1. SEPTEMBER 2013 C A l i f o r n i a C P A 15www.calcpa.org
early 30 years after the
enactment of its enabling legislation,
the Treasury Department and IRS
published final regulations May 10 under
Sec. 336(e) with Treasury Decision (TD)
9619 (78 FR 28467-01). Treas. Reg. secs.
1.336-1 through 1.336-5 (336(e) regs.) permit
taxpayers in certain situations to elect to treat
sales, exchanges and distributions of at least
80 percent of a target corporation’s stock as
taxable sales of the target’s assets.
These rules are generally favorable to
taxpayers in that they permit taxpayers to
obtain the benefits of asset sale treatment and
apply in many situations in which a similar
Sec. 338 election is not available.
This article will consider the potential
benefits of asset sale treatment, review
the potential advantages and limitations
of Sec. 338 elections, and explore the
mechanics and potential opportunities of
the new Sec. 336(e) election.
Unless otherwise indicated, all section
references in this article are to the Internal
Revenue Code of 1986, as amended (the
Code), or the regulations promulgated
pursuant to the Code—as the context requires.
Benefits of Asset Sale Treatment
A sale of a corporation’s assets can often be
more tax efficient than a sale of its stock. For
purposes of discussion, assume that basis of
the stock of a target corporation (T) equals the
basis in its assets and, in both cases, is less than
their fair market value.
If a purchaser (P) acquires the T stock
in a taxable transaction (there can be
multiple transaction forms to achieve a stock
acquisition), it will obtain cost basis in the T
stock acquired (generally equal to cash paid,
plus capitalized transaction costs). T’s asset
basis will be unaffected by the transaction.
P will not be able to recover any of its
purchase price through depreciation or
amortization deductions, although it can
recover the cost when it ultimately sells the
T stock.
However, if P acquires T’s assets, P will
obtain a cost basis in the T assets acquired
(generally equal to the cash paid, plus assumed
liabilities, plus capitalized transaction costs;
also, P will not inherit T’s tax attributes). See
“Success-based Fees” (California CPA, October
2011) for a discussion of transaction costs.
P will be able to recover its purchase
price to the extent of its depreciation and
amortization deductions for the T assets.
Accordingly, under these facts, the asset deal
tends to be more tax efficient for the buyer
than the stock deal.
There could be variations that make the
choice of an asset sale less desirable for the
seller. For example, if the outside stock basis is
significantly higher than the inside asset basis,
the T side would be less prone to sell assets
unless there are tax attributes—such as net
operating loss or tax credit carryovers to shield
the gain or eliminate the tax. The purchaser
may be willing to reimburse the seller for
additional tax if an asset sale would result in
a significantly higher amount of depreciation
and amortization deductions than a stock sale.
It’s good practice to analyze the numbers
to help determine whether the net present
value of the depreciation and amortization
deductions is greater than any additional costs
to the seller in undertaking the asset sale over
the stock sale.
Sec. 338(h)(10) Election
Often, particularly from the business
perspective of sellers, a stock sale is an easier
transaction to conclude than an asset sale.
However, as noted above, an asset sale can
yield a more efficient tax result.
One bridge between these often competing
concerns has been the Sec. 338(h)(10) election:
a legal sale of T stock that is treated for federal
income tax purposes as a sale and purchase
of T’s assets. While there is also a Sec. 338(g)
election and other methods to achieve asset
sale treatment, this article does not discuss
those other methods.
To make a Sec. 338(h)(10) election, an
eligible corporate purchaser (ECP) must acquire
stock of T in a qualified stock purchase [a QSP
under Sec. 338(d)(3)], which is very generally
defined to be an acquisition of at least 80
percent of the vote and value of the stock
of T, within a 12-month period in a taxable
transaction in which P and T are not be related.
If the parties make a Sec. 338(h)(10)
election, the transaction is generally treated
as if T sells all of its assets in a taxable
transaction to a new target owned by P, and T
liquidates into the seller(s). Because the stock
sale is ignored, the Sec. 338(h)(10) election
n
Asset Sale Treatment
FinalTreasury
Regulations
Under Sec. 336(e)
regulatoryupdate
by J e f f r e y M . H u r o k
A sale of a
corporation’s
assets can be
more tax efficient
than a sale
of its stock.
Sec. 336(e)
Originally published in California CPA Magazine, September 2013.

2. 16 C a l i f o r n i a C P A SEPTEMBER 2013 www.calcpa.org
generally results in only a single level of tax on
T’s deemed sale of its assets.
Secs. 338 and 336(e)
There are various situations involving the
sale of 80 percent or more of the stock of a
corporation in which a Sec. 338(h)(10) election
is not available because an ECP does not
acquire 80 percent or more of the T stock.
