26 U.S.C. § 338 — Certain stock purchases treated as asset acquisitions

(a) If a buying corporation ("the purchasing corporation") makes a special election under this section — or is treated as having made one under (e) — then when it makes a "qualified stock purchase" of another company's stock, the target company is treated two ways for tax purposes: (1) as if it sold all of its assets, at their fair market value, in one single transaction, right when the acquisition closes; and (2) as if it then became a brand-new company that bought back all those same assets, starting the next day. (b) Setting the new value ("basis") of the target's assets after this deemed sale: (1) The assets are treated as bought for a total price equal to two amounts added together: (A) a "grossed-up" version of the basis of the stock the purchasing corporation bought recently, plus (B) the basis of any stock it already owned before that (its "nonrecently purchased stock"). (2) That total gets adjusted under IRS regulations to account for the target's debts and other relevant factors. (3) The purchasing corporation can also elect to "step up" the basis of its older, nonrecently purchased stock: it can choose to treat that older stock as sold, on the acquisition date, for the basis amount worked out below, and recognize gain as if that sale happened. To find that basis amount: take the grossed-up basis from (1)(A) and multiply it by a fraction. The top of the fraction (numerator) is the percentage of the target's stock value that comes from the nonrecently purchased stock. The bottom (denominator) is 100% minus that same percentage. (4) To find the "grossed-up basis" itself: take the basis of the recently purchased stock and multiply it by a fraction. The numerator is 100% minus the percentage of target stock value that is nonrecently purchased stock. The denominator is the percentage of target stock value that is recently purchased stock. (5) The total basis amount from (1) and (2) then gets divided up among the target's individual assets, following IRS regulations. (6) Two key terms: "Recently purchased stock" is target stock the purchasing corporation holds on the acquisition date and bought during the 12-month acquisition period. "Nonrecently purchased stock" is target stock the purchasing corporation holds on the acquisition date that it bought outside that 12-month window. (c) This subsection has been repealed and no longer has any effect. (d) Key definitions: (1) The "purchasing corporation" is whichever corporation makes a qualified stock purchase of another corporation's stock. (2) The "target corporation" is the corporation whose stock gets bought that way. (3) A "qualified stock purchase" is any purchase, or series of purchases, in which one corporation buys stock (meeting the ownership test in section 1504(a)(2)) of another corporation during a 12-month acquisition period. (e) When the purchasing corporation is treated as having made the election automatically: (1) If, at any point during the "consistency period" (defined in (h)(4)), the purchasing corporation buys an asset directly from the target (or from a "target affiliate," defined in (h)(6)), it's treated as if it had made the election under this section for that target. (2) That automatic rule doesn't apply if: (A) the target sold the asset in the ordinary course of its business; (B) the buyer's basis in the asset is based entirely on the seller's old basis (a carryover basis); (C) the purchase happened before September 1, 1982; or (D) IRS regulations describe the purchase as excepted and its conditions are met. (3) To prevent people from working around this rule, the Secretary can also treat certain planned stock acquisitions that meet the section 1504(a)(2) ownership test as qualified stock purchases. (f) If the purchasing corporation makes qualified stock purchases of both the target corporation and one or more of its target affiliates during the same consistency period, the corporation must treat them all the same way (except where (e) says otherwise): (1) whatever election it made (or didn't make) for the first purchase automatically applies to every later purchase; and (2) it cannot elect differently for a later purchase than it did for the first one. (g) Making the election: (1) Unless regulations say otherwise, the election must be made by the 15th day of the 9th month after the month the acquisition date falls in. (2) It must be made in whatever manner the Secretary sets by regulation. (3) Once made, the election can never be taken back. (h) More definitions and special rules: (1) The "12-month acquisition period" is the 12 months starting on the date of the first stock purchase counted toward a qualified stock purchase (with a special starting date, set by regulation, for stock treated as purchased under the related-corporation rule in (3)(C)). (2) The "acquisition date" is the first day a qualified stock purchase exists for a given target's stock. (3) What counts as a "purchase": (A) Generally, any stock acquisition counts as a purchase only if: (i) the buyer's basis in the stock isn't simply carried over from the seller's basis, and isn't based on inheriting it from someone who died; (ii) the stock wasn't acquired in a tax-free exchange (under sections 351, 354, 355, or 356) or another transaction where the seller