Td 9619

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Rules and Regulations

Federal Register
Vol. 78, No. 94
Wednesday, May 15, 2013

This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents. Prices of
new books are listed in the first FEDERAL
REGISTER issue of each week.

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9619]
RIN 1545–BD84

Regulations Enabling Elections for
Certain Transactions Under Section
336(e)
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

This document contains final
regulations that provide guidance under
section 336(e) of the Internal Revenue
Code (Code), which authorizes the
issuance of regulations under which an
election may be made to treat the sale,
exchange, or distribution of at least 80
percent of the voting power and value
of the stock of a corporation (target) as
a sale of all its underlying assets. These
regulations provide the terms and
conditions for making such an election
and the consequences of the election.
These regulations affect domestic
corporate sellers (seller), S corporation
shareholders, and domestic targets.
DATES: Effective Date: These regulations
are effective on May 15, 2013.
Applicability Date: These regulations
apply to any qualified stock disposition
for which the disposition date is on or
after May 15, 2013.
FOR FURTHER INFORMATION CONTACT:
Mark J. Weiss, (202) 622–7930 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
TKELLEY on DSK3SPTVN1PROD with RULES

SUMMARY:

Paperwork Reduction Act
The collection of information
contained in these final regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.

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3507(d)) under OMB control number
1545–2125. The collection of
information in these final regulations is
in §§ 1.336–2(h) and 1.336–4(c)(4). This
information is required by the IRS to
allow certain parties to make a section
336(e) election and for certain
shareholders to make a gain recognition
election.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by section
6103.
Background
Section 336(e) of the Code authorizes
the issuance of regulations under which
an election may be made to treat the
sale, exchange, or distribution of at least
80 percent of the voting power and
value of the stock of a corporation
(target) as a sale of all its underlying
assets. Section 336(e) was enacted as
part of General Utilities repeal. Similar
to an election under section 338(h)(10)
available with respect to certain
purchases of target stock, section 336(e)
is meant to provide taxpayers relief from
a potential multiple taxation of the same
economic gain that can result when a
transfer of appreciated corporate stock is
taxed without providing a
corresponding step-up in the basis of
the assets of the corporation. See H.R.
Conf. Rep. No. 841, 99th Cong., 2d Sess.,
Vol. II, 198, 204 (1986), 1986–3 CB, Vol.
4, 198– 207.
On August 25, 2008, the IRS and
Treasury Department published a notice
of proposed rulemaking in the Federal
Register (REG–143544–04, 2008–42 IRB
947 [73 FR 49965–02]) (the proposed
regulations) that, when finalized, would
permit certain taxpayers to make an
election to treat certain sales, exchanges,
and distributions of another
corporation’s stock as taxable sales of
that corporation’s assets.
Summary of Proposed Regulations
A. In General
Under the proposed regulations, an
election under section 336(e) is

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available for ‘‘qualified stock
dispositions’’ of domestic target stock by
domestic corporate sellers (seller). The
proposed regulations generally adopt
the structure and principles established
under section 338(h)(10) and the
underlying regulations. For example,
the proposed regulations generally
incorporate the rules of section 338
governing the allocation of
consideration in the resulting deemed
sale of the target’s assets and the
determination of target’s basis in its
underlying assets resulting from such
deemed sale. The proposed regulations
alter terms or concepts to reflect
principles and factual circumstances
relevant to section 336(e).
Unlike an election under section
338(h)(10), which is available only if
target stock is acquired by a corporate
purchaser, the proposed regulations do
not require an acquirer of target stock to
be a corporation, or even necessarily a
purchaser. Also unlike section
338(h)(10), which generally requires
that a single purchasing corporation
acquire the stock of a target, the
proposed regulations permit the
aggregation of all stock of a target that
is sold, exchanged, and distributed by a
seller to different acquirers for purposes
of determining whether there has been
a qualified stock disposition of a target.
B. Two Different Models for Deemed
Transactions
The proposed regulations provide two
different models for the deemed
transactions treated as occurring if a
section 336(e) election is made. The first
model generally follows the same
structure used for the deemed
transactions resulting from the making
of a section 338(h)(10) election (basic
model) and is applicable to all qualified
stock dispositions (including those
consisting of taxable distributions of
target stock) other than distributions
described in sections 355(d)(2) or
355(e)(2) (section 355(d)(2) and (e)(2)
transactions). Under the basic model,
target, while owned by the seller (old
target), is treated as selling all of its
assets to an unrelated person and new
target is treated as acquiring all of its
assets from an unrelated person at the
close of the date on which the threshold
amount of target stock is disposed
(deemed asset disposition). Old target
recognizes the Federal income tax
consequences from the deemed asset

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disposition before the close of the date
on which its stock was disposed. After
recognizing the tax consequences of the
deemed asset disposition, old target is
generally treated as liquidating into the
seller. In addition, to the extent that the
qualified stock disposition consisted of
one or more distributions (rather than
sales or exchanges) of the stock of a
target (other than in section 355(d)(2)
and (e)(2) transactions), the seller is
treated as acquiring directly from new
target an amount of new target stock
equal to the amount of target stock
distributed. The tax consequences of the
purchaser(s) generally are unaffected by
the section 336(e) election.
The second model adopted by the
proposed regulations for the deemed
transactions resulting from a section
336(e) election applies to section
355(d)(2) and (e)(2) transactions (sale-toself model). Under the sale-to-self
model, old target (the controlled
corporation) is deemed to remain in
existence; old target is treated as if it
sold its assets to an unrelated person
and then repurchased those assets.
Following the deemed asset disposition,
old target (the controlled corporation) is
not deemed to liquidate into seller (the
distributing corporation). Instead, after
old target’s deemed repurchase of its
own assets, seller is treated as
distributing the stock of old target to its
shareholders, with seller recognizing no
gain or loss. Because no liquidation of
old target into seller is deemed to occur,
old target will generally retain the tax
attributes it would have had if the
section 336(e) election had not been
made, adjusted for the creation or
absorption of attributes resulting from
the election.

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C. The Disallowed Loss Rule
The proposed regulations contain a
rule that disallows the recognition of
losses resulting from the deemed asset
disposition to the extent the qualified
stock disposition consisted of one or
more distributions of target stock
(disallowed loss rule). The preamble to
the proposed regulations explains that
the allowance of losses pursuant to a
deemed asset disposition may be
inconsistent with sections 311(a) and
355(c) because had the target stock been
distributed, any loss in the target stock
would not have been recognized
pursuant to these provisions.
D. Time and Manner of Making a
Section 336(e) Election
The time and manner of making a
section 336(e) election provided in the
proposed regulations also differed from
those for making an election under
section 338(h)(10). Noting that a joint

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election may be burdensome in cases
with multiple purchasers, the proposed
regulations provide that a section 336(e)
election is unilaterally made by a seller
attaching a statement to its timely filed
Federal income tax return for the
taxable year that includes the
disposition date.
Summary of Comments and
Explanation of Provisions
Written comments were received in
response to the proposed regulations. A
public hearing was not requested and
none was held. After consideration of
all the comments, the proposed
regulations are adopted as amended by
this Treasury decision. In general, the
final regulations follow the approach of
the proposed regulations with some
modifications. The more significant
comments and modifications are
discussed in this section.
A. The Disallowed Loss Rule
The IRS and Treasury Department
received several comments that the
disallowed loss rule of the proposed
regulations was too harsh and frustrated
the intent of mitigating multiple levels
of tax as envisioned by section 336(e).
According to the comments, the result
of the disallowed loss rule was that the
making of a section 336(e) election in
connection with a stock distribution
would be largely impractical. One
commenter also noted that the rationale
for the disallowed loss rule, namely,
that asset losses should not be allowed
because a loss in target stock would not
be recognized under sections 311(a) or
355(c), did not extend to a seller’s
distribution of target stock under section
336(a). This is because the seller
generally would recognize the loss with
respect to the target stock in such a case.
The comments suggested several
alternatives, including that realized
losses in the deemed asset disposition
should be netted against the amount of
realized gains and that to the extent
realized losses exceed realized gains,
the net loss should be deferred by
attaching the net loss to the basis of the
assets in target’s hands after the deemed
asset disposition.
After consideration of the comments,
the IRS and Treasury Department have
determined that the disallowed loss rule
as set forth in the proposed regulations
is broader in scope than necessary to
serve the purposes of section 336(e).
Accordingly, the final regulations
modify the rule of the proposed
regulations to generally permit target’s
realized losses in the deemed asset
disposition to offset the amount of
target’s realized gains. Thus, the
proposed regulations disallow a net loss

