IRC Section 338

Definition

IRC Section 338 is a provision of the Internal Revenue Code that allows a corporate buyer to treat a stock purchase of another corporation as an asset purchase for tax purposes. This section is significant because it can provide favorable tax treatment to the buyer by allowing them to step up the basis of the acquired assets to their fair market value, which can result in increased depreciation and potentially lower taxable income in the future.

5 Must Know Facts For Your Next Test

1. IRC Section 338 primarily applies in situations where one corporation acquires another corporation's stock, enabling the buyer to elect to treat this as an asset acquisition.
2. The election under IRC Section 338 can provide significant tax benefits by allowing buyers to increase their depreciation deductions based on the stepped-up basis of acquired assets.
3. The buyer must file Form 8023 to make the IRC Section 338 election within a specified period after the acquisition, usually within 75 days.
4. Sellers may be less inclined to agree to an IRC Section 338 election due to potential tax consequences on capital gains resulting from the deemed asset sale.
5. This provision can impact both federal and state taxation, making it crucial for businesses to consider how it affects their overall tax strategy.

Review Questions

• How does IRC Section 338 benefit a corporate buyer during an acquisition?
  • IRC Section 338 benefits a corporate buyer by allowing them to treat a stock purchase as an asset purchase for tax purposes. This means that they can step up the basis of the acquired assets to their fair market value, leading to higher depreciation deductions. This increased depreciation can result in lower taxable income for the buyer in future years, ultimately providing substantial tax savings over time.
• What are the key filing requirements associated with making an IRC Section 338 election after an acquisition?
  • To make an IRC Section 338 election, the acquiring corporation must file Form 8023 within 75 days following the acquisition date. This form captures essential details about the transaction and formally elects to treat the stock purchase as an asset purchase for tax purposes. It is crucial for the corporation to adhere to this timeline, as failing to do so can lead to missed tax benefits associated with the election.
• Evaluate the potential drawbacks of IRC Section 338 for sellers in a corporate acquisition.
  • While IRC Section 338 provides advantages for buyers, it can pose significant drawbacks for sellers. When the buyer makes this election, it is treated as if they sold all of the assets at fair market value, triggering potential capital gains taxes on any appreciation of those assets. This may discourage sellers from agreeing to such terms, as it can result in increased tax liabilities compared to a straightforward stock sale. Additionally, understanding these implications is vital for sellers when negotiating terms during an acquisition.

Related terms

Asset Purchase: A transaction in which a buyer purchases specific assets and liabilities of a company, rather than its stock, often allowing for more selective acquisition.

Step-Up in Basis: The adjustment of the value of an asset to its current market value at the time of acquisition, which can impact depreciation and tax liabilities.

Stock Purchase: A transaction where a buyer acquires shares of a corporation directly, gaining control over the company and its existing assets and liabilities.