For example: S, a corporate owner of all
of the T stock, may want to sell all of the stock
of T to a partnership or to multiple investors
that are not able to form a corporation to
facilitate an election.
A Sec. 336(e) election treats certain
sales and distributions of at least 80 percent
of T’s stock as a sale or distribution of T’s
assets, disregarding the stock sale or stock
distribution. While a QSP requires a purchase
of T stock by a corporation, Sec. 336(e)
focuses on a disposition of stock. Because
there is no need for an ECP to acquire
80 percent of the T stock, the Sec. 336(e)
election is available in a variety of situations in
which Sec. 338 would not apply.
Qualifying for the Sec. 336(e) Election
The Sec. 336(e) regulations permit a domestic
T and domestic S (or, in the case of an S
corp, T and all of its shareholders) to make an
irrevocable election to treat a qualified stock
distribution (QSD) as a sale by T of all of its
assets. These rules adopt the structure and
principles of Sec. 338(h)(10).
A QSD mirrors the definition of a
QSP, except that the focus is on disposition
rather than acquisition. Specifically, a QSD
constitutes a series of transactions by which
at least 80 percent of the vote and value of
the stock of T [under the requirements of
Sec. 1504(a)(2)] is disposed of through a
sale, exchange, distribution or combination
thereof by S or members of S’s consolidated
group—or by T shareholders in the case of an
S corp—within 12 months.
Similarly, mirroring the Sec. 338 definition
of a “purchase,” a “disposition” for a QSD
includes any disposition of stock except
dispositions that result in a carryover tax basis
[e.g., Sec. 368(a) reorganizations], involve
inheriting property from a decedent under Sec.
1014, satisfy the requirements of secs. 351,
354, 355 [other than under section 355(d) and
(e)] or 356—or involve a sale or distribution to
a related person, defined in the 336(e) regs.
Aside from the focus on disposition rather
than acquisition, other key differences between
a QSD and a QSP include:
• A QSD permits a distribution of stock;
• No one purchaser needs to acquire
80 percent of the T stock; and
• The purchaser does not need to be a
corporation.
While it’s possible under certain
circumstances for a QSP to include a
distribution transaction, that is beyond the
scope of this article.
Basic Operational Rules
The regulations provide for several different
characterization models based on the nature
of the transaction at issue.
If a Sec. 336(e) election is made on the
sale of T’s stock (assuming T is a C corp and
assuming 100 percent of T’s stock is sold), the
336(e) regulations use the “Basic Model.”
• Old T is treated as selling its assets,
recognizing gain or loss on the difference
between Aggregate Deemed Asset
Disposition Price (ADADP, Treas. Reg.
Sec 1.336-3) and tax basis;
• A New T (the same legal entity as T with
the same employer identification number)
is treated as purchasing T’s assets, taking a
cost basis in T’s assets and does not inherit
T’s tax attributes; and
• Old T liquidates into S with S inheriting
T’s tax attributes.
If there is at least 80 percent of the stock
sold, but less than 100 percent distributed,
certain other rules apply. The Basic Model
mirrors the Sec. 338(h)(10) characterization of
a QSP. ADADP, which, like Sec. 338’s Adjusted
Deemed Sales Price (ADSP), is the hypothetical
sales price for T’s assets under Treas. Reg.
Sec. 1.336-3. ADADP is allocated among the
disposition date assets in the same manner
as ADSP is allocated under Treas. Reg. secs.
1.338-6 and 1.338-7 to determine the amount
realized from each of the sold assets.
If a Sec. 336(e) election is made on
the distribution of T’s stock in a non-
355 transaction (assuming T is a C Corp
and assuming 100 percent of T’s stock is
distributed), the regulations use the same Basic
Model, but add a loss limitation rule such that
T recognizes gain on the deemed sale of assets
and loss up to the amount of the gain, based
on ADADP.
The remaining built-in loss is unable to
be used. If there is a combination of sale and
distribution, the loss limitation rule is calculated
for the distribution portion of the QSD.
If there is at least 80 percent, but less than
100 percent, of the stock distributed, then
certain other rules apply. Sec. 336(e) treatment
on a distribution can be more favorable than
a distribution of the assets would be under
Sec. 311 because a distributing corporation
generally does not recognize any loss on a
distribution of assets.
If a Sec. 336(e) election is made on the
distribution of T’s stock in a Sec. 355(d)
or (e) transaction, the regulations use the
“Sale-to-Self Model,” which is similar to the
distribution rule except that T keeps its tax
attributes, consistent with general Sec. 355
treatment. Secs. 355(d) and (e) provide for gain
recognition by the distributing corporation
in certain distributions to which Sec. 355
otherwise applies.