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of target (that is, losses realized in
excess of target’s realized gains)
recognized on a deemed asset
disposition, but only in proportion to
the portion of target stock that was
disposed of by seller in one or more
distributions.
The loss disallowance rule in the
proposed regulations only applied to
distributions that were taken into
account as part of the qualified stock
disposition on or before the disposition
date. Thus, stock distributions that
occurred after 80 percent of target was
disposed of were not subject to the loss
disallowance rule. The final regulations
modify the disallowed loss rule of the
proposed regulations to take into
account (1) target stock distributed at
any time within the 12-month
disposition period, not just on or before
the disposition date, and (2) target stock
distributed within the 12-month
disposition period that is not part of the
qualified stock disposition, such as
stock distributed to a related person.
The IRS and Treasury Department
believe that limiting disallowed losses
to stock distributed on or before the
disposition date could lead to
manipulation because sellers who
would otherwise distribute target stock
on the disposition date may delay the
distribution for the sole purpose of
decreasing the disallowed net loss
recognized by target. Further, if stock
distributions that are not part of the
qualified stock disposition, such as
distributions to a related person, were
not taken into account by the
disallowed loss rule, target would be
able to recognize a greater portion of its
net loss by distributing stock to a related
person than it would recognize if it
distributed the stock to an unrelated
person, a result that the IRS and
Treasury Department believe would be
improper. Accordingly, under the
disallowed loss rule of the final
regulations, if a section 336(e) election
is made and any stock of target is
distributed during the 12-month
disposition period, whether or not as
part of the qualified stock disposition,
any net loss attributable to such stock
distribution is disallowed.
The final regulations do not follow
the recommendation of some
commenters that any disallowed losses
be applied to increase the basis of
target’s assets after the deemed asset
disposition for two reasons. First, as
discussed elsewhere in this preamble,
Congressional intent in providing for a
section 336(e) election was to prevent
multiple taxation of gain. Congress was
not concerned with the preservation of
loss. Second, allowing the losses to be
deferred by adding the basis to target’s

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assets would create administrative
difficulties far outweighing the benefits,
and disallowing losses rather than
deferring losses is consistent with many
other provisions within subchapter C.
Accordingly, to the extent the
disallowed loss rule of the final
regulations applies, losses are allowed
up to the amount of gains and any
excess losses are permanently
disallowed.
B. Issues Relating to the Adopted
Models

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1. Basic Model for Non-Section
355(d)(2) or (e)(2) Transactions
In general, the final regulations retain
the rules of the proposed regulations
with respect to the deemed transactions
under the basic model. One commenter
expressed concern that in the case of a
distribution of stock as part of a
qualified stock disposition that does not
consist of section 355(d)(2) or (e)(2)
transactions, the step in the basic model
in which seller is deemed to purchase
from new target the new target stock
actually distributed might be combined
with old target’s deemed sale of its
assets to new target resulting in a
section 351 transaction with boot,
which could lead to unintended
consequences. The commenter also
questioned what new target is deemed
to do with the consideration it is
deemed to receive from seller in the
deemed stock acquisition. The
commenter suggested resolving these
issues by having seller be deemed to
purchase new target stock from
unrelated new target shareholders with
cash equal to the fair market value of the
distributed stock.
The IRS and Treasury Department
agree with the concerns of the
commenter. Accordingly, the final
regulations modify the proposed
regulations by providing that in a
distribution of target stock (and also
with respect to stock in target that seller
retains after the distribution date) seller
is deemed to purchase the new target
stock that is distributed or retained not
from new target but from an unrelated
person in a taxable transaction. Seller
will not recognize any gain or loss on
the deemed distribution of new target
stock and purchaser will have a fair
market value basis in new target stock
received without any possible
application of section 351.
2. Sale-to-Self Model for Transactions
Described in Section 355(d)(2) or (e)(2)
We received several comments
suggesting the removal of the sale-to-self
model and the extension of the
provisions of § 1.336–2(b)(1), with any

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necessary adjustments, to section
355(d)(2) or (e)(2) transactions.
Commenters stated that the sale-to-self
model added unnecessary complexity
and that existing law under section
312(h) and § 1.312–10 adequately
addresses the concern of having
sufficient earnings and profits to
allocate to the controlled corporation.
One commenter also suggested that to
the extent that the sale-to-self model is
driven by a desire to have the controlled
corporation retain its attributes, a
special section 381 rule could be created
to reach this result.
Although the IRS and Treasury
Department agree with the commenters
who pointed out that even if target was
treated as a new corporation after the
deemed sale of its assets, the rules of
section 312(h) and § 1.312–10 would
typically result in target having some
level of earnings and profits after the
distribution of its stock, the IRS and
Treasury Department still believe that
the sale-to-self model should be
retained. While the deemed transactions
resulting from the making of section
336(e) elections with respect to taxable
sales, exchanges, or distributions of
target stock could actually be
undertaken in a transaction involving
the sale, exchange, or distribution of the
assets of target, a transaction that
included an actual sale or distribution
of all the assets of target could not
qualify under section 355. Because a
deemed sale of assets to a new target
cannot actually be undertaken in section
355(d)(2) or (e)(2) transactions, and the
IRS and Treasury Department believe
that the predominant feature of the
section 336(e) election with respect to a
section 355(d)(2) or (e)(2) transaction is
the section 355 transaction, the
regulations adopt the sale-to-self model
and treat the transaction as the
distribution of old target stock.
Additionally, the IRS and Treasury
Department do not believe that the saleto-self model adds significant
complexity to the regulation; in fact, it
may reduce complexity. As the
commenters pointed out, if the IRS and
Treasury Department believe that
adjustments to the basic model would
have to be made to account for a section
355(d)(2) or (e)(2) transaction, those
adjustments, such as satisfying the fiveyear active trade or business
requirement and maintaining all section
381 attributes with target (not solely
earnings and profits), would require that
exceptions and special rules be added to
the basic model. These exceptions and
special rules would result in a
regulation that we believe would be
more complex than the sale-to-self
model. Furthermore, because it is likely

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that only an insubstantial number of
section 336(e) elections will be the
result of transactions actually described
in section 355(d)(2) or (e)(2) (although a
substantial number of protective
elections may be made), we believe that
putting the exceptions and special rules
into the provisions of § 1.336–2(b)(1) for
this limited number of cases would
create complexity or confusion for the
majority of taxpayers engaging in
transactions that are not described in
section 355(d)(2) or (e)(2). By separating
the regulation into two separate models,
taxpayers whose transaction does not
involve a section 355(d)(2) or (e)(2)
transaction may apply the regulation’s
provisions without having to concern
themselves with provisions that do not
apply to their transaction.
Commenters have suggested that if the
regulations retain the sale-to-self model,
the regulations should address the wash
sale rules of section 1091 and the antichurning rules of section 197(f)(9). For
example, old target’s deemed
disposition of stock or securities and
subsequent repurchase of the same stock
or securities could be treated as a wash
sale, which could then be subject to loss
disallowance under section 1091(a) as
well as the disallowed loss rule of these
regulations. Under the section 336(e)
regulations, the basis of the stock or
security deemed purchased by target
should be its fair market value, while
under section 1091(d), the basis would
be the basis of the stock or security
deemed transferred plus or minus any
difference in the sale and acquisition
price of the stock or security.
The IRS and Treasury Department do
not believe that adoption of the sale-toself model should cause sections
197(f)(9) or 1091 to apply to a section
336(e) election with respect to a section
355(d)(2) or (e)(2) transaction. Because
the deemed transactions resulting from
the making of a section 336(e) election
could not actually be undertaken in the
context of a section 355(d)(2) or (e)(2)
transaction, we do not believe that the
regulations should cause a section
336(e) election in the context of a
section 355(d)(2) or (e)(2) transaction to
result in the application of sections
197(f)(9) or 1091 to the extent that a
section 336(e) election outside the
context of a section 355(d)(2) or (e)(2)
transaction would not result in the
application of such sections.
Accordingly, the final regulations
provide that for purposes of section
197(f)(9), section 1091, and any other
provision designated in the Internal
Revenue Bulletin by the IRS, old target,
in its capacity as seller of assets in the
deemed asset disposition, is treated as a
separate and distinct taxpayer from, and

