assets in the deemed purchase 
of assets under the sale-to-self model.

D. Intragroup Sales, Exchanges, or Distributions Prior to External 
Sales, Exchanges, or Distributions and Section 355(f)

    The proposed regulations requested comments concerning an 
intragroup sale, exchange, or distribution (an ``intragroup 
transaction'') prior to an external sale, exchange, or distribution, 
and also concerning the application of section 355(f).
    Generally, if the stock of a corporation is sold or distributed 
within an affiliated group and then is transferred outside the 
affiliated group, a section 336(e) election is not available for the 
intragroup transaction because the buyer and seller in the intragroup 
transaction are related persons after the disposition of target outside 
the affiliated group. While a section 336(e) election may be available 
for the external transfer, the election could result in the affiliated 
group immediately recognizing multiple levels of gain, both on target's 
stock from the intragroup transaction and on target's assets from the 
deemed asset disposition. Section 1.1502-13(f)(5)(ii)(C) provides an 
election (a ``Sec.  1.1502-13(f)(5) election'') in the case of section 
338(h)(10) and comparable transactions. A Sec.  1.1502-13(f)(5) 
election allows taxpayers to treat the deemed liquidation as the result 
of a section 338(h)(10) election or an actual liquidation as a taxable 
liquidation in order to provide the consolidated group with a stock 
loss to offset some, if not all, of the intragroup seller's stock gain 
from the intragroup transaction. One commenter asked for either a 
clarification that a Sec.  1.1502-13(f)(5) election is available for 
section 336(e) elections or that a similar election be provided in 
these regulations. Another commenter believed that the problem of 
multiple levels of tax could be solved by permitting a section 336(e) 
election on the intragroup transaction. With respect to the latter 
comment, the IRS and Treasury Department do not believe that allowing a 
section 336(e) election on the intragroup transaction is practical or 
administrable. Allowing a section 336(e) election would require special 
rules for related persons (see discussion of related party issues in 
section H of this preamble); further, these transactions could involve 
a significant time lapse between the intragroup transaction and 
external disposition. However, the IRS and Treasury Department agree 
with the first commenter that a taxpayer should be able to make a Sec.  
1.1502-13(f)(5) election to treat the deemed liquidation of target into 
seller as a result of a section 336(e) election as a taxable 
liquidation. Although we believe that under the general rule of Sec.  
1.336-1(a) of the proposed regulations, a Sec.  1.1502-13(f)(5) 
election would be available for a section 336(e) transaction without 
any modification in the final regulations, to remove any doubt the 
final regulations modify Sec.  1.1502-13(f)(5)(ii)(C) to clearly 
provide that the election is available for a section 336(e) election.
    The IRS and Treasury Department also acknowledge that an external 
distribution under section 355(d)(2) or (e)(2) that is preceded by an 
intragroup transaction raises the same concerns as those described in 
the preceding paragraph, but a Sec.  1.1502-13(f)(5) election would not 
provide relief because in a section 355(d)(2) or (e)(2) transaction 
there is no deemed liquidation of target. The IRS and Treasury 
Department believe that the rationale behind Sec.  1.1502-13(f)(5) to 
prevent multiple levels of taxation exists just as much with a section 
336(e) election as a result of a section 355(d)(2) or (e)(2) 
transaction as with a non-section 355(d)(2) or (e)(2) transaction. 
Therefore, the final regulations provide that in the case of a section 
355(d)(2) or (e)(2) transaction that is preceded by an intragroup 
transaction, for the limited purpose of a Sec.  1.1502-13(f)(5) 
election, immediately after the deemed asset disposition of target's 
assets, target is deemed to liquidate into seller, thus providing 
seller with a stock loss that can offset some or all of the group's 
intercompany gain with respect to the intragroup transfer of target 
stock.

E. Elections for S Corporations

    The proposed regulations do not provide for a section 336(e) 
election with respect to the sale of stock of an S corporation. 
Commenters asked that, just as a corporation that acquires stock of an 
S corporation in a qualified stock purchase may make a section 
338(h)(10) election, the ability to make a section 336(e) election be 
extended to S corporation targets. Commenters noted that the IRS and 
Treasury extended the application of section 338(h)(10) to qualified 
stock purchases of S corporations and that Congress intended that 
``under regulations, principles similar to those of section 338(h)(10) 
may be applied to taxable sales or distributions of controlled 
corporation stock.'' See H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess., 
Vol. II, 198, 204 (1986) [1986-3 CB, Vol. 4, 198, 204].
    The IRS and Treasury Department agree with the commenters that the 
principles of the regulations implementing section 338(h)(10) should 
apply to the regulations implementing section 336(e) elections. 
Accordingly, these final regulations permit a section 336(e) election 
to be made for S corporation targets and provide additional and special 
rules to allow section 336(e) elections to be made with respect to S 
corporation targets.
    If a section 338(h)(10) election is made with respect to an S 
corporation target, all of the S corporation shareholders, including 
those who do not sell their S corporation target stock, must consent to 
the election. With respect to a section 336(e) election, the final 
regulations provide the same requirement for purposes of making a 
section 336(e) election. While S corporation shareholders consent to a 
section 338(h)(10) election by signing Form 8023, to make a section 
336(e) election, the S corporation shareholders do not file a section 
336(e) election statement. Instead, consent to make a section 336(e) 
election is established by all the S corporation shareholders, 
including those who do not dispose of their stock in the transaction, 
and target entering into a written, binding agreement to make the 
election, on or before the due date (including extensions) of the S 
corporation target's income tax return. The section 336(e) election 
statement for an S corporation target is filed with the income tax 
return of the S corporation target.
    If a section 336(e) election is made for an S corporation target, 
old target's S election continues in effect through the close of the 
disposition date (including the time of the deemed asset disposition 
and the deemed liquidation) at which time old target's S election 
terminates, and old target ceases to exist. If new target qualifies as 
a small business corporation within the meaning of section 1361(b) and 
wants to be an S corporation, a new election for new target under 
section 1362(a) must be made.

[[Page 28472]]

F. Determination of AGUB and ADADP

    A commenter requested that the provisions in the proposed 
regulations for determining the Aggregate Deemed Asset Disposition 
Price (ADADP) and Adjusted Grossed-Up Basis (AGUB) be modified by 
grossing up the selling costs among all stock of target in order to 
determine ADADP and by grossing up the acquisition costs among all 
stock of target in order to determine AGUB. The commenter also 
requested rules that would disregard preferred stock in determining the 
percentage of stock disposed of in the qualified stock disposition, and 
then add back the value of the preferred stock in determining the 
grossed-up amount realized.
    With regard to grossing up the selling costs and acquisition costs 
over all target stock, this issue was specifically addressed in the 
preamble to the proposed section 338 regulations in 1999 (``Grossing-up 
the selling shareholders' selling costs or the purchasing corporation's 
acquisition costs would result in costs not actually incurred reducing 
old target's amount realized for the assets or increasing new target's 
cost basis in the assets. . . . [T]here is no evidence that the 
purchasing corporation's costs to acquire an amount of target stock 
sufficient for there to be a qualified stock purchase would increase 
proportionately if it acquired all of the target stock . . .''). See 
REG-107069-97, 1999-2 CB 346, 353. Accordingly, the final regulations 
retain the rule of the proposed regulations.
    With regard to the preferred stock issue, the determination of 
grossed-up basis in section 338 is specifically provided for in the 
Code, and Congress included preferred stock in determining the 
percentage of stock attributable to recently purchased stock. The 
regulations under section 338 apply the same rule in determining 
grossed-up amount realized. The IRS and the Treasury Department believe 
that it is appropriate to use the same computation for purposes of a 
section 336(e) election. Accordingly, the final regulations retain the 
rule of the proposed regulations.

G. Gain Recognition Elections

    Under the proposed regulations, a holder of nonrecently disposed 
stock may make a gain recognition election, similar to the gain 
recognition election under section 338, which treats 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. Once made, a gain recognition election is irrevocable. The 
proposed regulations requested comments on whether the rules regarding 
gain recognition elections in the section 336(e) regulations are 
appropriate and whether the gain recognition election rules in 
regulations promulgated under section 338 should continue to apply.
    Only one comment was received on this topic. The commenter was not 
sure why rules relating to gain recognition elections exist and 
believed they should be eliminated in both section 338(h)(10) and 
section 336(e). However, if this decision was not made, the election 
should be preserved for consistency in both sections. After 
consideration of this comment and further internal consideration, the 
IRS and Treasury Department have determined that the final regulations 
should retain the rule of the proposed regulations.

H. Related Party Rule

    The proposed regulations provide that a transaction is not a 
disposition (and therefore is ineligible to count towards a qualified 
stock disposition) if target stock is sold, exchanged, or distributed 
to a related person. The proposed regulations, like the section 338 
regulations, treat persons as 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). Comments were 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.
    The IRS and Treasury Department received a wide range of comments, 
most of which believed some type of prohibition against section 336(e) 
elections in the case of related party transactions should be 
maintained. However, the commenters also stated that they believe that 
the definition of related person in the proposed regulations is too 
restrictive and should deviate from the section 338 definition. 
Commenters stated that unlike section 338, there is no statutory 
definition of the term purchase, and the decision to import the section 
338 definition restricts the ability of a section 336(e) election to 
mitigate against multiple levels of tax. Commenters point to the fact 
that the legislative history does not prohibit related party 
transactions, but simply states that special rules may be needed to 
police certain situations (for example, rules prohibiting net operating 
loss refreshing, avoiding separate return limitation year rules, and 
triggering built-in gains to offset net operating losses otherwise 
limited by section 382). Suggestions made to modify the related party 
definition included (a) use of the existing section 338(h)(3)(A)(iii) 
definition, but limiting upstream and downstream partnership 
attribution to partners owning a specified percentage of the 
partnership and then only if the partnership bears some economic 
relationship to the transaction; (b) defining related persons by 
reference to whether the transaction that would be deemed to occur 
constitutes a nondivisive D reorganization or certain types of 
triangular C reorganizations using section 304(c) control; (c) defining 
related persons using section 267 principles; or (d) implementing some 
type of anti-abuse rule.
    The IRS and Treasury Department reviewed the comments received and 
continue to have concerns about the administrability and complexity of 
rules that would be needed to permit related party transactions. 
However, the IRS and Treasury Department do agree that the attribution 
rules with respect to partnerships are more inclusive than is necessary 
for the purpose of these regulations. Because the attribution rules in 
section 318(a) with respect to partnerships do not have a minimum 
ownership threshold, a situation in which one partner holds a very 
small ownership in two different partnerships that own purchaser and 
seller, respectively, could, under the proposed regulations, prevent 
the making of a section 336(e) election on the sale of the stock of 
target to purchaser. Although some of the same concerns exist with 
respect to a section 338(h)(10) election, in such case, the statute 
clearly prohibits a section 338(h)(10) election. With respect to a 
section 336(e) election, there is no statutory prohibition, and the IRS 
and Treasury Department agree with the comments received that deemed 
asset disposition treatment should not be prohibited if cross ownership 
is minimal. While each of the suggested approaches for modifying the 
attribution rules have merit, the IRS and Treasury Department believe 
that the best manner for addressing the commenters' concerns is to 
modify the definition of related persons as pertaining to partnerships 
by providing that, solely for purposes of determining whether purchaser 
and seller are related for purposes of section 336(e), the attribution 
rules of sections 318(a)(2)(A) and 318(a)(3)(A) will not apply to 
attribute stock ownership from a partnership to a partner, or from a

[[Page 28473]]

partner to a partnership if such partner owns, directly or indirectly, 
less than five percent of the value of the partnership. A five-percent 
threshold is within the range suggested by comments for limiting 
upstream and downstream attribution under section 318(a) between 
partners and partnerships, and is consistent with the five-percent 
threshold of constructive ownership rules under sections 267(e)(3) and 
1562(e)(2) relevant to partners and partnerships. The IRS and Treasury 
Department will continue to study whether related party transactions 
should qualify for a section 336(e) election.