didn't recognize its full gain or loss; and (iii) the stock wasn't bought from someone whose ownership would be attributed to the buyer under the family/entity attribution rules in section 318(a). (B) A "purchase" also includes any deemed purchase created by the deemed-new-corporation rule in (a)(2); its acquisition date is set by regulation. (C) Special rule for buying stock from a related corporation: (i) the ownership-attribution block in (A)(iii) doesn't apply to a purchase from a related corporation if at least 50% of that related corporation's own stock (by value) was itself bought by purchase; (ii) the carryover-basis block in (A)(i) doesn't apply to that kind of purchase either, if the buyer made a qualified stock purchase of the related corporation's stock and made (or is treated as having made) the election for that purchase; (iii) a corporation counts as "related" if its stock is treated, under section 318(a), as owned by the corporation buying the stock. (4) The "consistency period": (A) Normally, it covers three stretches of time: the year before the 12-month acquisition period starts, the 12-month acquisition period itself (through the acquisition date), and the year after the acquisition date. (B) But if the Secretary determines there was a plan to make this qualified stock purchase together with other stock or asset purchases involving the target or a target affiliate, the consistency period stretches to cover that whole plan. (5) "Affiliated group" has the meaning given in section 1504(a), ignoring the exceptions listed in section 1504(b). (6) A corporation is a "target affiliate" of the target corporation if, at some point during the consistency period up through the target's acquisition date, both corporations belonged to an affiliated group with the same parent company. Unless regulations say otherwise: foreign corporations and DISCs (a type of export company) don't count as target affiliates, and stock a target affiliate holds in a foreign corporation, or in a domestic DISC or certain insurance-related corporation under section 1248(e), doesn't count either. (7) This paragraph has been repealed and no longer has any effect. (8) Unless regulations say otherwise, stock and asset purchases made by different members of the same affiliated group are all treated as if one single corporation made them. (9) Except as (10) or regulations provide, the target corporation is not treated as a member of any affiliated group when it comes to the deemed sale described in (a)(1). (10) A special election lets the target recognize its own gain or loss on the deemed sale, in exchange for the parent group not recognizing gain or loss on the stock sale: (A) Under regulations, if the target was a member of the "selling consolidated group" before the transaction, and the target recognizes gain or loss as though it really sold all its assets in one transaction, then the target is treated as staying part of that selling group for this sale — and, to the extent regulations allow, the group members who sold the target's stock don't have to recognize gain or loss on that stock sale. (B) The "selling consolidated group" is the group of corporations that includes the target and files a consolidated tax return for the period covering the transaction; regulations can extend this to an affiliated group that includes the target even if it doesn't file a consolidated return. (C) When this election is made, the purchasing corporation and the selling group's parent company must report to the Secretary: how much of the price was allocated to goodwill or going-concern value, any later change to that amount, and any other information the Secretary requires. (11) For working out fair market value under (a)(1), regulations may provide a formula that accounts for the target's liabilities and other relevant factors. (12) This paragraph has been repealed and no longer has any effect. (13) The tax owed because of the deemed sale in (a)(1) is not counted when figuring estimated tax payments under section 6655 — except this protection doesn't apply if the target made the election described in (10). (14) This paragraph has been repealed and no longer has any effect. (15) Under regulations, if a purchasing corporation acquires several target corporations on the same acquisition date, and those targets were all part of the same selling consolidated group, they can all file one combined "deemed sale" tax return together. (16) Except as regulations provide, this section doesn't apply when figuring out the source or character of income for foreign tax credit purposes. But that exception doesn't apply to any gain that must be counted as a dividend under section 1248, figured without regard to any deemed sale a foreign corporation makes under this section. (i) The Secretary of the Treasury must write whatever regulations are necessary to carry out this section's purposes, including: (1) regulations making sure people can't get around the requirement to treat stock and asset sales consistently, whether through some other law or regulation (including consolidated-return rules) or by routing the transaction through a regulated investment company, real estate investment trust, or tax-exempt entity; and (2) regulations coordinating this section with the rules on taxing foreign corporations and their shareholders.