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unrelated to, old target in its capacity as
acquirer of assets in the subsequent
deemed purchase and for subsequent
periods. For example, if one of target’s
assets immediately before old target’s
deemed asset disposition was stock or
securities within the meaning of section
1091, old target, as seller of the stock or
securities in the deemed asset
disposition, is not treated for purposes
of section 1091 as the same taxpayer
that acquires substantially identical
stock or securities in the deemed
purchase of assets or that actually
acquires substantially identical stock or
securities in periods after the deemed
asset disposition. Therefore, section
1091 will not disallow any of old
target’s loss on the deemed sale of the
stock or securities as a result of either
old target’s deemed purchase of the
same stock or securities or an actual
purchase of substantially identical stock
or securities within the 30-day period
after the disposition date.
C. Time and Manner for Making the
Election
Commenters requested that the
unilateral seller election of the proposed
regulations be made into a joint election
between seller and target (acting in a
capacity for the purchasers). The
commenters expressed concern that a
unilateral election by seller could result
in unwanted results or unfair surprise to
target or purchaser. The proposed
regulations were premised on the view
that a unilateral election is supportable
because in sales or exchanges,
purchasers should be able to protect
their interests in any purchase contract;
in distributions, distributees’ interests
should generally be protected because of
the distributing corporation’s fiduciary
responsibilities to its shareholders.
However, in response to the comments,
the final regulations modify the rule of
the proposed regulations. Under the
final regulations, in order to make a
section 336(e) election, seller(s), or in
the case of an S corporation target, all
of the S corporation shareholders (see
section E of this preamble concerning
the availability of a section 336(e)
election for an S corporation target), and
target must enter into a written, binding
agreement to make a section 336(e)
election and a section 336(e) election
statement must be attached to the
relevant return. If seller(s) and target are
members of a consolidated group, the
election statement is filed on a timely
filed consolidated return and the
common parent of the consolidated
group must provide a copy of the
section 336(e) election statement to
target on or before the due date
(including extensions) of the

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consolidated group’s consolidated
Federal income tax return. If target is an
S corporation, the election statement is
filed on the S corporation’s timely filed
return. If seller and target are members
of an affiliated group but do not join in
the filing of a consolidated return, the
election statement is filed with both
seller’s and target’s timely filed returns.
By (1) requiring seller(s), or all the S
corporation shareholders, and target to
enter into a written, binding agreement,
(2) in the case of a consolidated group,
requiring the common parent of the
consolidated group to provide a copy of
the election statement to target, and (3)
in the case in which seller and target are
members of an affiliated group but do
not join in the filing of a consolidated
return, requiring both seller and target
to file the election statement on their
respective returns, the IRS and Treasury
Department believe that the final
regulations significantly reduce the
potential for unwanted results or unfair
surprise.
Several commenters also requested
changing the due date of the election
from the due date of the seller’s return
to the 15th day of the ninth month after
the disposition date, the same time for
making a section 338 election. The
commenters were concerned that the
due date in the proposed regulations
could result in many instances in which
target’s tax return would be due before
the due date for the election (because
target’s taxable year will close upon its
deemed dissolution), and therefore
target would be required to file its
return without knowing whether a
section 336(e) election was made. After
consideration of these comments, the
final regulations retain the rule that the
election must be made by the due date
of the relevant tax return. The IRS and
Treasury Department believe that a due
date of the 15th day of the ninth month
after the disposition date will add
administrative burden to both taxpayers
and the IRS. Such due date would
generally require that the election be
made prior to the filing of the tax return,
rather than on a tax return. It is
administratively beneficial for the IRS to
have the election made with the filing
of a return rather than in some manner
outside of the return. Additionally, an
accelerated due date would give
taxpayers less time in which to decide
whether an election is beneficial or
detrimental. The experience of the IRS
in administering section 338 has shown
that some taxpayers miss the due date
for making a section 338 election
because they wrongly believe that the
election is due with the income tax
return of the taxpayer. Further, except

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with respect to the election statement
filed by seller if seller and target are
members of the same affiliated group
but do not join in the filing of a
consolidated return, the due date for
filing the election statement now
coincides with the due date of the
return that includes the deemed
disposition tax consequences.
Accordingly, the final regulations do not
adopt this suggestion.
Because the general requirements for
who must file a section 336(e) election
statement have been modified from the
proposed regulations, these final
regulations provide detailed
requirements to assist taxpayers in
making a section 336(e) election for an
eligible subsidiary of target (target
subsidiary). See § 1.336–2(h)(4) and (5).
Some of these requirements are different
than those for making a section 336(e)
election for target subsidiaries under the
proposed regulations, which treated the
seller of the directly disposed of target
(ultimate seller) as the seller of the
target subsidiary for purposes of the
additional election statement to be
attached to the ultimate seller’s return.
Some of these requirements also differ
from those for making a section 338
election for target subsidiaries on Form
8023, which treats the purchasing
corporation(s) of the directly purchased
target as the purchasing corporation(s)
of any target subsidiary for purposes of
completing and signing a Form 8023 for
a target subsidiary that is filed outside
of any return. For example, if seller and
target are members of the seller
consolidated group but target subsidiary
is not, a section 336(e) election for target
subsidiary now requires that target
subsidiary be a party to either the
agreement entered into by seller and
target, or that target and target
subsidiary enter into a separate
agreement to make such election.
Because target subsidiary is not a
member of the same consolidated group
as target, the section 336(e) election for
target subsidiary requires that a section
336(e) election statement be attached to
both seller’s timely filed consolidated
Federal income tax return and the
timely filed Federal income tax return of
the target subsidiary.
The IRS intends to modify Form 8883,
which is currently entitled ‘‘Asset
Allocation Statement Under Section
338,’’ or create a new form, to include
an election under section 336(e).
However, until Form 8883 is modified
or a new form is created, old target and
new target should file Form 8883 to
report the results of the deemed asset
disposition, making appropriate
adjustments as necessary to account for
a section 336(e) election. Examples of

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appropriate adjustments include
treating a reference to Form 8023, a
qualified stock purchase, the acquisition
date, the 12-month acquisition period,
or the aggregate deemed sales price on
Form 8883 or the instructions thereto as
a reference to the section 336(e) election
statement, a qualified stock disposition,
the disposition date, the 12-month
disposition period, or the aggregate
deemed asset disposition price,
respectively. In the case of a section
336(e) election as the result of a
transaction described in section
355(d)(2) or (e)(2), old target should file
two Forms 8883 (or successor forms),
one in its capacity as the seller of assets
in the deemed asset disposition and one
in its capacity as the purchaser of assets
in the deemed purchase of assets under
the sale-to-self model.
D. Intragroup Sales, Exchanges, or
Distributions Prior to External Sales,
Exchanges, or Distributions and Section
355(f)
The proposed regulations requested
comments concerning an intragroup
sale, exchange, or distribution (an
‘‘intragroup transaction’’) prior to an
external sale, exchange, or distribution,
and also concerning the application of
section 355(f).
Generally, if the stock of a corporation
is sold or distributed within an affiliated
group and then is transferred outside
the affiliated group, a section 336(e)
election is not available for the
intragroup transaction because the
buyer and seller in the intragroup
transaction are related persons after the
disposition of target outside the
affiliated group. While a section 336(e)
election may be available for the
external transfer, the election could
result in the affiliated group
immediately recognizing multiple levels
of gain, both on target’s stock from the
intragroup transaction and on target’s
assets from the deemed asset
disposition. Section 1.1502–
13(f)(5)(ii)(C) provides an election (a
‘‘§ 1.1502–13(f)(5) election’’) in the case
of section 338(h)(10) and comparable
transactions. A § 1.1502–13(f)(5)
election allows taxpayers to treat the
deemed liquidation as the result of a
section 338(h)(10) election or an actual
liquidation as a taxable liquidation in
order to provide the consolidated group
with a stock loss to offset some, if not
all, of the intragroup seller’s stock gain
from the intragroup transaction. One
commenter asked for either a
clarification that a § 1.1502–13(f)(5)
election is available for section 336(e)
elections or that a similar election be
provided in these regulations. Another
commenter believed that the problem of