I. Scope of Regulations

    The proposed regulations look to and build upon section 338(h)(10) 
principles and guidelines that address taxable sales and exchanges of 
target stock. The proposed regulations expanded the section 338(h)(10) 
model to include fully taxable distributions and section 355(d)(2) and 
(e)(2) distributions. All of these transactions involve a basic taxable 
event relating to target's stock that is disregarded and in its place a 
sale of target's assets takes place.
    Commenters asked the IRS and Treasury Department to extend a 
section 336(e) election to transactions in which the corporate level of 
tax is duplicated by other transactions, for example section 351 
exchanges or certain tax-free reorganizations, so that the section 
336(e) election can be used to turn two potential levels of tax into 
one. Commenters cited language from the legislative history to section 
336(e), which discusses a section 336(e) election in both the context 
of General Utilities repeal and the desire to avoid multiple levels of 
corporate tax. ``This provision offers taxpayers relief from a 
potential multiple taxation at the corporate level of the same economic 
gain, which may result when a transfer of appreciated corporate stock 
is taxed without providing a corresponding step-up in basis of the 
assets of the corporation.'' H.R. Conf. Rep. No. 841, 99th Cong., 2d 
Sess., Vol. II, 198, 204 (1986) [1986-3 CB, Vol. 4, 198, 204].
    The IRS and Treasury Department believe that the commenters have 
raised some valid concerns and have considered whether the scope of the 
regulations should be broadened to include certain non-taxable 
transactions and if so, how the regulations would address those 
transactions. The issues involved are very complex. The IRS and 
Treasury Department believe that addressing these concerns in these 
final regulations would significantly delay the finalization of these 
regulations, thus preventing taxpayers whose transactions are within 
the scope of the proposed regulations from making a section 336(e) 
election until the rules and regulations, if any, for non-taxable 
transactions are also promulgated. Such delay would not be in the best 
interests of taxpayers as a whole. Accordingly, these final regulations 
do not permit an election to be made in non-taxable transfers of target 
stock. However, the IRS and Treasury Department will continue to study 
this issue and may address the issue in future guidance. We welcome any 
comments concerning this issue, including recommendations not just on 
the scope of the regulations, but on specific means and models for 
implementing such suggestions.

J. International Provisions

1. Application to Foreign Targets
    The proposed regulations do not apply to transactions in which 
either seller or target is a foreign corporation. Comments were 
requested regarding how 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. The IRS and the Treasury Department received comments 
in response to this request. For reasons similar to those discussed 
concerning extending the scope of these regulations to non-taxable 
transactions, these final regulations retain the requirements in the 
proposed regulations that seller and target must be domestic 
corporations. However, the IRS and the Treasury Department will 
continue to study the application of section 336(e) to transactions in 
which either seller or target is a foreign corporation and may consider 
expanding the scope of the regulations to address these transactions in 
future guidance.
2. Allocation of Foreign Taxes Paid
    The proposed regulations provide that if a section 336(e) election 
is made and target's taxable year under foreign law (if any) does not 
close at the end of the disposition date, foreign income taxes paid by 
new target attributable to the foreign taxable income earned by target 
during such foreign taxable year are allocated to old target and new 
target under the principles of Sec.  1.1502-76(b). The proposed rule is 
consistent with a similar rule in Sec.  1.338-9(d) for allocating 
foreign tax paid by a target that is acquired in a transaction that is 
treated as an asset acquisition pursuant to an election under section 
338 if the foreign taxable year of target does not close at the end of 
the acquisition date. In addition, regulations under section 901, which 
were published on February 14, 2012, provide foreign tax allocation 
rules, consistent with Sec.  1.338-9(d), for certain changes in 
ownership of a partnership or disregarded entity during the entity's 
foreign taxable year. See Sec.  1.901-2(f)(4). The final regulations at 
Sec.  1.336-2(g)(3)(ii) reflect modifications made to achieve 
consistency with Sec.  1.901-2(f)(4). The regulations also provide that 
if target holds an interest in a disregarded entity or partnership, the 
rules of Sec.  1.901-2(f)(4) apply with respect to foreign tax imposed 
at the entity level on the income of such entities. The IRS and 
Treasury Department intend to issue future guidance that will make 
similar modifications to Sec.  1.338-9(d).
    Section 212 of the legislation commonly referred to as the 
Education Jobs and Medicaid Assistance Act of 2010, enacted on August 
10, 2010 (Pub. L. 111-226), added section 901(m) to the Code. Section 
901(m)(1) provides, in part, that in the case of a covered asset 
acquisition, the disqualified portion of any foreign income taxes 
determined with respect to the income or gain attributable to a 
relevant foreign asset shall not be taken into account in determining 
the foreign tax credit allowed under section 901(a). Section 
901(m)(2)(B) defines a covered asset acquisition to include any 
transaction that is treated as an acquisition of assets for U.S. income 
tax purposes and as the acquisition of stock of a corporation (or is 
disregarded) for purposes of a foreign income tax. Because a section 
336(e) election for target is treated as an acquisition of assets for 
U.S. income tax purposes, and is treated as the acquisition of stock of 
a corporation (or is disregarded in the case of tiered section 336(e) 
elections) for foreign tax purposes, a section 336(e) election for a 
target corporation is a covered asset acquisition. See Staff of the 
Joint Committee on Taxation, Technical Explanation of the Revenue 
Provisions of the Senate Amendment to the House Amendment to the Senate 
Amendment to H.R. 1586, Scheduled for Consideration by the House of 
Representatives on August 10, 2010, at 13, footnote 55 (August 10, 
2010). Accordingly, the final regulations contain a cross-reference to 
the rules under section 901(m), which, for example, could apply if 
target has foreign branch operations.

K. Retained Stock

    The proposed regulations provide that if seller retains any stock 
in target after the 12-month disposition period, seller

[[Page 28474]]

is treated as purchasing the stock so retained on the day after the 
disposition date. The proposed regulations provide the holding period 
and purchase price (and thus the basis) of the retained stock. The 
regulations under Sec.  1.338(h)(10)-1 provide a similar rule 
concerning retained stock, with the exception that the Sec.  
1.338(h)(10)-1 rule only requires that the stock be retained after the 
acquisition date. Under the proposed regulations, if seller sells, 
exchanges, or distributes less than all of its stock prior to the 
disposition date, but sells, exchanges, or distributes additional stock 
after the disposition date but before the end of the 12-month 
disposition period, the regulations are silent as to holding period and 
purchase price (and thus the basis) of such stock. If the later 
transaction is part of the qualified stock disposition, the basis and 
holding period may not be relevant, because no gain or loss is 
recognized on that transaction. However, if the stock is transferred in 
a transaction not part of the qualified stock disposition, such as a 
sale to a related person, the basis and holding period will be 
relevant. After considering this matter, the IRS and Treasury 
Department have determined that the rule in the Sec.  1.338(h)(10)-1 
regulations, providing that stock is retained if seller owns the stock 
after the acquisition date, should be adopted by the regulations under 
section 336(e). Accordingly, the final regulations modify the rule of 
the proposed regulations, so that stock is retained if owned by seller 
after the disposition date.

L. Consistency Rules

    The proposed regulations generally follow the structure and 
policies of section 338(h)(10), including the application of the 
consistency rules of Sec.  1.338-8. In general, Sec.  1.338-8 provides 
that if (1) a purchasing corporation (or an affiliate) acquires an 
asset meeting certain requirements from target (or a subsidiary of 
target) in a sale during the target consistency period, (2) gain from 
the sale is reflected in the basis of target stock as of the target 
acquisition date, and (3) the purchasing corporation acquires stock of 
target in a qualified stock purchase (but does not make a section 338 
election), then the purchasing corporation is required to take a 
carryover basis in the acquired asset.
    Commenters have asked how the consistency rules apply to qualified 
stock dispositions. Commenters expressed concern that although Sec.  
1.338-8(b)(1)(iii) requires that the same corporate purchaser (or an 
affiliate) acquire both stock of target and an asset of target (or a 
subsidiary of target), because, unlike section 338, section 336(e) does 
not require a single corporate purchaser of 80 percent of the stock of 
target, the consistency rules could apply to any purchase of an asset 
of target (or a subsidiary of target) if there was also a qualified 
stock disposition of target, regardless of whether the purchaser of the 
asset was also the purchaser of target stock. That is, the regulations 
would be unnecessarily broad. Alternatively, the regulations could be 
viewed as too narrow because the consistency rules of Sec.  1.338-8, by 
their terms, only apply to corporate purchasers.
    The IRS and Treasury Department agree with the commenters' concerns 
about the potential breadth of the consistency rules as applied to 
section 336(e). We do not believe that the purposes of the consistency 
rules mandate a carryover basis for an asset unless the same person (or 
a related person) acquires both the asset of the target (or subsidiary 
of target) and more than a minimal amount of the stock of target. In 
addition, it would be inappropriate to limit the consistency rules for 
purposes of section 336(e) to corporate purchasers. Accordingly, the 
final regulations provide that the consistency rules apply to an asset 
only if the asset is owned, immediately after its acquisition and on 
the disposition date, by a person (or by a related person to such a 
person) that acquires five percent or more, by value, of the stock of 
target in a qualified stock disposition.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. Further, it is hereby certified that these 
final 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. 
The collections of information may affect small businesses if the stock 
of a corporation that is a small entity is disposed of in a qualified 
stock disposition. The regulations permit an election to be filed in 
order to treat a stock sale as an asset sale, and impose the same type 
of requirements on small businesses as section 338(h)(10). The 
professional skills that would be necessary to make the election would 
be the same as those required to prepare a return for the small 
business. 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, these final regulations, as 
well as the proposed regulations preceding these final regulations, 
were submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business, and no 
comments were received.

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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
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. * * *


0
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.
    (1) In general.
    (2) Consistency rules.
    (b) Definitions.
    (1) Seller.
    (2) Purchaser.
    (3) Target; S corporation target; old target; new target.
    (4) S corporation shareholders.
    (5) Disposed of; disposition.

[[Page 28475]]

    (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.
    (6) Qualified stock disposition.
    (i) In general.
    (ii) Overlap with qualified stock purchase.
    (A) In general.
    (B) Exception.
    (7) 12-month disposition period.
    (8) Disposition date.
    (9) Disposition date assets.
    (10) Domestic corporation.
    (11) Section 336(e) election.
    (12) Related persons.
    (13) Liquidation.
    (14) Deemed asset disposition.
    (15) Deemed disposition tax consequences.
    (16) 80-percent purchaser.
    (17) Recently disposed stock.
    (18) 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.
    (i) In general.
    (ii) Stock distributions.
    (iii) Amount and allocation of disallowed loss.
    (iv) Tiered targets.
    (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.
    (1) Old target not deemed to liquidate.
    (2) Exception.
    (B) Gains and losses.
    (1) Gains.
    (2) Losses.
    (i) In general.
    (ii) Stock distributions.
    (iii) Amount and allocation of disallowed loss.
    (iv) Tiered targets.
    (3) Examples.
    (C) Tiered targets.
    (ii) Old target--deemed purchase.
    (A) In general.
    (B) Tiered targets.
    (C) Application of section 197(f)(9), section 1091, and other 
provisions to old target.
    (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) International provisions.
    (i) Source and foreign tax credit.
    (ii) Allocation of foreign taxes.
    (A) General rule.
    (B) Taxes imposed on partnerships and disregarded entities.
    (iii) Disallowance of foreign tax credits under section 901(m).
    (h) Making the section 336(e) election.
    (1) Consolidated group.
    (2) Non-consolidated/non-S corporation target.
    (3) S corporation target.
    (4) Tiered targets.
    (5) Section 336(e) election statement.
    (i) In general.
    (ii) Target subsidiaries.
    (6) Contents of section 336(e) election statement.
    (7) Asset Allocation Statement.
    (8) Examples.
    (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 disposition 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.
    (g) Examples.