Making the Sec. 336(e) Election
S and T must enter into a written and binding
agreement to make a Sec. 336(e) election
(Election Statement). There is no IRS form
for this agreement. The Election Statement
must be attached to the relevant tax return for
S and T [unlike the Sec. 338(h)(10) and Sec.
338(g) elections that must be made by the 15th
day of the ninth month after the QSP].
The deemed asset sale should be reported
on Form 8883, which is used for the Sec. 338
elections, with adjustments as necessary to
comply with the Sec. 336(e) regulations. In
T.D. 9619, the IRS has stated its intention to
either to create a new form for Sec. 336(e)
or to modify Form 8883 to include specific
references to 336(e).
If T is an S corp, all shareholders must
sign the Election Statement, including those
who do not dispose of any stock in the QSD.
For shareholders in community property
states such as California, it’s a good idea for
shareholders and their spouses to also sign
the Election Statement, even though this is
not specified in the 336(e) regulations. As in
the case of a Sec. 338(h)(10) election for an S
corp, a purchaser should undertake sufficient
due diligence to be sure that T qualifies as an
S corp.
Practical Application of Sec. 336(e)
A Sec. 336(e) election should be considered if:
• It is structured as an eligible stock sale;
Asset Sale Treatment
regulatoryupdate
Often, particularly
from the business
perspective of sellers,
a stock sale is an
easier transaction
to conclude than an
asset sale. However …
an asset sale can
yield a more efficient
tax result.

3. Asset Sale Treatment
regulatoryupdate
• An asset sale is likely more tax efficient;
and
• A Sec. 338 election is not available.
Such situations may include, but are not
limited to:
• Sale of stock to a non-corporate purchaser;
• Sale of stock to a group of purchasers
where one corporation does not acquire
80 percent of the target stock and the
group is not able to set-up a joint corporate
purchaser;
• Certain stock distributions that do not
qualify under Sec. 355;
• Certain stock distributions that qualify
under Sec. 355, but are subject to
corporate-level gain recognition under Sec.
355(d) or (e);
• Protective elections for distributions
intended to qualify under Sec. 355 (to
take effect in the event that the transaction
for some reason does not qualify under
Sec. 355); or
• A disposition of stock comprised of a
combination of sales and distributions.
The rules provide that Sec. 338, rather
than 336(e), generally apply to a QSD that
also constitutes a QSP.
There is an exception to this rule for a
QSP that results from the deemed sale of
assets resulting from a Sec. 336(e) election. In
that case, the lower tier QSP/QSD will be
treated under Sec. 336(e) rather than Sec. 338.
Nevertheless, a selling taxpayer should
consider making a protective Sec. 336(e)
election whenever it makes a Sec. 338(h)(10)
election to help protect against the possibility
that the transaction may not constitute a
QSP (e.g., in the case of a newly formed and
transitory purchasing corporation).
Deal Considerations
Because a Sec. 336(e) election only is made on
the selling side of a transaction, any purchaser
of T stock should consider stock purchase
agreement language that would give it some
control over a potential Sec. 336(e) election.
This is advisable because a Sec. 336(e) election
could be both unexpected and detrimental to a
purchaser in certain circumstances.
For example: P acquires 60 percent of the
T stock with the expectation that T will have
certain tax attributes subject to an acceptable
Sec. 382 limitation. If S sells 20 percent or
more of the outstanding T stock to other
persons, and S and T make a Sec. 336(e)
election, T’s tax attributes will not remain with
T subsequent to the QSD.
In that case, P’s economics regarding its
investment in T may be skewed if the expected
tax attributes no longer are available.
Summary
The 336(e) regulations provide a new and
welcome approach for structuring transactions,
giving taxpayers the ability to treat a stock sale
as an asset sale in certain situations in which
Sec. 338 is unavailable.
Because—like Sec. 338—Sec. 336(e) is a
complex provision, taxpayers and tax advisers
should be careful to read the regulations and
the preamble to T.D. 9619 before deciding
whether to make a Sec. 336(e) election.
Also, as in any case in which the parties are
deciding whether to sell stock or assets for
tax purposes, the parties should analyze the
numbers to determine which transaction may
be more advantageous.
The information contained herein is of a general
nature and based on authorities that are subject to
change. Applicability of the information to specific
situations should be determined through consultation
with your tax adviser. This article represents the views
of the author only and does not necessarily represent
the views or professional advice of KPMG LLP.
John N. Geracimos, managing director, tax, in
KPMG’s Washington National Tax practice
contributed to this article.
Jeffrey M. Hurok is a managing director,
mergers and acquisitions, tax services at KPMG
LLP.You can reach him at jhurok@kpmg.com.
(c) 2013 California Society of Certified Public Accountants.