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multiple levels of tax could be solved by
permitting a section 336(e) election on
the intragroup transaction. With respect
to the latter comment, the IRS and
Treasury Department do not believe that
allowing a section 336(e) election on the
intragroup transaction is practical or
administrable. Allowing a section 336(e)
election would require special rules for
related persons (see discussion of
related party issues in section H of this
preamble); further, these transactions
could involve a significant time lapse
between the intragroup transaction and
external disposition. However, the IRS
and Treasury Department agree with the
first commenter that a taxpayer should
be able to make a § 1.1502–13(f)(5)
election to treat the deemed liquidation
of target into seller as a result of a
section 336(e) election as a taxable
liquidation. Although we believe that
under the general rule of § 1.336–1(a) of
the proposed regulations, a § 1.1502–
13(f)(5) election would be available for
a section 336(e) transaction without any
modification in the final regulations, to
remove any doubt the final regulations
modify § 1.1502–13(f)(5)(ii)(C) to clearly
provide that the election is available for
a section 336(e) election.
The IRS and Treasury Department
also acknowledge that an external
distribution under section 355(d)(2) or
(e)(2) that is preceded by an intragroup
transaction raises the same concerns as
those described in the preceding
paragraph, but a § 1.1502–13(f)(5)
election would not provide relief
because in a section 355(d)(2) or (e)(2)
transaction there is no deemed
liquidation of target. The IRS and
Treasury Department believe that the
rationale behind § 1.1502–13(f)(5) to
prevent multiple levels of taxation
exists just as much with a section 336(e)
election as a result of a section 355(d)(2)
or (e)(2) transaction as with a nonsection 355(d)(2) or (e)(2) transaction.
Therefore, the final regulations provide
that in the case of a section 355(d)(2) or
(e)(2) transaction that is preceded by an
intragroup transaction, for the limited
purpose of a § 1.1502–13(f)(5) election,
immediately after the deemed asset
disposition of target’s assets, target is
deemed to liquidate into seller, thus
providing seller with a stock loss that
can offset some or all of the group’s
intercompany gain with respect to the
intragroup transfer of target stock.
E. Elections for S Corporations
The proposed regulations do not
provide for a section 336(e) election
with respect to the sale of stock of an
S corporation. Commenters asked that,
just as a corporation that acquires stock
of an S corporation in a qualified stock

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28471

purchase may make a section 338(h)(10)
election, the ability to make a section
336(e) election be extended to S
corporation targets. Commenters noted
that the IRS and Treasury extended the
application of section 338(h)(10) to
qualified stock purchases of S
corporations and that Congress intended
that ‘‘under regulations, principles
similar to those of section 338(h)(10)
may be applied to taxable sales or
distributions of controlled corporation
stock.’’ See H.R. Conf. Rep. No. 841,
99th Cong., 2d Sess., Vol. II, 198, 204
(1986) [1986–3 CB, Vol. 4, 198, 204].
The IRS and Treasury Department
agree with the commenters that the
principles of the regulations
implementing section 338(h)(10) should
apply to the regulations implementing
section 336(e) elections. Accordingly,
these final regulations permit a section
336(e) election to be made for S
corporation targets and provide
additional and special rules to allow
section 336(e) elections to be made with
respect to S corporation targets.
If a section 338(h)(10) election is
made with respect to an S corporation
target, all of the S corporation
shareholders, including those who do
not sell their S corporation target stock,
must consent to the election. With
respect to a section 336(e) election, the
final regulations provide the same
requirement for purposes of making a
section 336(e) election. While S
corporation shareholders consent to a
section 338(h)(10) election by signing
Form 8023, to make a section 336(e)
election, the S corporation shareholders
do not file a section 336(e) election
statement. Instead, consent to make a
section 336(e) election is established by
all the S corporation shareholders,
including those who do not dispose of
their stock in the transaction, and target
entering into a written, binding
agreement to make the election, on or
before the due date (including
extensions) of the S corporation target’s
income tax return. The section 336(e)
election statement for an S corporation
target is filed with the income tax return
of the S corporation target.
If a section 336(e) election is made for
an S corporation target, old target’s S
election continues in effect through the
close of the disposition date (including
the time of the deemed asset disposition
and the deemed liquidation) at which
time old target’s S election terminates,
and old target ceases to exist. If new
target qualifies as a small business
corporation within the meaning of
section 1361(b) and wants to be an S
corporation, a new election for new
target under section 1362(a) must be
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F. Determination of AGUB and ADADP
A commenter requested that the
provisions in the proposed regulations
for determining the Aggregate Deemed
Asset Disposition Price (ADADP) and
Adjusted Grossed-Up Basis (AGUB) be
modified by grossing up the selling
costs among all stock of target in order
to determine ADADP and by grossing up
the acquisition costs among all stock of
target in order to determine AGUB. The
commenter also requested rules that
would disregard preferred stock in
determining the percentage of stock
disposed of in the qualified stock
disposition, and then add back the value
of the preferred stock in determining the
grossed-up amount realized.
With regard to grossing up the selling
costs and acquisition costs over all
target stock, this issue was specifically
addressed in the preamble to the
proposed section 338 regulations in
1999 (‘‘Grossing-up the selling
shareholders’ selling costs or the
purchasing corporation’s acquisition
costs would result in costs not actually
incurred reducing old target’s amount
realized for the assets or increasing new
target’s cost basis in the assets. . . .
[T]here is no evidence that the
purchasing corporation’s costs to
acquire an amount of target stock
sufficient for there to be a qualified
stock purchase would increase
proportionately if it acquired all of the
target stock . . .’’). See REG–107069–97,
1999–2 CB 346, 353. Accordingly, the
final regulations retain the rule of the
proposed regulations.
With regard to the preferred stock
issue, the determination of grossed-up
basis in section 338 is specifically
provided for in the Code, and Congress
included preferred stock in determining
the percentage of stock attributable to
recently purchased stock. The
regulations under section 338 apply the
same rule in determining grossed-up
amount realized. The IRS and the
Treasury Department believe that it is
appropriate to use the same
computation for purposes of a section
336(e) election. Accordingly, the final
regulations retain the rule of the
proposed regulations.

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G. Gain Recognition Elections
Under the proposed regulations, a
holder of nonrecently disposed stock
may make a gain recognition election,
similar to the gain recognition election
under section 338, which treats
nonrecently disposed stock as being
sold as of the disposition date. The gain
recognition election is mandatory if a
purchaser owns (after the application of
the rules of section 318(a), other than

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section 318(a)(4)), 80-percent or more of
the voting power or value of target
stock. Once made, a gain recognition
election is irrevocable. The proposed
regulations requested comments on
whether the rules regarding gain
recognition elections in the section
336(e) regulations are appropriate and
whether the gain recognition election
rules in regulations promulgated under
section 338 should continue to apply.
Only one comment was received on
this topic. The commenter was not sure
why rules relating to gain recognition
elections exist and believed they should
be eliminated in both section 338(h)(10)
and section 336(e). However, if this
decision was not made, the election
should be preserved for consistency in
both sections. After consideration of this
comment and further internal
consideration, the IRS and Treasury
Department have determined that the
final regulations should retain the rule
of the proposed regulations.
H. Related Party Rule
The proposed regulations provide that
a transaction is not a disposition (and
therefore is ineligible to count towards
a qualified stock disposition) if target
stock is sold, exchanged, or distributed
to a related person. The proposed
regulations, like the section 338
regulations, treat persons as related if
stock in a corporation owned by one of
the persons would be attributed to the
other person under section 318(a), other
than section 318(a)(4). Comments were
requested regarding dispositions to
related persons, including special rules
needed to prevent the use of net
operating losses to offset liquidation
gains, manipulation of earnings and
profits, and changes of accounting
methods.
The IRS and Treasury Department
received a wide range of comments,
most of which believed some type of
prohibition against section 336(e)
elections in the case of related party
transactions should be maintained.
However, the commenters also stated
that they believe that the definition of
related person in the proposed
regulations is too restrictive and should
deviate from the section 338 definition.
Commenters stated that unlike section
338, there is no statutory definition of
the term purchase, and the decision to
import the section 338 definition
restricts the ability of a section 336(e)
election to mitigate against multiple
levels of tax. Commenters point to the
fact that the legislative history does not
prohibit related party transactions, but
simply states that special rules may be
needed to police certain situations (for
example, rules prohibiting net operating