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--(1) In general. Section 336(e) authorizes the 
promulgation of regulations under which, in certain circumstances, a 
sale, exchange, or distribution of the stock of a corporation 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 
section 336(e) should coincide with those of section 338(h)(10). 
Accordingly, to the extent not inconsistent with section 336(e) or 
these regulations, the principles of section 338 and the regulations 
under section 338 apply for purposes of these regulations. For example, 
Sec.  1.338(h)(10)-1(d)(8), concerning the availability of the section 
453 installment method, may apply with respect to section 336(e).
    (2) Consistency rules. In general, the principles of Sec.  1.338-8, 
concerning asset and stock consistency, apply with respect to section 
336(e). However, for this purpose, the application of Sec.  1.338-
8(b)(1) is modified such that Sec.  1.338-8(b)(1)(iii) applies to an 
asset if the asset is owned, immediately after its acquisition and on 
the disposition date, by a person or by a related person (as defined in 
Sec.  1.336-1(b)(12)) to a person that acquires, by sale, exchange, 
distribution, or any combination thereof, five percent or more, by 
value, of the stock of target in the qualified stock disposition.
    (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. 
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 
acquire or receive the stock of another corporation in a qualified 
stock disposition. A purchaser includes both a transferee and a 
distributee of target stock.

[[Page 28476]]

    (3) Target; S corporation target; old target; new target. The term 
target means any domestic corporation the stock of which is sold, 
exchanged, or distributed in a qualified stock disposition. An S 
corporation target is a target that is an S corporation immediately 
before the disposition date; any other target is a non-S corporation 
target. Except as the context otherwise requires, a reference to target 
includes a reference to an S corporation target. 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) S corporation shareholders. S corporation shareholders are the 
S corporation target's shareholders. Unless otherwise provided, a 
reference to S corporation shareholders refers both to S corporation 
shareholders who dispose of and those who do not dispose of their S 
corporation target stock.
    (5) 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 the stock is acquired 
or under section 1014(a) (relating to property acquired from a 
decedent);
    (B) Except as provided in paragraph (b)(5)(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)(5)(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 target may be considered 
disposed of if, under general principles of tax law, seller is 
considered to sell, exchange, or distribute stock of 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 by seller to another person under this section that is reacquired by 
seller or a member of seller's consolidated group during the 12-month 
disposition period shall not be considered as disposed of. Similarly, 
stock disposed of by an S corporation shareholder to another person 
under this section that is reacquired by the S corporation shareholder 
or by a person related (within the meaning of paragraph (b)(12) of this 
section) to the S corporation shareholder during the 12-month 
disposition period shall not be considered as disposed of.
    (6) 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 or by the S 
corporation shareholders in a disposition, within the meaning of 
paragraph (b)(5) of this section, during the 12-month disposition 
period.
    (ii) Overlap with qualified stock purchase--(A) In general. Except 
as provided in paragraph (b)(6)(ii)(B) of this section, a transaction 
satisfying the definition of a qualified stock disposition under 
paragraph (b)(6)(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)(6)(ii)(A) of this section, a qualified stock disposition 
of the stock of a subsidiary of target, then paragraph (b)(6)(ii)(A) 
shall not apply to the disposition of the stock of the subsidiary.
    (7) 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.
    (8) 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.
    (9) Disposition date assets. Disposition date assets are the assets 
of 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)).
    (10) Domestic corporation. The term domestic corporation has the 
same meaning as in Sec.  1.338-2(c)(9).
    (11) 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).
    (12) 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. However, 
neither section 318(a)(2)(A) nor section 318(a)(3)(A) apply to 
attribute stock ownership from a partnership to a partner, or from a 
partner to a partnership, if such partner owns, directly or indirectly, 
interests representing less than five percent of the value of the 
partnership.
    (13) 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.
    (14) 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.
    (15) 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.
    (16) 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 target stock.
    (17) Recently disposed stock. The term recently disposed stock 
means any stock in target that is not held by seller, a member of 
seller's consolidated group, or an S corporation shareholder 
immediately after the close of the disposition date and that was 
disposed of by seller, a member of seller's consolidated group, or an S 
corporation

[[Page 28477]]

shareholder during the 12-month disposition period.
    (18) Nonrecently disposed stock. The term nonrecently disposed 
stock means stock in target that is held on the disposition date by a 
purchaser or a person related (as described in Sec.  1.336-1(b)(12)) 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 that 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, Sub, S 
Corporation Target, and Target Subsidiary are domestic corporations and 
A, B, C, and D are individuals, none of whom are related to Parent, 
Seller, Target, Sub, S Corporation Target, Target Subsidiary, 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 seller or S corporation shareholder(s) dispose of stock of 
another corporation (target) in a qualified stock disposition (as 
defined in Sec.  1.336-1(b)(6)). 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.
    (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, seller (or S corporation shareholders) are 
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 the aggregate deemed sale 
price (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 or the S corporation shareholders. If old 
target is an S corporation target, old target's S election continues in 
effect through the close of the disposition date (including the time of 
the deemed asset disposition and the deemed liquidation) 
notwithstanding section 1362(d)(2)(B). Also, if old target is an S 
corporation target (but not a qualified subchapter S subsidiary), any 
direct or indirect subsidiaries of old target that old target has 
elected to treat as qualified subchapter S subsidiaries under section 
1361(b)(3) remain qualified subchapter S subsidiaries through the close 
of the disposition date.
    (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 gains realized on the deemed asset 
disposition.
    (2) Losses--(i) In general. Except as provided in paragraphs 
(b)(1)(i)(B)(2)(ii), (iii), and (iv) of this section, old target shall 
recognize all of the losses realized on the deemed asset disposition.
    (ii) Stock distributions. Notwithstanding paragraphs (b)(1)(i)(A) 
and (b)(1)(iii)(A) of this section, for purposes of determining the 
amount of target's losses that are disallowed on the deemed asset 
disposition, seller is still treated as selling, exchanging, or 
distributing its target stock disposed of in the 12-month disposition 
period. If target's losses realized on the deemed sale of all of its 
assets exceed target's gains realized (a net loss), the portion of such 
net loss attributable to a distribution of target stock during the 12-
month disposition period is disallowed. The total amount of disallowed 
loss and the allocation of disallowed loss is determined in the manner 
provided in paragraphs (b)(1)(i)(B)(2)(iii) and (iv) of this section.
    (iii) Amount and allocation of disallowed loss. The total 
disallowed loss pursuant to paragraph (b)(1)(i)(B)(2)(ii) of this 
section shall be determined by multiplying the net loss realized on the 
deemed asset disposition by the disallowed loss fraction. The numerator 
of the disallowed loss fraction is the value of target stock, 
determined on the disposition date, distributed by seller during the 
12-month disposition period, whether or not a part of the qualified 
stock disposition (for example, stock distributed to a related person), 
and the denominator of the disallowed loss fraction is the sum of the 
value of target stock, determined on the disposition date, disposed of 
by sale or exchange in the qualified stock disposition during the 12-
month disposition period and the value of target stock, determined on 
the disposition date, distributed by seller during the 12-month 
disposition period, whether or not a part of the qualified stock 
disposition. The amount of the disallowed loss allocated to each asset 
disposed of in the deemed asset disposition is determined by 
multiplying the total amount of the disallowed loss by the loss 
allocation fraction. The numerator of the loss allocation fraction is 
the amount of loss realized with respect to the asset and the 
denominator of the loss allocation fraction is the sum of the amount of 
losses realized with respect to each loss asset disposed of in the 
deemed asset disposition. To the extent old target's losses from the 
deemed asset disposition are not disallowed under this paragraph, 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.
    (iv) Tiered targets. If an asset of target is the stock of a 
subsidiary corporation of target for which a section 336(e) election is 
made, any gain or loss realized on the deemed sale of the stock of the 
subsidiary corporation is disregarded in determining the amount of 
disallowed loss. For purposes of determining the amount of disallowed 
loss on the deemed asset disposition by a subsidiary of target for 
which a section 336(e) election is made, the amount of subsidiary stock 
deemed sold in the deemed asset disposition of target's assets 
multiplied by the disallowed loss fraction with respect to the 
corporation that is deemed to have disposed of stock of the subsidiary 
is considered to have been distributed. In determining the disallowed 
loss fraction with respect to the deemed asset disposition of any 
subsidiary of target, disregard any sale, exchange, or distribution of 
its stock that was made after the disposition date if such stock was 
included in the deemed asset disposition of the corporation deemed to 
have disposed of the subsidiary stock.
    (3) Examples. The following examples illustrate this paragraph 
(b)(1)(i)(B).

    Example 1.  (i) Facts. Parent owns 60 of the 100 outstanding 
shares of the common stock of Seller, Seller's only class of stock 
outstanding. The remaining 40 shares of the common stock of Seller 
are held by shareholders unrelated to Seller or each

[[Page 28478]]

