IRC Section 338

Definition

IRC Section 338 provides a tax election for a corporate buyer to treat a stock purchase of another corporation as an asset purchase for tax purposes. This allows the buyer to step up the basis of the acquired assets to their fair market value, which can lead to increased depreciation deductions and potential tax benefits. The section is particularly relevant in taxable acquisitions where the structure of the deal can significantly impact the tax implications for both parties involved.

5 Must Know Facts For Your Next Test

1. An election under IRC Section 338 is made using Form 8023, which must be filed with the IRS within specific time limits after the acquisition.
2. The election allows the purchasing corporation to treat the acquired stock as if it had purchased the underlying assets, providing a stepped-up basis that can enhance tax deductions.
3. IRC Section 338 applies mainly in situations where a corporation acquires at least 80% of another corporation's stock within a specified period.
4. The buyer must be a corporation and the target must be a domestic corporation for the section to apply effectively.
5. Any gain recognized on the deemed sale of assets under IRC Section 338 can result in taxable income for the selling shareholders, which can influence negotiations.

Review Questions

• How does IRC Section 338 impact the decision-making process for a corporation considering an acquisition?
  • IRC Section 338 influences acquisition decisions by allowing corporations to elect to treat stock purchases as asset purchases, which can provide significant tax advantages. This election can lead to increased depreciation deductions due to the stepped-up basis of acquired assets, making the acquisition more financially appealing. Therefore, understanding this provision helps corporate buyers assess potential tax implications and optimize their acquisition strategies.
• Discuss the advantages and disadvantages of making an IRC Section 338 election from both the buyer's and seller's perspectives.
  • From the buyer's perspective, making an IRC Section 338 election allows for a stepped-up basis in assets, which enhances future depreciation deductions and reduces taxable income. However, sellers may face immediate tax consequences due to potential capital gains taxes on recognized gain from the deemed sale of assets. The decision to elect under IRC Section 338 thus involves weighing these benefits against possible immediate tax liabilities for sellers, influencing negotiation terms.
• Evaluate how IRC Section 338 can influence market behavior and trends in corporate acquisitions.
  • IRC Section 338 can significantly influence market behavior by encouraging more corporations to engage in taxable stock acquisitions rather than asset deals. The potential for favorable tax treatment through increased depreciation and lower overall tax liabilities can make corporate acquisitions more attractive. This provision can lead to increased competition among buyers as they seek to leverage these tax benefits, ultimately affecting acquisition prices and strategies in the marketplace.

Related terms

Asset Purchase: A transaction in which a buyer purchases specific assets and liabilities of a target company, rather than its stock.

Stock Purchase: A transaction where a buyer acquires shares of a company, resulting in a change of ownership without directly purchasing the company's assets.

Step-Up in Basis: The adjustment of the value of an asset for tax purposes when it is transferred, typically allowing for increased depreciation or amortization deductions.