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loss refreshing, avoiding separate return
limitation year rules, and triggering
built-in gains to offset net operating
losses otherwise limited by section 382).
Suggestions made to modify the related
party definition included (a) use of the
existing section 338(h)(3)(A)(iii)
definition, but limiting upstream and
downstream partnership attribution to
partners owning a specified percentage
of the partnership and then only if the
partnership bears some economic
relationship to the transaction; (b)
defining related persons by reference to
whether the transaction that would be
deemed to occur constitutes a
nondivisive D reorganization or certain
types of triangular C reorganizations
using section 304(c) control; (c) defining
related persons using section 267
principles; or (d) implementing some
type of anti-abuse rule.
The IRS and Treasury Department
reviewed the comments received and
continue to have concerns about the
administrability and complexity of rules
that would be needed to permit related
party transactions. However, the IRS
and Treasury Department do agree that
the attribution rules with respect to
partnerships are more inclusive than is
necessary for the purpose of these
regulations. Because the attribution
rules in section 318(a) with respect to
partnerships do not have a minimum
ownership threshold, a situation in
which one partner holds a very small
ownership in two different partnerships
that own purchaser and seller,
respectively, could, under the proposed
regulations, prevent the making of a
section 336(e) election on the sale of the
stock of target to purchaser. Although
some of the same concerns exist with
respect to a section 338(h)(10) election,
in such case, the statute clearly
prohibits a section 338(h)(10) election.
With respect to a section 336(e) election,
there is no statutory prohibition, and the
IRS and Treasury Department agree with
the comments received that deemed
asset disposition treatment should not
be prohibited if cross ownership is
minimal. While each of the suggested
approaches for modifying the attribution
rules have merit, the IRS and Treasury
Department believe that the best manner
for addressing the commenters’
concerns is to modify the definition of
related persons as pertaining to
partnerships by providing that, solely
for purposes of determining whether
purchaser and seller are related for
purposes of section 336(e), the
attribution rules of sections 318(a)(2)(A)
and 318(a)(3)(A) will not apply to
attribute stock ownership from a
partnership to a partner, or from a

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partner to a partnership if such partner
owns, directly or indirectly, less than
five percent of the value of the
partnership. A five-percent threshold is
within the range suggested by comments
for limiting upstream and downstream
attribution under section 318(a) between
partners and partnerships, and is
consistent with the five-percent
threshold of constructive ownership
rules under sections 267(e)(3) and
1562(e)(2) relevant to partners and
partnerships. The IRS and Treasury
Department will continue to study
whether related party transactions
should qualify for a section 336(e)
election.
I. Scope of Regulations
The proposed regulations look to and
build upon section 338(h)(10) principles
and guidelines that address taxable sales
and exchanges of target stock. The
proposed regulations expanded the
section 338(h)(10) model to include
fully taxable distributions and section
355(d)(2) and (e)(2) distributions. All of
these transactions involve a basic
taxable event relating to target’s stock
that is disregarded and in its place a sale
of target’s assets takes place.
Commenters asked the IRS and
Treasury Department to extend a section
336(e) election to transactions in which
the corporate level of tax is duplicated
by other transactions, for example
section 351 exchanges or certain tax-free
reorganizations, so that the section
336(e) election can be used to turn two
potential levels of tax into one.
Commenters cited language from the
legislative history to section 336(e),
which discusses a section 336(e)
election in both the context of General
Utilities repeal and the desire to avoid
multiple levels of corporate tax. ‘‘This
provision offers taxpayers relief from a
potential multiple taxation at the
corporate level of the same economic
gain, which may result when a transfer
of appreciated corporate stock is taxed
without providing a corresponding stepup in basis of the assets of the
corporation.’’ H.R. Conf. Rep. No. 841,
99th Cong., 2d Sess., Vol. II, 198, 204
(1986) [1986–3 CB, Vol. 4, 198, 204].
The IRS and Treasury Department
believe that the commenters have raised
some valid concerns and have
considered whether the scope of the
regulations should be broadened to
include certain non-taxable transactions
and if so, how the regulations would
address those transactions. The issues
involved are very complex. The IRS and
Treasury Department believe that
addressing these concerns in these final
regulations would significantly delay
the finalization of these regulations,

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thus preventing taxpayers whose
transactions are within the scope of the
proposed regulations from making a
section 336(e) election until the rules
and regulations, if any, for non-taxable
transactions are also promulgated. Such
delay would not be in the best interests
of taxpayers as a whole. Accordingly,
these final regulations do not permit an
election to be made in non-taxable
transfers of target stock. However, the
IRS and Treasury Department will
continue to study this issue and may
address the issue in future guidance. We
welcome any comments concerning this
issue, including recommendations not
just on the scope of the regulations, but
on specific means and models for
implementing such suggestions.
J. International Provisions
1. Application to Foreign Targets
The proposed regulations do not
apply to transactions in which either
seller or target is a foreign corporation.
Comments were requested regarding
how the proposed regulations should be
modified to take into account the
policies of international tax provisions
if the proposed regulations were
extended to apply to foreign sellers and/
or foreign targets. The IRS and the
Treasury Department received
comments in response to this request.
For reasons similar to those discussed
concerning extending the scope of these
regulations to non-taxable transactions,
these final regulations retain the
requirements in the proposed
regulations that seller and target must be
domestic corporations. However, the
IRS and the Treasury Department will
continue to study the application of
section 336(e) to transactions in which
either seller or target is a foreign
corporation and may consider
expanding the scope of the regulations
to address these transactions in future
guidance.
2. Allocation of Foreign Taxes Paid
The proposed regulations provide that
if a section 336(e) election is made and
target’s taxable year under foreign law
(if any) does not close at the end of the
disposition date, foreign income taxes
paid by new target attributable to the
foreign taxable income earned by target
during such foreign taxable year are
allocated to old target and new target
under the principles of § 1.1502–76(b).
The proposed rule is consistent with a
similar rule in § 1.338–9(d) for
allocating foreign tax paid by a target
that is acquired in a transaction that is
treated as an asset acquisition pursuant
to an election under section 338 if the
foreign taxable year of target does not

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close at the end of the acquisition date.
In addition, regulations under section
901, which were published on February
14, 2012, provide foreign tax allocation
rules, consistent with § 1.338–9(d), for
certain changes in ownership of a
partnership or disregarded entity during
the entity’s foreign taxable year. See
§ 1.901–2(f)(4). The final regulations at
§ 1.336–2(g)(3)(ii) reflect modifications
made to achieve consistency with
§ 1.901–2(f)(4). The regulations also
provide that if target holds an interest in
a disregarded entity or partnership, the
rules of § 1.901–2(f)(4) apply with
respect to foreign tax imposed at the
entity level on the income of such
entities. The IRS and Treasury
Department intend to issue future
guidance that will make similar
modifications to § 1.338–9(d).
Section 212 of the legislation
commonly referred to as the Education
Jobs and Medicaid Assistance Act of
2010, enacted on August 10, 2010 (Pub.
L. 111–226), added section 901(m) to
the Code. Section 901(m)(1) provides, in
part, that in the case of a covered asset
acquisition, the disqualified portion of
any foreign income taxes determined
with respect to the income or gain
attributable to a relevant foreign asset
shall not be taken into account in
determining the foreign tax credit
allowed under section 901(a). Section
901(m)(2)(B) defines a covered asset
acquisition to include any transaction
that is treated as an acquisition of assets
for U.S. income tax purposes and as the
acquisition of stock of a corporation (or
is disregarded) for purposes of a foreign
income tax. Because a section 336(e)
election for target is treated as an
acquisition of assets for U.S. income tax
purposes, and is treated as the
acquisition of stock of a corporation (or
is disregarded in the case of tiered
section 336(e) elections) for foreign tax
purposes, a section 336(e) election for a
target corporation is a covered asset
acquisition. See Staff of the Joint
Committee on Taxation, Technical
Explanation of the Revenue Provisions
of the Senate Amendment to the House
Amendment to the Senate Amendment
to H.R. 1586, Scheduled for
Consideration by the House of
Representatives on August 10, 2010, at
13, footnote 55 (August 10, 2010).
Accordingly, the final regulations
contain a cross-reference to the rules
under section 901(m), which, for
example, could apply if target has
foreign branch operations.
K. Retained Stock
The proposed regulations provide that
if seller retains any stock in target after
the 12-month disposition period, seller