other. Seller owns 95 of the 100 outstanding shares of Target common 
stock, and all 100 shares of Target preferred stock that is 
described in section 1504(a)(4). The remaining 5 shares of Target 
common stock are owned by A. On January 1 of Year 1, Seller sells 72 
shares of Target common stock to B for $3,520. On July 1 of Year 1, 
Seller distributes 12 shares of Target common stock to Parent and 8 
shares to its unrelated shareholders in a distribution described in 
section 301. Seller retains 3 shares of Target common stock and all 
100 shares of Target preferred stock immediately after July 1. The 
value of Target common stock on July 1 is $60 per share. The value 
of Target preferred stock on July 1 is $36 per share. Target has 
three assets, Asset 1, a Class IV asset, with a basis of $1,776 and 
a fair market value of $2,000, Asset 2, a Class V asset, with a 
basis of $2,600 and a fair market value of $2,750, and Asset 3, a 
Class V asset, with a basis of $3,900 and a fair market value of 
$3,850. Seller incurred no selling costs on the sale of the 72 
shares of Target common stock to B. Target has no liabilities. A 
section 336(e) election is made.
    (ii) Consequences--Deemed Asset Sale. Because at least 80 
percent ((72 + 8)/100) of Target stock, other than stock described 
in section 1504(a)(4), was disposed of (within the meaning of Sec.  
1.336-1(b)(5)) by Seller during the 12-month disposition period, a 
qualified stock disposition occurred. July 1 of Year 1, the first 
day on which there was a qualified stock disposition with respect to 
Target stock, is the disposition date. Accordingly, pursuant to the 
section 336(e) election, for Federal income tax purposes, Seller 
generally is not treated as selling the 72 shares of Target common 
stock sold to B or distributing the 8 shares of Target common stock 
distributed to its unrelated shareholders. However, Seller is still 
treated as distributing the 12 shares of Target common stock 
distributed to Parent because Seller and Parent are related persons 
within the meaning of Sec.  1.336-1(b)(12) and accordingly the 12 
shares are not part of the qualified stock disposition. Target is 
treated as if, on July 1, it sold all of its assets to an unrelated 
person in exchange for the ADADP, $8,000, which is allocated $2,000 
to Asset 1, $2,500 to Asset 2, and $3,500 to Asset 3 (see Example 1 
of Sec.  1.336-3(g) for the determination and allocation of ADADP).
    (iii) Consequences--Amount and Allocation of Disallowed Loss. 
Old Target realized a net loss of $276 on the deemed asset 
disposition ($224 gain realized on Asset 1, $100 loss realized on 
Asset 2, and $400 loss realized on Asset 3). However, 20 shares of 
Target common stock were distributed by Seller during the 12-month 
disposition period (8 shares distributed to Seller's unrelated 
shareholders in the qualified stock disposition plus 12 shares 
distributed to Parent that were not part of the qualified stock 
disposition). Therefore, because there was a net loss realized on 
the deemed asset disposition and a portion of the stock of Target 
was distributed during the 12-month disposition period, a portion of 
the loss on the deemed sale of each of Target's loss assets is 
disallowed. The total amount of disallowed loss equals $60 ($276 net 
loss realized on the deemed disposition of Assets 1, 2, and 3 
multiplied by the disallowed loss fraction, the numerator of which 
is $1,200, the value on July 1, the disposition date, of the 20 
shares of Target common stock distributed during the 12-month 
disposition period, and the denominator of which is $5,520, the sum 
of $4,320, the value on July 1 of the 72 shares of Target common 
stock sold to B and $1,200, the value on July 1 of the 20 shares of 
Target common stock distributed during the 12-month disposition 
period). The portion of the disallowed loss allocated to Asset 2 is 
$12 ($60 total disallowed loss multiplied by the loss allocation 
fraction, the numerator of which is $100, the loss realized on the 
deemed disposition of Asset 2 and the denominator of which is $500, 
the sum of the losses realized on the deemed disposition of Assets 2 
and 3). The portion of the disallowed loss allocated to Asset 3 is 
$48 ($60 total disallowed loss multiplied by the loss allocation 
fraction, the numerator of which is $400, the loss realized on the 
deemed disposition of Asset 3 and the denominator of which is $500, 
the sum of the losses realized on the deemed disposition of Assets 2 
and 3). Accordingly, Old Target recognizes $224 of gain on Asset 1, 
recognizes $88 of loss on Asset 2 (realized loss of $100 less 
allocated disallowed loss of $12), and recognizes $352 of loss on 
Asset 3 (realized loss of $400 less allocated disallowed loss of 
$48) or a recognized net loss of $216 on the deemed asset 
disposition.
    Example 2. (i) Facts. The facts are the same as in Example 1 
except that Asset 2 is the stock of Target Subsidiary, a corporation 
of which Target owns 100 of the 110 shares of common stock, the only 
outstanding class of Target Subsidiary stock. The remaining 10 
shares of Target Subsidiary stock are owned by D. The value of 
Target Subsidiary stock on July 1 is $27.50 per share. Target 
Subsidiary has two assets, Asset 4, a Class IV asset, with a basis 
of $800 and a fair market value of $1,000, and Asset 5, a Class IV 
asset, with a basis of $2,200 and a fair market value of $2,025. 
Target Subsidiary has no liabilities. A section 336(e) election with 
respect to Target Subsidiary is also made.
    (ii) Consequences--Target. The ADADP on the deemed sale of 
Target's assets is determined and allocated in the same manner as in 
Example 1. However, Target's loss realized on the deemed sale of 
Target Subsidiary is disregarded in determining the amount of 
disallowed loss on the deemed asset disposition of Target's assets. 
Thus, the net loss is only $176 ($224 gain realized on Asset 1 and 
$400 loss realized on Asset 3), and the amount of disallowed loss 
equals $38.26 ($176 net loss multiplied by the disallowed loss 
fraction with respect to Target stock, $1,200/$5,520). The entire 
disallowed loss is allocated to Asset 3.
    (iii) Consequences--Target Subsidiary. The deemed sale of the 
stock of Target Subsidiary is disregarded and instead Target 
Subsidiary is deemed to sell all of its assets to an unrelated 
person. The ADADP on the deemed asset disposition of Target 
Subsidiary is $2,750, which is allocated $909 to Asset 4 and $1,841 
to Asset 5 (see Example 2 of Sec.  1.336-3(g) for the determination 
and allocation of ADADP). Old Target Subsidiary realized $109 of 
gain on Asset 4 and realized $359 of loss on Asset 5 in the deemed 
asset disposition. Although Old Target Subsidiary realized a net 
loss of $250 on the deemed asset disposition ($109 gain on Asset 4 
and $359 loss on Asset 5), a portion of this net loss is disallowed 
because a portion of Target stock was distributed during the 12-
month disposition period. For purposes of determining the amount of 
disallowed loss on the deemed sale of the assets of Target 
Subsidiary, the portion of the 100 shares of Target Subsidiary stock 
deemed sold by Target pursuant to the section 336(e) election for 
Target Subsidiary multiplied by the disallowed loss fraction with 
respect to Target stock is treated as having been distributed. Thus, 
for purposes of determining the amount of disallowed loss on the 
deemed asset disposition of Target Subsidiary's assets, 21.74 shares 
of Target Subsidiary stock (100 shares of Target Subsidiary stock 
owned by Target multiplied by the disallowed loss fraction with 
respect to Target stock, $1,200/$5,520) are treated as having been 
distributed by Target during the 12-month disposition period. The 
total amount of disallowed loss with respect to the deemed asset 
disposition of Target Subsidiary's assets equals $54 ($250 net loss 
realized on the deemed disposition of Assets 4 and 5 multiplied by 
the disallowed loss fraction with respect to Target Subsidiary, the 
numerator of which is $598, the value on July 1, the disposition 
date, of the 21.74 shares of Target Subsidiary stock deemed 
distributed during the 12-month disposition period (21.74 shares x 
$27.50) and the denominator of which is $2,750 (the sum of $2,152, 
the value on July 1 of the 78.26 shares of Target Subsidiary stock 
deemed sold in the qualified stock disposition pursuant to the 
section 336(e) election for Target Subsidiary (78.26 shares x 
$27.50) and $598, the value on July 1 of the 21.74 shares of Target 
Subsidiary stock deemed distributed during the 12-month disposition 
period)). (The 10 shares of Target Subsidiary owned by D are not 
part of the qualified stock disposition and therefore are not 
included in the denominator of the disallowed loss fraction.) All of 
the disallowed loss is allocated to Asset 5, the only loss asset. 
Accordingly, Old Target Subsidiary recognizes $109 of gain on Asset 
4 and recognizes $305 of loss on Asset 5 (realized loss of $359 less 
disallowed loss of $54) or a net loss of $196 on the deemed asset 
disposition.
    Example 3.  (i) Facts. The facts are the same as in Example 2 
except that on August 1 of Year 1, Target sells 50 of its shares of 
Target Subsidiary stock and distributes the remaining 50 shares.
    (ii) Consequences. Because the 100 shares of Target Subsidiary 
stock that were sold and distributed on August 1 were deemed 
disposed of on July 1 in the deemed asset disposition of Target, the 
August 1 sale and distribution of Target Subsidiary stock are 
disregarded in determining the amount of disallowed loss. 
Accordingly, the consequences are the same as in Example 2.

    (C) Tiered targets. (i) In the case of parent-subsidiary chains of 
corporations

[[Page 28479]]

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 allocates 
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. If new target 
qualifies as a small business corporation within the meaning of section 
1361(b) and wants to be an S corporation, a new election under section 
1362(a) must be made. 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. If 
old target is an S corporation, S corporation shareholders (whether or 
not they sell or exchange their stock) take their pro rata share of the 
deemed disposition tax consequences into account under section 1366 and 
increase or decrease their basis in target stock under section 1367. 
Old target and seller (or S corporation shareholders) 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 target is owned by seller or S corporation shareholders, old 
target transferred all of the consideration deemed received from new 
target in the deemed asset disposition to seller or S corporation 
shareholders, any S corporation election for old target terminated, and 
old target ceased to exist. The transfer from old target to seller or S 
corporation shareholders 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 of its stock, one of a series of 
distributions in complete cancellation or redemption of all of 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 sections 331 or 332 and 
sections 336 or 337 apply.
    (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 a qualified stock disposition, seller 
(the distributor) is deemed to purchase from an unrelated person, on 
the disposition date, immediately after the deemed liquidation of old 
target, the amount of stock distributed in the qualified stock 
disposition (new target stock) and to have distributed such new target 
stock to its shareholders. Seller recognizes no gain or loss on the 
distribution of such stock.
    (v) Seller--retention of target stock. If seller or an S 
corporation shareholder retains any target stock after the disposition 
date, seller or the S corporation shareholder is treated as purchasing 
the stock so retained from an unrelated person (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.
    (1) Old target not deemed to liquidate. In general, 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 after the deemed asset disposition.
    (2) Exception. If an election is made under Sec.  1.1502-
13(f)(5)(ii)(E), then solely for purposes of Sec.  1.1502-
13(f)(5)(ii)(C), immediately after the deemed asset disposition of old 
target, old target is deemed to liquidate into 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 gains realized on the deemed asset 
disposition.
    (2) Losses--(i) In general. Except as provided in paragraphs 
(b)(2)(i)(B)(2)(ii), (iii), and (iv) of this section, old target shall 
recognize all of the losses realized on the deemed asset disposition.
    (ii) Stock distributions. If target's losses realized on the deemed 
sale of all of its assets exceed target's gains realized (a net loss), 
the portion of such net loss attributable to a distribution of target 
stock during the 12-month disposition period is disallowed. The total 
amount of disallowed loss and the allocation of disallowed loss is 
determined in the manner provided in paragraphs (b)(2)(i)(B)(2)(iii) 
and (iv) of this section.
    (iii) Amount and allocation of disallowed loss. The total 
disallowed loss pursuant to paragraph (b)(2)(i)(B)(2)(ii) of this 
section shall be determined by multiplying the net loss realized on the 
deemed asset disposition by the disallowed loss fraction. The numerator 
of the disallowed loss fraction is the value of target stock, 
determined on the disposition date, distributed by seller during the 
12-month disposition period, whether or not a part of the qualified 
stock disposition (for example, stock distributed to a related person), 
and the denominator of the disallowed loss fraction is the sum of the 
value of target stock, determined on the disposition date, disposed of 
by sale or exchange in the qualified stock disposition during the 12-
month disposition period and the value of target stock, determined on 
the disposition date, distributed by seller during the 12-month 
disposition period, whether or not a part of the qualified stock 
disposition. The amount of the

[[Page 28480]]

disallowed loss allocated to each asset disposed of in the deemed asset 
disposition is determined by multiplying the total amount of the 
disallowed loss by the loss allocation fraction. The numerator of the 
loss allocation fraction is the amount of loss realized with respect to 
the asset and the denominator of the loss allocation fraction is the 
sum of the amount of losses realized with respect to each loss asset 
disposed of in the deemed asset disposition. To the extent old target's 
losses from the deemed asset disposition are not disallowed under this 
paragraph, 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.
    (iv) Tiered targets. If an asset of target is the stock of a 
subsidiary corporation of target for which a section 336(e) election is 
made, any gain or loss realized on the deemed sale of the stock of the 
subsidiary corporation is disregarded in determining the amount of 
disallowed loss. For purposes of determining the amount of disallowed 
loss on the deemed asset disposition by a subsidiary of target for 
which a section 336(e) election is made, see paragraph (b)(1)(i)(B)(2) 
of this section.
    (3) Examples. The following examples illustrate this paragraph 
(b)(2)(i)(B).

