Corporation X Purchases From Corporation

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Corporation X purchases from Corporation Y, the entire stock of YSub, a wholly owned subsidiary (WOS) of Y, and pays a price representing the present worth of YSub. After the acquisition, YSub becomes a WOS of X, and X secures a cost basis in YSub stock. On the other hand, as there is no change in the ownership of YSub’s underlying assets, there is no basis step-up (or step-down) in those assets.

Buyers don’t often prefer this result as their purchase price recovery is pushed to the time of sale or other disposition of target’s stock, and there is no intermediate benefit as corporate stock is not depreciable or amortizable under US tax principles. As such, buyers, in general, prefer to acquire assets which allow faster purchase price
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The choice is exercised by making an election by filing a prescribed form with the Internal Revenue Service (“Service” or “IRS”). If the election is made, the acquired subsidiary secures a step-up (or step-down) in the basis of the assets. In effect, for the selling shareholder it is still a sale of stock; while for the purchaser it is in essence an acquisition of assets. Since the deemed sale is regarded only for federal income tax purposes, and not for other federal and state laws, the ownership of assets and contracts remains intact, thereby avoiding the complications of an actual assets transfer.


If within a period of twelve months, a corporation acquires from an unrelated seller in a taxable transaction, stock representing at least 80% of the vote and value of another corporation section 338 allows the purchasing corporation (and, in more limited circumstances, jointly with the selling shareholders) to irrevocably elect (“section 338 election”) that such stock acquisition be regarded as a purchase of the underlying assets for federal income tax purposes. The election is made by filing Form 8023 with the Service within 8½ months from the end of the month in which the acquisition was made.

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