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is treated as purchasing the stock so
retained on the day after the disposition
date. The proposed regulations provide
the holding period and purchase price
(and thus the basis) of the retained
stock. The regulations under
§ 1.338(h)(10)–1 provide a similar rule
concerning retained stock, with the
exception that the § 1.338(h)(10)–1 rule
only requires that the stock be retained
after the acquisition date. Under the
proposed regulations, if seller sells,
exchanges, or distributes less than all of
its stock prior to the disposition date,
but sells, exchanges, or distributes
additional stock after the disposition
date but before the end of the 12-month
disposition period, the regulations are
silent as to holding period and purchase
price (and thus the basis) of such stock.
If the later transaction is part of the
qualified stock disposition, the basis
and holding period may not be relevant,
because no gain or loss is recognized on
that transaction. However, if the stock is
transferred in a transaction not part of
the qualified stock disposition, such as
a sale to a related person, the basis and
holding period will be relevant. After
considering this matter, the IRS and
Treasury Department have determined
that the rule in the § 1.338(h)(10)–1
regulations, providing that stock is
retained if seller owns the stock after the
acquisition date, should be adopted by
the regulations under section 336(e).
Accordingly, the final regulations
modify the rule of the proposed
regulations, so that stock is retained if
owned by seller after the disposition
date.
L. Consistency Rules
The proposed regulations generally
follow the structure and policies of
section 338(h)(10), including the
application of the consistency rules of
§ 1.338–8. In general, § 1.338–8 provides
that if (1) a purchasing corporation (or
an affiliate) acquires an asset meeting
certain requirements from target (or a
subsidiary of target) in a sale during the
target consistency period, (2) gain from
the sale is reflected in the basis of target
stock as of the target acquisition date,
and (3) the purchasing corporation
acquires stock of target in a qualified
stock purchase (but does not make a
section 338 election), then the
purchasing corporation is required to
take a carryover basis in the acquired
asset.
Commenters have asked how the
consistency rules apply to qualified
stock dispositions. Commenters
expressed concern that although
§ 1.338–8(b)(1)(iii) requires that the
same corporate purchaser (or an
affiliate) acquire both stock of target and

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an asset of target (or a subsidiary of
target), because, unlike section 338,
section 336(e) does not require a single
corporate purchaser of 80 percent of the
stock of target, the consistency rules
could apply to any purchase of an asset
of target (or a subsidiary of target) if
there was also a qualified stock
disposition of target, regardless of
whether the purchaser of the asset was
also the purchaser of target stock. That
is, the regulations would be
unnecessarily broad. Alternatively, the
regulations could be viewed as too
narrow because the consistency rules of
§ 1.338–8, by their terms, only apply to
corporate purchasers.
The IRS and Treasury Department
agree with the commenters’ concerns
about the potential breadth of the
consistency rules as applied to section
336(e). We do not believe that the
purposes of the consistency rules
mandate a carryover basis for an asset
unless the same person (or a related
person) acquires both the asset of the
target (or subsidiary of target) and more
than a minimal amount of the stock of
target. In addition, it would be
inappropriate to limit the consistency
rules for purposes of section 336(e) to
corporate purchasers. Accordingly, the
final regulations provide that the
consistency rules apply to an asset only
if the asset is owned, immediately after
its acquisition and on the disposition
date, by a person (or by a related person
to such a person) that acquires five
percent or more, by value, of the stock
of target in a qualified stock disposition.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866, as
supplemented by Executive Order
13563. Therefore, a regulatory
assessment is not required. Further, it is
hereby certified that these final
regulations will not have a significant
economic impact on a substantial
number of small entities. This
certification is based on the fact that
these regulations do not have a
substantial economic impact because
they merely provide for an election in
the context of certain sales, exchanges,
and distributions of stock of
corporations. The collections of
information may affect small businesses
if the stock of a corporation that is a
small entity is disposed of in a qualified
stock disposition. The regulations
permit an election to be filed in order
to treat a stock sale as an asset sale, and
impose the same type of requirements
on small businesses as section
338(h)(10). The professional skills that

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would be necessary to make the election
would be the same as those required to
prepare a return for the small business.
Accordingly, a Regulatory Flexibility
Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f)
of the Code, these final regulations, as
well as the proposed regulations
preceding these final regulations, were
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business, and no
comments were received.
Drafting Information
The principal author of these
regulations is Mark J. Weiss of the Office
of Associate Chief Counsel (Corporate).
Other personnel from the IRS and
Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
in numerical order to read in part as
follows:

■

Authority: 26 U.S.C. 7805 * * *
Section 1.336–1 is also issued under 26
U.S.C. 336. * * *
Section 1.336–2 is also issued under 26
U.S.C. 336. * * *
Section 1.336–3 is also issued under 26
U.S.C. 336. * * *
Section 1.336–4 is also issued under 26
U.S.C. 336. * * *
Section 1.336–5 is also issued under 26
U.S.C. 336. * * *

Par. 2. Sections 1.336–0 through
1.336–5 are added to read as follows:

■

§ 1.336–0

Table of contents.

This section lists captions contained
in §§ 1.336–1, 1.336–2, 1.336–3, 1.336–
4, and 1.336–5.
§ 1.336–1 General principles, nomenclature,
and definitions for a section 336(e)
election.
(a) Overview.
(1) In general.
(2) Consistency rules.
(b) Definitions.
(1) Seller.
(2) Purchaser.
(3) Target; S corporation target; old target;
new target.
(4) S corporation shareholders.
(5) Disposed of; disposition.

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(i) In general.
(ii) Exception for disposition of stock in
certain section 355 transactions.
(iii) Transactions with related persons.
(iv) No consideration paid.
(v) Disposed of stock reacquired by certain
persons.
(6) Qualified stock disposition.
(i) In general.
(ii) Overlap with qualified stock purchase.
(A) In general.
(B) Exception.
(7) 12-month disposition period.
(8) Disposition date.
(9) Disposition date assets.
(10) Domestic corporation.
(11) Section 336(e) election.
(12) Related persons.
(13) Liquidation.
(14) Deemed asset disposition.
(15) Deemed disposition tax consequences.
(16) 80-percent purchaser.
(17) Recently disposed stock.
(18) Nonrecently disposed stock.
(c) Nomenclature.
§ 1.336–2 Availability, mechanics, and
consequences of section 336(e) election.
(a) Availability of election.
(b) Deemed transaction.
(1) Dispositions not described in section
355(d)(2) or (e)(2).
(i) Old target—deemed asset disposition.
(A) In general.
(B) Gains and losses.
(1) Gains.
(2) Losses.
(i) In general.
(ii) Stock distributions.
(iii) Amount and allocation of disallowed
loss.
(iv) Tiered targets.
(3) Examples.
(C) Tiered targets.
(ii) New target—deemed purchase.
(iii) Old target and seller—deemed
liquidation.
(A) In general.
(B) Tiered targets.
(iv) Seller—distribution of target stock.
(v) Seller—retention of target stock.
(2) Dispositions described in section
355(d)(2) or (e)(2).
(i) Old target—deemed asset disposition.
(A) In general.
(1) Old target not deemed to liquidate.
(2) Exception.
(B) Gains and losses.
(1) Gains.
(2) Losses.
(i) In general.
(ii) Stock distributions.
(iii) Amount and allocation of disallowed
loss.
(iv) Tiered targets.
(3) Examples.
(C) Tiered targets.
(ii) Old target—deemed purchase.
(A) In general.
(B) Tiered targets.
(C) Application of section 197(f)(9), section
1091, and other provisions to old target.
(iii) Seller—distribution of target stock.
(A) In general.
(B) Tiered targets.
(iv) Seller—retention of target stock.
(v) Qualification under section 355.

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(vi) Earnings and profits.
(c) Purchaser.
(d) Minority shareholders.
(1) In general.
(2) Sale, exchange, or distribution of target
stock by a minority shareholder.
(3) Retention of target stock by a minority
shareholder.
(e) Treatment consistent with an actual
asset disposition.
(f) Treatment of target under other
provisions of the Internal Revenue Code.
(g) Special rules.
(1) Target as two corporations.
(2) Treatment of members of a consolidated
group.
(3) International provisions.
(i) Source and foreign tax credit.
(ii) Allocation of foreign taxes.
(A) General rule.
(B) Taxes imposed on partnerships and
disregarded entities.
(iii) Disallowance of foreign tax credits
under section 901(m).
(h) Making the section 336(e) election.
(1) Consolidated group.
(2) Non-consolidated/non-S corporation
target.
(3) S corporation target.
(4) Tiered targets.
(5) Section 336(e) election statement.
(i) In general.
(ii) Target subsidiaries.
(6) Contents of section 336(e) election
statement.
(7) Asset Allocation Statement.
(8) Examples.
(i) [Reserved].
(j) Protective section 336(e) election.
(k) Examples.
§ 1.336–3 Aggregate deemed asset
disposition price; various aspects of
taxation of the deemed asset disposition.
(a) Scope.
(b) Determination of ADADP.
(1) General rule.
(2) Time and amount of ADADP.
(i) Original determination.
(ii) Redetermination of ADADP.
(c) Grossed-up amount realized on the
disposition of recently disposed stock of
target.
(1) Determination of amount.
(2) Example.
(d) Liabilities of old target.
(1) In general.
(2) Time and amount of liabilities.
(e) Deemed disposition tax consequences.
(f) Other rules apply in determining
ADADP.
(g) Examples.
§ 1.336–4 Adjusted grossed-up basis.
(a) Scope.
(b) Modifications to the principles in
§ 1.338–5.
(1) Purchasing corporation; purchaser.
(2) Acquisition date; disposition date.
(3) Section 338 election; section 338(h)(10)
election; section 336(e) election.
(4) New target; old target.
(5) Recently purchased stock; recently
disposed stock.
(6) Nonrecently purchased stock;
nonrecently disposed stock.
(c) Gain recognition election.