    Example 1.  (i) Facts. Seller owns 90 of the 100 outstanding 
shares of Target common stock, the only class of Target stock 
outstanding. The remaining 10 shares of Target common stock are 
owned by C. On January 1 of Year 1, Seller sells 10 shares of Target 
common stock to D for $910. On July 1, in an unrelated transaction, 
Seller distributes its remaining 80 shares of Target common stock to 
its unrelated shareholders in a distribution described in section 
355(d)(2) or (e)(2). On July 1, the value of Target common stock is 
$100 per share. Target has three assets, Asset 1 with a basis of 
$1,220, Asset 2 with a basis of $3,675, and Asset 3 with a basis of 
$5,725. Seller incurred no selling costs on the sale of the 10 
shares of Target common stock to D. Target has no liabilities. A 
section 336(e) election is made.
    (ii) Consequences. Because at least 80 percent of Target stock 
((10 + 80)/100) was disposed of (within the meaning of Sec.  1.336-
1(b)(5)) by Seller during the 12-month disposition period, a 
qualified stock disposition occurred. July 1 of Year 1, the first 
day on which there was a qualified stock disposition with respect to 
Target, is the disposition date. Accordingly, pursuant to the 
section 336(e) election, for Federal income tax purposes, Target is 
treated as if, on July 1, it sold all of its assets to an unrelated 
person in exchange for the ADADP, $9,900, as determined under Sec.  
1.336-3. Assume that the ADADP is allocated $2,000 to Asset 1, 
$3,300 to Asset 2, and $4,600 to Asset 3 under Sec.  1.336-3. Old 
Target realized a net loss of $720 on the deemed asset disposition 
($780 gain realized on Asset 1, $375 loss realized on Asset 2, and 
$1,125 loss realized on Asset 3). However, because a portion of 
Target stock was distributed during the 12-month disposition period 
and there was a net loss on the deemed asset disposition, a portion 
of the loss on each of the loss assets is disallowed. The total 
amount of disallowed loss equals $640 ($720 net loss realized on the 
deemed disposition of Assets 1, 2, and 3 multiplied by the 
disallowed loss fraction, the numerator of which is $8,000, the 
value on July 1, the disposition date, of the 80 shares of Target 
common stock distributed by Seller during the 12-month disposition 
period, and the denominator of which is $9,000, the sum of $1,000, 
the value on July 1 of the 10 shares of Target common stock sold to 
D, and $8,000, the value on July 1 of the 80 shares of Target common 
stock distributed by Seller during the 12-month disposition period). 
The portion of the disallowed loss allocated to Asset 2 is $160 
($640 total disallowed loss on the deemed asset disposition 
multiplied by the loss allocation fraction, the numerator of which 
is $375, the loss realized on the deemed disposition of Asset 2, and 
the denominator of which is $1,500, the sum of the losses realized 
on the deemed disposition of Assets 2 and 3). The portion of the 
disallowed loss allocated to Asset 3 is $480 ($640 total disallowed 
loss on the deemed asset disposition multiplied by the loss 
allocation fraction, the numerator of which is $1,125, the loss 
realized on the deemed disposition of Asset 3, and the denominator 
of which is $1,500, the sum of the losses realized on the deemed 
disposition of Assets 2 and 3). Accordingly, Old Target recognizes 
$780 of gain on Asset 1, recognizes $215 of loss on Asset 2 
(realized loss of $375 less allocated disallowed loss of $160), and 
recognizes $645 of loss on Asset 3 (realized loss of $1,125 less 
allocated disallowed loss of $480) or a recognized net loss of $80 
on the deemed asset disposition.
    Example 2.  (i) Facts. The facts are the same as in Example 1 
except that Asset 2 is 100 shares of common stock of Target 
Subsidiary, a wholly-owned subsidiary of Target. The value of Target 
Subsidiary common stock on July 1 is $40 per share. Target 
Subsidiary has two assets, Asset 4 with a basis of $500 and Asset 5 
with a basis of $3,000. Target Subsidiary has no liabilities. A 
section 336(e) election is also made with respect to Target 
Subsidiary.
    (ii) Consequences--Target. The ADADP on the deemed sale of 
Target's assets is determined and allocated in the same manner as in 
Example 1. However, Old Target's loss realized on the deemed sale of 
Target Subsidiary is disregarded in determining the amount of the 
disallowed loss on the deemed asset disposition of Old Target's 
assets. Thus, the realized net loss is only $345 ($780 gain on Asset 
1 and $1,125 loss on Asset 3), and the amount of disallowed loss 
equals $307, the $345 realized net loss multiplied by the disallowed 
loss fraction with respect to Target stock, $8,000/$9,000. The 
entire disallowed loss is allocated to Asset 3. Accordingly, Old 
Target recognizes $780 of gain on Asset 1 and recognizes $818 of 
loss on Asset 3 (realized loss of $1,125 less allocated disallowed 
loss of $307) or a recognized net loss of $38 on the deemed asset 
disposition.
    (iii) Consequences--Target Subsidiary. Because the deemed sale 
of Target Subsidiary is not a transaction described in section 
355(d)(2) or (e)(2), the tax consequences of the deemed sale of 
Target Subsidiary are determined under paragraph (b)(1) of this 
section and not this paragraph (b)(2). The deemed sale of the stock 
of Target Subsidiary is disregarded and instead Target Subsidiary is 
deemed to sell all of its assets to an unrelated person. The ADADP 
on the deemed asset disposition of Target Subsidiary as determined 
under Sec.  1.336-3 is $3,300. Assume that the ADADP is allocated 
$900 to Asset 4 and $2,400 to Asset 5 under Sec.  1.336-3. Old 
Target Subsidiary realized a net loss of $200 on the deemed asset 
disposition ($400 gain realized on Asset 4 and $600 loss realized on 
Asset 5). However, because a portion of Target stock was distributed 
during the 12-month disposition period, for purposes of determining 
the amount of disallowed loss on the deemed sale of the assets of 
Target Subsidiary, the portion of the 100 shares of Target 
Subsidiary stock deemed sold pursuant to the section 336(e) election 
for Target Subsidiary multiplied by the disallowed loss fraction 
with respect to Target stock are treated as having been distributed. 
Thus, for purposes of determining the amount of disallowed loss on 
the deemed asset disposition of Target Subsidiary's assets, 88.89 
shares of Target Subsidiary common stock (100 shares owned by Target 
multiplied by the disallowed loss fraction with respect to Target 
stock, $8,000/$9,000) are treated as distributed during the 12-month 
disposition period. The total amount of disallowed loss with respect 
to the deemed asset disposition of Target Subsidiary's assets equals 
$177.78 ($200 net loss realized on the deemed disposition of Assets 
4 and 5 multiplied by the disallowed loss fraction with respect to 
Target Subsidiary, the numerator of which is $3,556, the value on 
July 1, the disposition date, of the 88.89 shares of Target 
Subsidiary common stock deemed distributed during the 12-month 
disposition period (88.89 shares x $40) and the denominator of which 
is $4,000 (the sum of $444, the value on July 1 of the 11.11 shares 
of Target Subsidiary common stock deemed sold in the qualified stock 
disposition pursuant to the section 336(e) election for Target 
Subsidiary (11.11 shares x $40) and $3,556, the value on July 1 of 
the 88.89 shares of Target Subsidiary common stock deemed 
distributed during the 12-month disposition period)). All of the 
disallowed loss is allocated to Asset 5, the only loss asset. 
Accordingly, Old Target Subsidiary recognizes $400 of gain on Asset 
4 and recognizes $422.22 of loss on Asset 5 (realized loss of $600 
less allocated disallowed loss of $177.78) or a recognized net loss 
of $22.22 on the deemed asset disposition.

    (C) Tiered targets. In the case of parent-subsidiary chains of 
corporations making section 336(e) elections, the

[[Page 28481]]

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 
allocates 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.
    (C) Application of section 197(f)(9), section 1091, and other 
provisions to old target. Solely for purposes of section 197(f)(9), 
section 1091, and any other provision designated in the Internal 
Revenue Bulletin by the Internal Revenue Service (see Sec.  
601.601(d)(2)(ii) of this chapter), old target, in its capacity as 
seller of assets in the deemed asset disposition described in paragraph 
(b)(2)(i)(A) of this section, shall be treated as a separate and 
distinct taxpayer from, and unrelated to, old target in its capacity as 
acquirer of assets in the deemed purchase described in paragraph 
(b)(2)(ii)(A) of this section and for subsequent periods.
    (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, exchanged, or distributed outside of the section 355 
transaction but still 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 such sale, exchange, or 
distribution.
    (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 unless the stock of the subsidiary of 
target is actually disposed of in a qualified stock disposition 
described, in whole or in part, in section 355(d)(2) or (e)(2). The 
deemed liquidation of a lower-tier subsidiary 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 seller retains any 
target stock after the disposition date, 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 an unrelated person 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, any deemed transactions under paragraph (b)(1) 
or (b)(2) of this section that a subsidiary of target is treated as 
engaging in 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 purchaser 
would have been subject with respect to the acquisition of 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), 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 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 a 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 
seller, a member of seller's consolidated group, and S corporation 
shareholders (whether or not they sell or exchange 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 this 
treatment of 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.
    (e) Treatment consistent with an actual asset disposition. Except 
as otherwise provided, no provision in this

[[Page 28482]]

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 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 seller's 
consolidated group are treated as a single seller, regardless of which 
member or members actually dispose 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 seller.
    (3) International provisions--(i) Source and foreign tax credit. 
The principles of section 338(h)(16) apply to section 336(e) elections 
for targets with foreign operations to ensure that the source and 
foreign tax credit limitation are properly determined.
    (ii) Allocation of foreign taxes--(A) General rule. Except as 
provided in paragraph (g)(3)(ii)(B) of this section, 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 tax paid or accrued by new target with respect to such foreign 
taxable year is allocated between old target and new target. If there 
is more than one section 336(e) election with respect to target during 
target's foreign taxable year, foreign tax paid or accrued with respect 
to that foreign taxable year is allocated among all old targets and new 
targets. The allocation is made based on the respective portions of the 
taxable income (as determined under foreign law) for the foreign 
taxable year that are attributable under the principles of Sec.  
1.1502-76(b) to the period of existence of each old target and new 
target during the foreign taxable year.
    (B) Taxes imposed on partnerships and disregarded entities. If a 
section 336(e) election is made for target and target holds an interest 
in a disregarded entity or partnership, the rules of Sec.  1.901-
2(f)(4) apply to determine the person who is considered for U.S. 
Federal income tax purposes to pay foreign tax imposed at the entity 
level on the income of the disregarded entity or partnership.
    (iii) Disallowance of foreign tax credits under section 901(m). For 
rules that may apply to disallow foreign tax credits with respect to 
income not subject to United States taxation by reason of a covered 
asset acquisition, see section 901(m).
    (h) Making the section 336(e) election--(1) Consolidated group. If 
seller(s) and target are members of the same consolidated group, a 
section 336(e) election is made by completing the following 
requirements:
    (i) Seller(s) and target must enter into a written, binding 
agreement, on or before the due date (including extensions) of the 
consolidated group's consolidated Federal income tax return for the 
taxable year that includes the disposition date, to make a section 
336(e) election;
    (ii) The common parent of the consolidated group must retain a copy 
of the written agreement;
    (iii) The common parent of the consolidated group must attach the 
section 336(e) election statement, described in paragraphs (h)(5) and 
(6) of this section, to the group's timely filed (including extensions) 
consolidated Federal income tax return for the taxable year that 
includes the disposition date; and
    (iv) The common parent of the consolidated group must provide a 
copy of the section 336(e) election statement to target on or before 
the due date (including extensions) of the consolidated group's 
consolidated Federal income tax return.
    (2) Non-consolidated/non-S corporation target. If target is neither 
a member of the same consolidated group as seller nor an S corporation, 
a section 336(e) election is made by completing the following 
requirements:
    (i) Seller and target must enter into a written, binding agreement, 
on or before the due date (including extensions) of seller's or 
target's Federal income tax return for the taxable year that includes 
the disposition date, whichever is earlier, to make a section 336(e) 
election;
    (ii) Seller and target each must retain a copy of the written 
agreement; and
    (iii) Seller and target each must attach the section 336(e) 
election statement, described in paragraphs (h)(5) and (6) of this 
section, to its timely filed (including extensions) Federal income tax 
return for the taxable year that includes the disposition date. 
However, seller's section 336(e) election statement may disregard 
paragraph (h)(6)(xii) of this section (concerning a gain recognition 
election).
    (3) S corporation target. A section 336(e) election for an S 
corporation target is made by completing the following requirements:
    (i) All of the S corporation shareholders, including those who do 
not dispose of any stock in the qualified stock disposition, and the S 
corporation target must enter into a written, binding agreement, on or 
before the due date (including extensions) of the Federal income tax 
return of the S corporation target for the taxable year that includes 
the disposition date, to make a section 336(e) election;
    (ii) S corporation target must retain a copy of the written 
agreement; and
    (iii) S corporation target must attach the section 336(e) election 
statement, described in paragraphs (h)(5) and (6) of this section, to 
its timely filed (including extensions) Federal income tax return for 
the taxable year that includes the disposition date.
    (4) Tiered targets. In the case of parent-subsidiary chains of 
corporations making section 336(e) elections, in order to make a 
section 336(e) election for a lower-tier target (target subsidiary), 
the requirements described in paragraph (h)(1) or (h)(2), of this 
section, whichever is applicable to the qualified stock disposition of 
target subsidiary, must be satisfied. The written agreement described 
in paragraph (h)(1) or (h)(2) of this section for the section 336(e) 
election with respect to target subsidiary may be either a separate 
written agreement between target subsidiary and the corporation deemed 
to dispose of the stock of target subsidiary or may be included in the 
written agreement between seller(s) (or the S corporation shareholders) 
and target.
    (5) Section 336(e) election statement--(i) In general. The section 
336(e) election statement must be 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.'' The

[[Page 28483]]

section 336(e) election statement must include the information 
described in paragraph (h)(6) of this section. The relevant information 
for each S corporation shareholder and, notwithstanding paragraph 
(g)(2) of this section, each consolidated group member that disposes of 
or retains target stock must be set forth individually, not in the 
aggregate.
    (ii) Target subsidiaries. In the case of a section 336(e) election 
for a target subsidiary, a separate statement must be filed for each 
target subsidiary. In preparing the section 336(e) election statement 
with respect to a target subsidiary, any reference to seller in 
paragraph (h)(6) of this section should be considered a reference to 
the corporation deemed to dispose of the stock of the target subsidiary 
and any reference to target in paragraphs (h)(5)(i) and (h)(6) of this 
section should be considered a reference to the target subsidiary.
    (6) Contents of section 336(e) election statement. The section 
336(e) election statement must include:
    (i) The name, address, taxpayer identifying number (TIN), taxable 
year, and state of incorporation (if any) of the seller(s) or the S 
corporation shareholder(s);
    (ii) The name, address, employer identification number (EIN), 
taxable year, and state of incorporation of the common parent, if any, 
of seller(s);
    (iii) The name, address, EIN, taxable year, and state of 
incorporation of target;
    (iv) The name, address, TIN, taxable year, and state of 
incorporation (if any) of any 80-percent purchaser;
    (v) The name, address, TIN, taxable year, and state of 
incorporation (if any) of any purchaser that holds nonrecently disposed 
stock within the meaning of Sec.  1.336-1(b)(18);
    (vi) The disposition date;
    (vii) The percentage of target stock that was disposed of by each 
seller or S corporation shareholder in the qualified stock disposition;
    (viii) The percentage of target stock that was disposed of by each 
seller or S corporation shareholder in the qualified stock disposition 
on or before the disposition date;
    (ix) A statement regarding whether target realized a net loss on 
the deemed asset disposition;
    (x) If target realized a net loss on the deemed asset disposition, 
a statement regarding whether any stock of target or that of any 
higher-tier corporation up through the highest-tier corporation for 
which a section 336(e) election was made by any seller(s) or S 
corporation shareholder(s) was distributed during the 12-month 
disposition period. If so, also provide a statement regarding whether 
any stock of target or that of any higher-tier corporation up through 
the highest-tier corporation for which a section 336(e) election was 
made was actually sold or exchanged (rather than deemed sold in a 
deemed asset disposition) by any seller(s) or S corporation 
shareholder(s) in a qualified stock disposition;
    (xi) The percentage of target stock that was retained by each 
seller or S corporation shareholder after the disposition date;
    (xii) The name, address, and TIN of any purchaser that made a gain 
recognition election pursuant to Sec.  1.336-4(c). A copy of the gain 
recognition election statement must be retained by the filer of the 
section 336(e) election statement designated as the appropriate party 
in Sec.  1.336-4(c)(3); and
    (xiii) A statement that each of the seller(s) or S corporation 
shareholder(s) (as applicable) and target have executed a written, 
binding agreement to make a section 336(e) election.
    (7) Asset Allocation Statement. Old target and new target must 
report information concerning the deemed sale of target's assets on 
Form 8883, ``Asset Allocation Statement Under Section 338,'' (making 
appropriate adjustments to report the results of the section 336(e) 
election), or on any successor form prescribed by the Internal Revenue 
Service, in accordance with forms, instructions, or other appropriate 
guidance provided by the Internal Revenue Service. In addition, in the 
case of a section 336(e) election as the result of a transaction 
described in section 355(d)(2) or (e)(2), old target should file two 
Forms 8883, (or successor forms), one in its capacity as the seller of 
the assets in the deemed asset disposition described in paragraph 
(b)(2)(i) of this section and one in its capacity as the purchaser of 
the assets in the deemed purchase described in paragraph (b)(2)(ii) of 
this section.
    (8) Examples. The following examples illustrate the provisions of 
paragraph (h) of this section.
    Example 1.  (i) Facts. Seller owns all of the stock of Target 
and Target owns all of the stock of Target Subsidiary. Seller is the 
common parent of a consolidated group that includes Target. However, 
Target Subsidiary is not included in the consolidated group pursuant 
to section 1504(a)(3). On Date 1, Seller sells 80 percent of its 
Target stock to A and distributes the remaining 20 percent of Target 
stock to Seller's unrelated shareholders.
    (ii) Making of election for Target. Because Seller and Target 
are members of a consolidated group, in order to make a section 
336(e) election for the qualified stock disposition of Target, the 
requirements of paragraph (h)(1) of this section must be satisfied. 
On or before the due date of Seller group's consolidated Federal 
income tax return that includes Date 1, Seller and Target must enter 
into a written, binding agreement to make a section 336(e) election; 
Seller must retain a copy of the written agreement; Seller must 
attach the section 336(e) election statement to the group's timely 
filed consolidated return for the taxable year that includes Date 1, 
and Seller must provide a copy of the section 336(e) election 
statement to Target on or before the due date (including extensions) 
of the consolidated return.
    (iii) Making of election for Target Subsidiary. Because Target 
and Target Subsidiary do not join in the filing of a consolidated 
Federal income tax return and Target Subsidiary is not an S 
corporation, in order to make a section 336(e) election for the 
qualified stock disposition of Target Subsidiary, the requirements 
of paragraph (h)(2) of this section must be satisfied. On or before 
the due date of Seller group's consolidated Federal income tax 
return that includes Date 1, or Target Subsidiary's Federal income 
tax return that includes Date 1, whichever is earlier, either Target 
Subsidiary must join in the written agreement described in paragraph 
(ii) of this Example 1 to make a section 336(e) election with 
respect to the qualified stock disposition of Target Subsidiary or 
Target and Target Subsidiary must enter into a separate written, 
binding agreement to make a section 336(e) election with respect to 
the qualified stock disposition of Target Subsidiary; Seller (as 
agent of the consolidated group that includes Target) and Target 
Subsidiary each must retain a copy of the written agreement; and 
Seller (as agent of the consolidated group that includes Target) and 
Target Subsidiary each must attach the section 336(e) election 
statement with respect to the qualified stock disposition of Target 
Subsidiary to its timely filed Federal income tax return for the 
taxable year that includes Date 1. In preparing the section 336(e) 
election statement, paragraph (i) of the statement should include 
the relevant information for Target, paragraph (ii) of the statement 
should include the relevant information for Seller, paragraph (iii) 
of the statement should include the relevant information for Target 
Subsidiary, paragraphs (vii) through (xi) of the statement should 
provide information for both Seller's actual sale and distribution 
of Target stock as well as information for Target's deemed sale of 
Target Subsidiary stock, and paragraph (xiii) of the statement 
should include a statement that Seller, Target, and Target 
Subsidiary, or Target and Target Subsidiary, whichever is 
appropriate, have executed a written, binding agreement to make a 
section 336(e) election with respect to the qualified stock 
disposition of Target Subsidiary.
    Example 2. (i) Facts. A and B each own 45 percent and C owns the 
remaining 10 percent of the stock of S Corporation Target, an S 
corporation. S Corporation Target owns 80 percent of the stock of 
Target Subsidiary and D owns the remaining 20 percent. On Date 1, A 
and B each sell all of their S Corporation Target stock to an 
unrelated individual. C retains his 10 percent of the stock of S 
Corporation Target.

[[Page 28484]]

    (ii) Making of election for S Corporation Target. Because S 
Corporation Target is an S corporation, in order to make a section 
336(e) election for the qualified stock disposition of S Corporation 
Target, the requirements of paragraph (h)(3) of this section must be 
satisfied. On or before the due date of S Corporation Target's 
Federal income tax return that includes Date 1, A, B, C, and Target 
must enter into a written, binding agreement to make a section 
336(e) election; S Corporation Target must retain a copy of the 
written agreement; and S Corporation Target must attach the section 
336(e) election statement to its timely filed Federal income tax 
return for the taxable year that includes Date 1.
    (iii) Making of election for Target Subsidiary. Because Target 
Subsidiary is neither a member of the same consolidated group as S 
Corporation Target nor is an S corporation, in order to make a 
section 336(e) election for the qualified stock disposition of 
Target Subsidiary, the requirements of paragraph (h)(2) of this 
section must be satisfied. On or before the due date of S 
Corporation Target's Federal income tax return that includes Date 1, 
or Target Subsidiary's Federal income tax return that includes Date 
1, whichever is earlier, either Target Subsidiary must join in the 
written agreement described in paragraph (ii) of this Example 2 to 
make a section 336(e) election with respect to the qualified stock 
disposition of Target Subsidiary or S Corporation Target and Target 
Subsidiary must enter into a separate written, binding agreement to 
make a section 336(e) election with respect to the qualified stock 
disposition of Target Subsidiary; S Corporation Target and Target 
Subsidiary each must retain a copy of the written agreement; and S 
Corporation Target and Target Subsidiary each must attach the 
section 336(e) election statement to its timely filed Federal income 
tax return for the taxable year that includes Date 1. In preparing 
the section 336(e) election statement, paragraph (i) of the 
statement should include the relevant information for S Corporation 
Target, paragraph (iii) of the statement should include the relevant 
information for Target Subsidiary, paragraphs (vii) through (xi) of 
the statement should provide information for both A's and B's actual 
sale and C's actual retention of S Corporation Target stock as well 
as information for S Corporation Target's deemed sale of Target 
Subsidiary stock, and paragraph (xiii) of the statement should 
include a statement that A, B, C, S Corporation Target, and Target 
Subsidiary, or S Corporation Target and Target Subsidiary, whichever 
is appropriate, have executed a written, binding agreement to make a 
section 336(e) election with respect to the qualified stock 
disposition of Target Subsidiary.