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(1) In general.
(2) 80-percent purchaser.
(3) Non-80-percent purchaser.
(4) Gain recognition election statement.
(d) Examples.
§ 1.336–5 Effective/applicability date.
§ 1.336–1 General principles,
nomenclature, and definitions for a section
336(e) election.

(a) Overview—(1) In general. Section
336(e) authorizes the promulgation of
regulations under which, in certain
circumstances, a sale, exchange, or
distribution of the stock of a corporation
may be treated as an asset sale. This
section and §§ 1.336–2 through 1.336–5
provide the rules for and consequences
of making such election. This section
provides the definitions and
nomenclature. Generally, except to the
extent inconsistent with section 336(e),
the results of section 336(e) should
coincide with those of section
338(h)(10). Accordingly, to the extent
not inconsistent with section 336(e) or
these regulations, the principles of
section 338 and the regulations under
section 338 apply for purposes of these
regulations. For example,
§ 1.338(h)(10)–1(d)(8), concerning the
availability of the section 453
installment method, may apply with
respect to section 336(e).
(2) Consistency rules. In general, the
principles of § 1.338–8, concerning asset
and stock consistency, apply with
respect to section 336(e). However, for
this purpose, the application of § 1.338–
8(b)(1) is modified such that § 1.338–
8(b)(1)(iii) applies to an asset if the asset
is owned, immediately after its
acquisition and on the disposition date,
by a person or by a related person (as
defined in § 1.336–1(b)(12)) to a person
that acquires, by sale, exchange,
distribution, or any combination
thereof, five percent or more, by value,
of the stock of target in the qualified
stock disposition.
(b) Definitions. For purposes of
§§ 1.336–1 through 1.336–5 (except as
otherwise provided):
(1) Seller. The term seller means any
domestic corporation that makes a
qualified stock disposition of stock of
another corporation. Seller includes
both a transferor and a distributor of
target stock. Generally, all members of a
consolidated group that dispose of target
stock are treated as a single seller. See
§ 1.336–2(g)(2).
(2) Purchaser. The term purchaser
means one or more persons that acquire
or receive the stock of another
corporation in a qualified stock
disposition. A purchaser includes both
a transferee and a distributee of target
stock.

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(3) Target; S corporation target; old
target; new target. The term target
means any domestic corporation the
stock of which is sold, exchanged, or
distributed in a qualified stock
disposition. An S corporation target is a
target that is an S corporation
immediately before the disposition date;
any other target is a non-S corporation
target. Except as the context otherwise
requires, a reference to target includes a
reference to an S corporation target. In
the case of a transaction not described
in section 355(d)(2) or (e)(2), old target
refers to target for periods ending on or
before the close of target’s disposition
date and new target refers to target for
subsequent periods. In the case of a
transaction described in section
355(d)(2) or (e)(2), old target refers to
target for periods ending on or before
the disposition date as well as for
subsequent periods.
(4) S corporation shareholders. S
corporation shareholders are the S
corporation target’s shareholders.
Unless otherwise provided, a reference
to S corporation shareholders refers
both to S corporation shareholders who
dispose of and those who do not dispose
of their S corporation target stock.
(5) Disposed of; disposition—(i) In
general. The term disposed of refers to
a transfer of stock in a disposition. The
term disposition means any sale,
exchange, or distribution of stock, but
only if—
(A) The basis of the stock in the hands
of the purchaser is not determined in
whole or in part by reference to the
adjusted basis of such stock in the
hands of the person from whom the
stock is acquired or under section
1014(a) (relating to property acquired
from a decedent);
(B) Except as provided in paragraph
(b)(5)(ii) of this section, the stock is not
sold, exchanged, or distributed in a
transaction to which section 351, 354,
355, or 356 applies and is not sold,
exchanged, or distributed in any
transaction described in regulations in
which the transferor does not recognize
the entire amount of the gain or loss
realized in the transaction; and
(C) The stock is not sold, exchanged,
or distributed to a related person.
(ii) Exception for disposition of stock
in certain section 355 transactions.
Notwithstanding paragraph (b)(5)(i)(B)
of this section, a distribution of stock to
a person who is not a related person in
a transaction in which the full amount
of stock gain would be recognized
pursuant to section 355(d)(2) or (e)(2)
shall be considered a disposition.
(iii) Transactions with related
persons. In determining whether stock
is sold, exchanged, or distributed to a

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related person, the principles of section
338(h)(3)(C) and § 1.338–3(b)(3) shall
apply.
(iv) No consideration paid. Stock in
target may be considered disposed of if,
under general principles of tax law,
seller is considered to sell, exchange, or
distribute stock of target
notwithstanding that no amount may be
paid for (or allocated to) the stock.
(v) Disposed of stock reacquired by
certain persons. Stock disposed of by
seller to another person under this
section that is reacquired by seller or a
member of seller’s consolidated group
during the 12-month disposition period
shall not be considered as disposed of.
Similarly, stock disposed of by an S
corporation shareholder to another
person under this section that is
reacquired by the S corporation
shareholder or by a person related
(within the meaning of paragraph (b)(12)
of this section) to the S corporation
shareholder during the 12-month
disposition period shall not be
considered as disposed of.
(6) Qualified stock disposition—(i) In
general. The term qualified stock
disposition means any transaction or
series of transactions in which stock
meeting the requirements of section
1504(a)(2) of a domestic corporation is
either sold, exchanged, or distributed, or
any combination thereof, by another
domestic corporation or by the S
corporation shareholders in a
disposition, within the meaning of
paragraph (b)(5) of this section, during
the 12-month disposition period.
(ii) Overlap with qualified stock
purchase—(A) In general. Except as
provided in paragraph (b)(6)(ii)(B) of
this section, a transaction satisfying the
definition of a qualified stock
disposition under paragraph (b)(6)(i) of
this section, which also qualifies as a
qualified stock purchase (as defined in
section 338(d)(3)), will not be treated as
a qualified stock disposition.
(B) Exception. If, as a result of the
deemed sale of old target’s assets
pursuant to a section 336(e) election,
there would be, but for paragraph
(b)(6)(ii)(A) of this section, a qualified
stock disposition of the stock of a
subsidiary of target, then paragraph
(b)(6)(ii)(A) shall not apply to the
disposition of the stock of the
subsidiary.
(7) 12-month disposition period. The
term 12-month disposition period
means the 12-month period beginning
with the date of the first sale, exchange,
or distribution of stock included in a
qualified stock disposition.
(8) Disposition date. The term
disposition date means, with respect to
any corporation, the first day on which

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there is a qualified stock disposition
with respect to the stock of such
corporation.
(9) Disposition date assets.
Disposition date assets are the assets of
target held at the beginning of the day
after the disposition date (but see
§ 1.338–1(d) (regarding certain
transactions on the disposition date)).
(10) Domestic corporation. The term
domestic corporation has the same
meaning as in § 1.338–2(c)(9).
(11) Section 336(e) election. A section
336(e) election is an election to apply
section 336(e) to target. A section 336(e)
election is made by making an election
for target under § 1.336–2(h).
(12) Related persons. Two persons are
related if stock of a corporation owned
by one of the persons would be
attributed under section 318(a), other
than section 318(a)(4), to the other.
However, neither section 318(a)(2)(A)
nor section 318(a)(3)(A) apply to
attribute stock ownership from a
partnership to a partner, or from a
partner to a partnership, if such partner
owns, directly or indirectly, interests
representing less than five percent of the
value of the partnership.
(13) Liquidation. Any reference to a
liquidation is treated as a reference to
the transfer described in § 1.336–
2(b)(1)(iii) notwithstanding its ultimate
characterization for Federal income tax
purposes.
(14) Deemed asset disposition. The
deemed sale of old target’s assets is,
without regard to its characterization for
Federal income tax purposes, referred to
as the deemed asset disposition.
(15) Deemed disposition tax
consequences. Deemed disposition tax
consequences refers to, in the aggregate,
the Federal income tax consequences
(generally, the income, gain, deduction,
and loss) of the deemed asset
disposition. Deemed disposition tax
consequences also refers to the Federal
income tax consequences of the transfer
of a particular asset in the deemed asset
disposition.
(16) 80-percent purchaser. An 80percent purchaser is any purchaser that,
after application of the attribution rules
of section 318(a), other than section
318(a)(4), owns 80 percent or more of
the voting power or value of target
stock.
(17) Recently disposed stock. The
term recently disposed stock means any
stock in target that is not held by seller,
a member of seller’s consolidated group,
or an S corporation shareholder
immediately after the close of the
disposition date and that was disposed
of by seller, a member of seller’s
consolidated group, or an S corporation