    (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)(6), 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. 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. A section 336(e) election is made.
    (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 of $10,000, which is 
allocated $7,000 to Parcel 1 and $3,000 to Parcel 2 (see Sec. Sec.  
1.336-3 and 1.338-6 for determination of amount 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 amount of the AGUB of $10,000, which is allocated $7,000 to 
Parcel 1 and $3,000 to Parcel 2 (see Sec. Sec.  1.336-4, 1.338-5, 
and 1.338-6 for determination of amount and allocation of AGUB). Old 
Target is treated as liquidating into Parent immediately thereafter, 
distributing the $10,000 deemed received in exchange for Parcel 1 
and Parcel 2 in a transaction qualifying under section 332. Parent 
recognizes no gain or loss on the liquidation. A's basis in New 
Target stock is $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 an unrelated 
person on July 2, the day after the disposition date, the 20 shares 
of Target stock (New Target stock) not sold to A, for their fair 
market value as determined under Sec.  1.336-2(b)(1)(v) of $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 
on July 1 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. The value of Target stock on July 1 is $100 per share.
    (ii) Consequences. The distribution 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 
distributing the stock of Target to its shareholders, 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 of $10,000, which is allocated $7,000 to Parcel 1 and $3,000 
to Parcel 2 (see Sec. Sec.  1.336-3 and 1.338-6 for determination of 
amount and allocation of ADADP). Target recognizes gain of $2,000 on 
Parcel 1 and loss of $1,000 on Parcel 2. Because Target's losses 
realized on the deemed asset disposition do not exceed Target's 
gains realized on the deemed asset disposition, Target can recognize 
all of the losses from the deemed asset disposition (see Sec.  
1.336-2(b)(1)(i)(B)). New Target is then treated as acquiring all 
its assets from an unrelated person in a single transaction in 
exchange for the amount of the AGUB of $10,000, which is allocated 
$7,000 to Parcel 1 and $3,000 to Parcel 2 (see Sec. Sec.  1.336-4, 
1.338-5, and 1.338-6 for determination of amount and allocation of 
AGUB). Old Target is treated as liquidating into Parent immediately 
thereafter, distributing the $10,000 deemed received in exchange for 
Parcel 1 and Parcel 2 in a transaction qualifying under section 332. 
Parent recognizes no gain or loss on the liquidation. On July 1, 
immediately after the deemed liquidation of Target, Parent is deemed 
to purchase from an unrelated person 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 New Target 
stock as a distribution pursuant to section 301 and their basis in 
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. 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 Target stock is $120 per share, Parent distributes 
30 shares of Target to Parent's 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.

[[Page 28485]]

    (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 
($8,000 ((50 shares x $88) + (30 shares x $120))/.80 ($9,600 (80 
shares x $120)/$12,000 (100 shares x $120))), which is allocated to 
Buildings 1 and 2 in proportion to their fair market values, $6,500 
to Building 1 and $3,500 to Building 2 (see Sec. Sec.  1.336-3 and 
1.338-6 for determination of amount and allocation of ADADP). Target 
realizes a gain of $500 on the deemed sale of Building 1 ($6,500-
$6,000). Target realizes a loss of $1,600 on the deemed sale of 
Building 2 ($3,500-$5,100). Target recognizes all of its gains on 
the deemed asset disposition. However, because 30 shares of Target 
stock were distributed during the 12-month disposition period and 
there was a net loss of $1,100 realized on the deemed disposition of 
Buildings 1 and 2, $413 of the loss on the deemed sale is disallowed 
(see Sec.  1.336-2(b)(1)(i)(B)(2) for the determination of the 
disallowed loss amount). New Target is then treated as acquiring all 
its assets from an unrelated person in a single transaction in 
exchange for the amount of the AGUB, $10,000 ($8,000 ((50 shares x 
$88) + (30 shares x $120)) x 1.25 ((100-0)/80)), which is allocated 
to Buildings 1 and 2 in proportion to their fair market values, 
$6,500 to Building 1 and $3,500 to Building 2 (see Sec. Sec.  1.336-
4, 1.338-5, and 1.338-6 for determination of amount and allocation 
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 an unrelated person on July 1, and to 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 (20 shares multiplied by $100 
fair market value per share ($10,000 grossed-up amount realized on 
the sale and distribution of 80 shares of target stock divided by 
100 shares)). 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 New Target stock on July 1 of 
Year 1 as a distribution pursuant to section 301 and their basis in 
New Target stock received is $120 per share, 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 of the stock of Sub and 50 of the 100 
outstanding shares of Target stock. Sub owns the remaining 50 shares 
of Target stock. 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.
    (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. Old 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 
a net 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 amount of the AGUB, $10,000 (see Sec. Sec.  1.336-4 
and 1.338-5 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 recognizes gain or loss on the liquidation. 
Parent is then treated as purchasing from an unrelated person on 
March 2, the day after the disposition date, the 20 shares of Target 
stock (New Target stock) retained for 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 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.
    (ii) Consequences. Because Parent and Sub do not join in the 
filing of 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)(5)(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)(12), 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. Old 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 treated as liquidating into Seller 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 an unrelated person and then 
distributing the 80 shares of New Target stock 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 an unrelated 
person on the day after the disposition date the 20 shares of Target 
stock (New Target stock) retained for their 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)(12), and the 
distribution of Target stock to A is not a disposition. Because only 
32 percent of Target stock was sold, exchanged, or distributed to 
unrelated persons, there has not been a qualified stock disposition. 
Accordingly, the section 336(e) election made with respect to the 
distribution of Target stock has no effect.

[[Page 28486]]

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 the aggregate deemed sale 
price (ADSP) is allocated under Sec.  1.338-6 to determine the amount 
for which each asset is deemed to have been sold. If 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 disposition of recently 
disposed stock of Target--(1) Determination of amount. The grossed-up 
amount realized on the disposition of recently disposed stock of Target 
is an amount equal to--
    (i) The sum of --
    (A) With respect to recently disposed of stock of Target that is 
not distributed in the qualified stock disposition, the amount realized 
on the sale or exchange of such recently disposed stock of Target, 
determined as if seller or S corporation shareholders 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) With respect to recently disposed of stock of Target that is 
distributed in the qualified stock disposition, the fair market value 
of such recently disposed stock of Target determined on the date of 
each distribution;
    (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 seller or S corporation 
shareholders 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 
Target voting common stock with a fair market value of $120 to B. On 
May 1 of Year 2, Seller distributes 10 shares of Target 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 all the preferred stock is $600 ($6 per share). 
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 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 (80 shares of recently disposed stock x $10, 
the fair market value of each share of Target common stock on the 
disposition date)/$1,600 ($1,000 (the total value of Target's common 
stock on the disposition date) + $600 (the total value of Target's 
preferred stock on the disposition date))). 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 Target or a higher-tier corporation, 
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 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 amount realized as of the beginning of the day after the 
disposition date, the liability is not initially taken into account in 
determining ADADP, but 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.
    (g) Examples. The following examples illustrate this section.


[[Page 28487]]


    Example 1.  (i) Facts. The facts are the same as in Example 1 of 
Sec.  1.336-2(b)(1)(i)(B)(3), that is, Parent owns 60 of the 100 
outstanding shares of the common stock of Seller, Seller's only 
class of stock outstanding. The remaining 40 shares of the common 
stock of Seller are held by shareholders unrelated to Seller or each 
other. Seller owns 95 of the 100 outstanding shares of Target common 
stock, and all 100 shares of Target preferred stock that is 
described in section 1504(a)(4). The remaining 5 shares of Target 
common stock are owned by A. On January 1 of Year 1, Seller sells 72 
shares of Target common stock to B for $3,520. On July 1 of Year 1, 
Seller distributes 12 shares of Target common stock to Parent and 8 
shares to its unrelated shareholders in a distribution described in 
section 301. Seller retains 3 shares of Target common stock and all 
100 shares of Target preferred stock immediately after July 1. The 
value of Target common stock on July 1 is $60 per share. The value 
of Target preferred stock on July 1 is $36 per share. Target has 
three assets, Asset 1, a Class IV asset, with a basis of $1,776 and 
a fair market value of $2,000, Asset 2, a Class V asset, with a 
basis of $2,600 and a fair market value of $2,750, and Asset 3, a 
Class V asset, with a basis of $3,900 and a fair market value of 
$3,850. Seller incurred no selling costs on the sale of the 72 
shares of Target common stock to B. Target has no liabilities. A 
section 336(e) election is made.
    (ii) Determination of ADADP. The ADADP on the deemed asset 
disposition of Target is determined as follows. The grossed-up 
amount realized on the sale, exchange, or distribution of recently 
disposed stock of Target is $8,000, the sum of $3,520, the amount 
realized on the sale to B of the 72 shares of Target common stock 
and $480, the fair market value on the date distributed of the 8 
shares of Target common stock distributed to Seller's unrelated 
shareholders in the qualified stock disposition, divided by .50, the 
percentage of Target stock by value, determined on the disposition 
date, attributable to the recently disposed stock ($4,800 (80 shares 
of Target common stock disposed of in the qualified stock 
disposition x $60, the value of a share of Target common stock on 
the disposition date) divided by $9,600 ((100, the total number of 
shares of Target common stock x $60, the value of a share of Target 
common stock on the disposition date) + (100, the total number of 
shares of Target preferred stock x $36, the value of a share of 
Target preferred stock on the disposition date))), minus $0, 
Seller's selling costs in connection with the sale of the 72 shares 
of Target common stock sold to B. The $8,000 grossed-up amount 
realized on the sale, exchange, or distribution of recently disposed 
stock of Target is then added to the liabilities of Old Target, $0, 
to arrive at the ADADP, $8,000.
    (iii) Allocation of ADADP. The ADADP of $8,000 is allocated 
first to Asset 1, the Class IV asset, but not in excess of Asset 1's 
fair market value, $2,000. The remaining ADADP of $6,000 is 
allocated between Assets 2 and 3, both Class V assets, in proportion 
to their fair market values, but not in excess of their fair market 
values. Because the total fair market value of Assets 2 and 3, 
$6,600, exceeds the ADADP remaining after allocation of a portion of 
the ADADP to Asset 1, the $6,000 remaining ADADP is allocated to 
Assets 2 and 3 in proportion to their respective fair market values. 
Accordingly, $2,500 is allocated to Asset 2 ($6,000 x ($2,750/
($2,750 + $3,850))) and $3,500 is allocated to Asset 3 ($6,000 x 
($3,850/($2,750 + $3,850))).
    Example 2.  (i) Facts. The facts are the same as in Example 1 
except that Asset 2 is the stock of Target Subsidiary, a corporation 
of which Target owns 100 of the 110 shares of common stock, the only 
outstanding class of Target Subsidiary stock. The remaining 10 
shares of Target Subsidiary stock are owned by D. The value of 
Target Subsidiary stock on July 1 is $27.50 per share. Target 
Subsidiary has two assets, Asset 4, a Class IV asset, with a basis 
of $800 and a fair market value of $1,000, and Asset 5, a Class IV 
asset, with a basis of $2,200 and a fair market value of $2,025. 
Target Subsidiary has no liabilities. A section 336(e) election with 
respect to Target Subsidiary is also made.
    (ii) Determination of ADADP. The ADADP on the deemed asset 
disposition of Target Subsidiary is determined as follows. The 
grossed-up amount realized on the sale, exchange, or distribution of 
recently disposed stock of Target Subsidiary is $2,750, ($2,500 
ADADP allocable to Asset 2, the 100 shares of the stock of Target 
Subsidiary owned by Target, divided by .909, the percentage of 
Target Subsidiary stock by value, determined on the disposition 
date, attributable to the recently disposed stock ($2,750 (100 
shares of the stock of Target Subsidiary deemed disposed in the 
qualified stock disposition x $27.50, the value of a share of Target 
Subsidiary stock on the disposition date) divided by $3,025 (110, 
the total number of shares of Target Subsidiary stock x $27.50, the 
value of a share of Target Subsidiary stock on the disposition 
date)), minus $0, Seller's selling costs in connection with the 
deemed sale of the 100 shares of Target Subsidiary stock). The 
$2,750 grossed-up amount realized on the sale, exchange, or 
distribution of recently disposed stock of Target Subsidiary is then 
added to the liabilities of Old Target Subsidiary, $0, to arrive at 
the ADADP of Target Subsidiary, $2,750.
    (iii) Allocation of ADADP. Because Assets 4 and 5 are each 
assets of the same class, and the total fair market value of Assets 
4 and 5 exceeds the $2,750 ADADP of Target Subsidiary, the $2,750 
ADADP is allocated to Assets 4 and 5 in proportion to their 
respective fair market values. Accordingly, $909 is allocated to 
Asset 4 ($2,750 x ($1,000/($1,000 + $2,025))) and $1,841 is 
allocated to Asset 5 ($2,750 x ($2,025/($1,000 + $2,025))).
    Example 3.  (i) Seller owns all 100 of the outstanding shares of 
the common stock of Target, the only class of Target stock 
outstanding. On January 1 of Year 1, Seller sells 10 shares of 
Target stock to A for $6,000 ($600 per share). On August 1 of Year 
1, Seller distributes the remaining 90 shares of Target stock to its 
unrelated shareholders in a transaction described in section 
355(d)(2) or (e)(2). The value of Target stock on August 1 is $560 
per share. Target has two assets, Asset 1, which is stock in trade 
of Target, a Class IV asset, with a basis of $15,000 and a value of 
$50,000, and Asset 2, which is stock in a publicly traded, unrelated 
corporation, a Class II asset, with a basis of $38,000 and a value 
of $16,000. Target has no liabilities other than any liabilities for 
Federal tax on account of the deemed asset disposition. Assume 
Target's Federal tax rate for any gain or income on the deemed asset 
disposition is 34 percent. Seller had no selling costs in connection 
with its sale of the 10 shares of Target stock. A section 336(e) 
election is made.
    (ii) Because at least 80 percent of Target stock was disposed of 
(within the meaning of Sec.  1.336-1(b)(5)) by Seller during the 12-
month disposition period, a qualified stock disposition occurred. 
August 1 of Year 1 is the disposition date. Accordingly, pursuant to 
the section 336(e) election, for Federal income tax purposes, Target 
is treated as if, on August 1, it sold all of its assets to an 
unrelated person in exchange for the ADADP.
    (iii) Under these facts, although a portion of the qualified 
stock disposition was the result of a stock distribution, because 
the grossed-up amount realized on the disposition of recently 
disposed stock of Target, $56,400 (($6,000 + ($560 x 90))/1) exceeds 
Target's total basis in its assets, none of the losses realized on 
the deemed asset disposition are disallowed under Sec.  1.336-
2(b)(2)(i)(B)(2). Because the grossed-up amount realized on the 
disposition of recently disposed stock of Target exceeds the value 
of Asset 2, the ADADP allocated to Asset 2 equals the value of Asset 
2, $16,000, and Target realizes a $22,000 loss on the deemed 
disposition of Asset 2. None of this loss is disallowed under 
section 1091. See Sec.  1.336-2(b)(2)(ii)(C). Accordingly, Target 
recognizes a $22,000 loss on the deemed disposition of Asset 2.
    (iv) The ADADP allocated to Asset 1 is determined as follows 
(for purposes of this Example 3, TotADADP is the total ADADP for the 
deemed asset disposition, A1ADADP is the tentative amount of the 
total ADADP allocated to Asset 1, A2ADADP is the amount of the total 
ADADP allocated to Asset 2, G is the grossed-up amount realized on 
the disposition of recently disposed stock of Target, L is Target's 
liabilities other than Target's tax liability for the deemed 
disposition tax consequences, TR is the applicable tax 
rate, and B1 is the adjusted basis of Asset 1 and B2 is the adjusted 
basis of Asset 2):
TotADADP = G + L + (TR x (TotADADP-B1-B2))
A1ADADP = TotADADP-A2ADADP
A2ADADP = $16,000
A1ADADP = TotADADP-$16,000
G = ($6,000 + ($560 x 90))/1
G = $56,400
TotADADP = $56,400 + 0 + (.34 x (TotADADP-$15,000-$38,000))
TotADADP = $56,400 + .34TotADADP-$18,020
.66TotADADP = $38,380
TotADADP = $58,152
A1ADADP = $42,152
    (v) Because A1ADADP, $42,152, does not exceed the value of Asset 
1, $50,000, the

[[Page 28488]]

entire A1ADADP is allocated to Asset 1. Old Target thus realizes and 
recognizes a gain of $27,152 on the deemed disposition of Asset 1 
($42,152-$15,000).


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 grossed-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. If 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)(8).
    (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)(11).
    (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)(17). 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)(18).
    (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. If not automatically deemed made 
under paragraph (c)(2) of this section, a gain recognition election is 
made by a non-80-percent purchaser providing, on or before the due date 
for filing the section 336(e) election statement by the appropriate 
party, a gain recognition election statement, as described in paragraph 
(c)(4) of this section, to the appropriate party. If seller and target 
are members of the same consolidated group, seller is the appropriate 
party and the common parent of the consolidated group must retain the 
gain recognition election statement. If seller and target are members 
of the same affiliated group but do not join in the filing of a 
consolidated Federal income tax return, or if target is an S 
corporation, target is the appropriate party and target must retain the 
gain recognition election statement. 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 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 employer 
identification number of target].
    (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 section 336(e) election is made. A does not make a gain 
recognition election. 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 Target stock. September 1 of Year 2 is the disposition 
date. Because A owns at least 10 percent of 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 $1,011, 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 Target stock that is 
nonrecently disposed stock, and the denominator of which is 80, the 
percentage of Target stock attributable to recently disposed stock 
($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 $1,011 
grossed-up basis of recently disposed Target stock ($966 + $45 = 
$1,011). New Target's AGUB is $1,051, the sum of $1,011, 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

[[Page 28489]]

recognition election, A is treated as if he sold on September 1 of 
Year 2, the disposition date, his 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 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 Target stock, by 
value, determined on the disposition date, which is A's recently 
disposed stock, 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 $1,091, the sum of $1,011, 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.
    Example 3.  (i) The facts are the same as in Example 3 of Sec.  
1.336-3(g), that is, Seller owns all 100 of the outstanding shares 
of the common stock of Target, the only class of Target stock 
outstanding. On January 1 of Year 1, Seller sells 10 shares of 
Target stock to A for $6,000 ($600 per share). On August 1 of Year 
1, Seller distributes the remaining 90 shares of Target stock to its 
unrelated shareholders in a transaction described in section 
355(d)(2) or (e)(2). The value of Target stock on August 1 is $560 
per share. Target has two assets, Asset 1, which is stock in trade 
of Target, a Class IV asset, with a basis of $15,000 and a value of 
$50,000, and Asset 2, which is stock in a publicly traded, unrelated 
corporation, a Class II asset, with a basis of $38,000 and a value 
of $16,000. Target has no liabilities other than any liabilities for 
Federal tax on account of the deemed asset disposition. Assume 
Target's Federal tax rate for any gain or income on the deemed asset 
disposition is 34 percent. Seller had no selling costs in connection 
with its sale of the 10 shares of Target stock. A section 336(e) 
election is made. In addition, A incurred $100 of acquisition costs 
with respect to the purchase of the 10 shares of Target stock. 
Target's AGUB in the assets deemed acquired pursuant to Sec.  1.336-
2(b)(2)(ii)(B) is determined as follows (for purposes of this 
Example 3, GRD is the grossed-up basis of recently disposed stock, 
BND is the basis in nonrecently disposed stock, TotL is Target's 
total liabilities, including Target's tax liability, and X is the 
A's total acquisition costs):
AGUB = GRD + BND + TotL
GRD = ($6,000 + ($560 x 90)) x ((100 - 0)/100) + X
GRD = ($6,000 + $50,400) x (100/100) + $100
GRD = $56,500
BND = $0
TotL = .34 x ($27,152 (Target's gain recognized on deemed 
disposition of Asset 1) - $22,000 (Target's loss recognized on 
deemed disposition of Asset 2)) (see Example 3 of Sec.  1.336-3(g) 
for determination of Target's gain and loss recognized on deemed 
disposition of Assets 1 and 2)
TotL = $1,752
AGUB = $56,500 + $0 + $1,752
AGUB = $58,252
    (ii) The AGUB allocated to Asset 2 is $16,000, the value of 
Asset 2. Because the excess of the total AGUB, $58,252, over the 
portion of the AGUB allocated to Asset 2, $16,000, does not exceed 
the value of Asset 1, the AGUB allocated to Asset 1 is such excess, 
$42,252.


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 May 15, 2013.

0
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.
* * * * *

0
Par. 4. Section 1.338-1 is amended by adding three 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 (as 
defined in Sec.  1.336-1(b)(6)) of the stock of a subsidiary of 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)(6)(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 (as defined in Sec.  1.336-1(b)(8)) is on or 
after May 15, 2013.

0
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 in 
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 purchase or qualified 
stock disposition (as defined in Sec.  1.336-1(b)(6)) for which the 
acquisition date or disposition date (as defined in Sec.  1.336-
1(b)(8)), respectively, is on or after May 15, 2013.

0
Par. 6. Section 1.901-2 is amended by redesignating paragraph (f)(5) as 
paragraph (f)(6), adding a new paragraph (f)(5), and revising the first 
sentence in paragraph (h)(4) to read as follows:


Sec.  1.901-2  Income, war profits, or excess profits tax paid or 
accrued.

* * * * *
    (f) * * *
    (5) Allocation of foreign taxes in connection with elections under 
section 336(e) or 338. For rules relating to the allocation of foreign 
taxes in connection with elections made pursuant to section 336(e), see 
Sec.  1.336-2(g)(3)(ii). For rules relating to the allocation of 
foreign taxes in connection with elections made pursuant to section 
338, see Sec.  1.338-9(d).
* * * * *
    (h) * * *
    (4) Paragraphs (f)(3), (f)(4), and (f)(6) of this section apply to 
foreign taxes

[[Page 28490]]

paid or accrued in taxable years beginning after February 14, 2012. * * 
*

0
Par. 7. Section 1.1502-13 is amended by:
0
1. Revising the heading of paragraph (f)(5)(ii)(C).
0
2. Revising the first sentence in paragraph (f)(5)(ii)(C)(1).
0
3. Adding a new sentence at the end of paragraph (m).
    The revisions and addition read as follows:


Sec.  1.1502-13  Intercompany transactions.

* * * * *
    (f) * * *
    (5) * * *
    (ii) * * *
    (C) Section 338(h)(10) and Section 336(e).-- (1) In general. This 
paragraph (f)(5)(ii)(C) applies to a deemed liquidation of T under 
section 332 as the result of an election under section 338(h)(10) or 
section 336(e). * * *
* * * * *
    (m) Effective/applicability date. * * * Paragraph (f)(5)(ii)(C) of 
this section is applicable to any qualified stock disposition (as 
defined in Sec.  1.336-1(b)(6)) for which the disposition date (as 
defined in Sec.  1.336-1(b)(8)) is on or after May 15, 2013.
* * * * *

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: May 9, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-11522 Filed 5-10-13; 4:15 pm]
BILLING CODE 4830-01-P