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shareholder during the 12-month
disposition period.
(18) Nonrecently disposed stock. The
term nonrecently disposed stock means
stock in target that is held on the
disposition date by a purchaser or a
person related (as described in § 1.336–
1(b)(12)) to the purchaser who owns, on
the disposition date, with the
application of section 318(a), other than
section 318(a)(4), at least 10 percent of
the total voting power or value of the
stock of target and that is not recently
disposed stock.
(c) Nomenclature. For purposes of
§§ 1.336–1 through 1.336–5, except as
otherwise provided, Parent, Seller,
Target, Sub, S Corporation Target, and
Target Subsidiary are domestic
corporations and A, B, C, and D are
individuals, none of whom are related
to Parent, Seller, Target, Sub, S
Corporation Target, Target Subsidiary,
or each other.

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§ 1.336–2 Availability, mechanics, and
consequences of section 336(e) election.

(a) Availability of election. A section
336(e) election is available if seller or S
corporation shareholder(s) dispose of
stock of another corporation (target) in
a qualified stock disposition (as defined
in § 1.336–1(b)(6)). A section 336(e)
election is irrevocable. A section 336(e)
election is not available for transactions
described in section 336(e) that do not
constitute qualified stock dispositions.
(b) Deemed transaction—(1)
Dispositions not described in section
355(d)(2) or (e)(2)—(i) Old target—
deemed asset disposition—(A) In
general. This paragraph (b)(1) provides
the Federal income tax consequences of
a section 336(e) election made with
respect to a qualified stock disposition
not described, in whole or in part, in
section 355(d)(2) or (e)(2). For the
Federal income tax consequences of a
section 336(e) election made with
respect to a qualified stock disposition
described, in whole or in part, in section
355(d)(2) or (e)(2), see paragraph (b)(2)
of this section. In general, if a section
336(e) election is made, seller (or S
corporation shareholders) are treated as
not having sold, exchanged, or
distributed the stock disposed of in the
qualified stock disposition. Instead, old
target is treated as selling its assets to an
unrelated person in a single transaction
at the close of the disposition date (but
before the deemed liquidation described
in paragraph (b)(1)(iii) of this section) in
exchange for the aggregate deemed asset
disposition price (ADADP) as
determined under § 1.336–3. ADADP is
allocated among the disposition date
assets in the same manner as the
aggregate deemed sale price (ADSP) is

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allocated under §§ 1.338–6 and 1.338–7
in order to determine the amount
realized from each of the sold assets.
Old target realizes the deemed
disposition tax consequences from the
deemed asset disposition before the
close of the disposition date while old
target is owned by seller or the S
corporation shareholders. If old target is
an S corporation target, old target’s S
election continues in effect through the
close of the disposition date (including
the time of the deemed asset disposition
and the deemed liquidation)
notwithstanding section 1362(d)(2)(B).
Also, if old target is an S corporation
target (but not a qualified subchapter S
subsidiary), any direct or indirect
subsidiaries of old target that old target
has elected to treat as qualified
subchapter S subsidiaries under section
1361(b)(3) remain qualified subchapter
S subsidiaries through the close of the
disposition date.
(B) Gains and losses—(1) Gains.
Except as provided in § 1.338(h)(10)–
1(d)(8) (regarding the installment
method), old target shall recognize all of
the gains realized on the deemed asset
disposition.
(2) Losses—(i) In general. Except as
provided in paragraphs (b)(1)(i)(B)(2)(ii),
(iii), and (iv) of this section, old target
shall recognize all of the losses realized
on the deemed asset disposition.
(ii) Stock distributions.
Notwithstanding paragraphs (b)(1)(i)(A)
and (b)(1)(iii)(A) of this section, for
purposes of determining the amount of
target’s losses that are disallowed on the
deemed asset disposition, seller is still
treated as selling, exchanging, or
distributing its target stock disposed of
in the 12-month disposition period. If
target’s losses realized on the deemed
sale of all of its assets exceed target’s
gains realized (a net loss), the portion of
such net loss attributable to a
distribution of target stock during the
12-month disposition period is
disallowed. The total amount of
disallowed loss and the allocation of
disallowed loss is determined in the
manner provided in paragraphs
(b)(1)(i)(B)(2)(iii) and (iv) of this section.
(iii) Amount and allocation of
disallowed loss. The total disallowed
loss pursuant to paragraph
(b)(1)(i)(B)(2)(ii) of this section shall be
determined by multiplying the net loss
realized on the deemed asset disposition
by the disallowed loss fraction. The
numerator of the disallowed loss
fraction is the value of target stock,
determined on the disposition date,
distributed by seller during the 12month disposition period, whether or
not a part of the qualified stock
disposition (for example, stock

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distributed to a related person), and the
denominator of the disallowed loss
fraction is the sum of the value of target
stock, determined on the disposition
date, disposed of by sale or exchange in
the qualified stock disposition during
the 12-month disposition period and the
value of target stock, determined on the
disposition date, distributed by seller
during the 12-month disposition period,
whether or not a part of the qualified
stock disposition. The amount of the
disallowed loss allocated to each asset
disposed of in the deemed asset
disposition is determined by
multiplying the total amount of the
disallowed loss by the loss allocation
fraction. The numerator of the loss
allocation fraction is the amount of loss
realized with respect to the asset and
the denominator of the loss allocation
fraction is the sum of the amount of
losses realized with respect to each loss
asset disposed of in the deemed asset
disposition. To the extent old target’s
losses from the deemed asset
disposition are not disallowed under
this paragraph, such losses may be
disallowed under other provisions of
the Internal Revenue Code or general
principles of tax law, in the same
manner as if such assets were actually
sold to an unrelated person.
(iv) Tiered targets. If an asset of target
is the stock of a subsidiary corporation
of target for which a section 336(e)
election is made, any gain or loss
realized on the deemed sale of the stock
of the subsidiary corporation is
disregarded in determining the amount
of disallowed loss. For purposes of
determining the amount of disallowed
loss on the deemed asset disposition by
a subsidiary of target for which a section
336(e) election is made, the amount of
subsidiary stock deemed sold in the
deemed asset disposition of target’s
assets multiplied by the disallowed loss
fraction with respect to the corporation
that is deemed to have disposed of stock
of the subsidiary is considered to have
been distributed. In determining the
disallowed loss fraction with respect to
the deemed asset disposition of any
subsidiary of target, disregard any sale,
exchange, or distribution of its stock
that was made after the disposition date
if such stock was included in the
deemed asset disposition of the
corporation deemed to have disposed of
the subsidiary stock.
(3) Examples. The following examples
illustrate this paragraph (b)(1)(i)(B).
Example 1. (i) Facts. Parent owns 60 of the
100 outstanding shares of the common stock
of Seller, Seller’s only class of stock
outstanding. The remaining 40 shares of the
common stock of Seller are held by
shareholders unrelated to Seller or each

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other. Seller owns 95 of the 100 outstanding
shares of Target common stock, and all 100
shares of Target preferred stock that is
described in section 1504(a)(4). The
remaining 5 shares of Target common stock
are owned by A. On January 1 of Year 1,
Seller sells 72 shares of Target common stock
to B for $3,520. On July 1 of Year 1, Seller
distributes 12 shares of Target common stock
to Parent and 8 shares to its unrelated
shareholders in a distribution described in
section 301. Seller retains 3 shares of Target
common stock and all 100 shares of Target
preferred stock immediately after July 1. The
value of Target common stock on July 1 is
$60 per share. The value of Target preferred
stock on July 1 is $36 per share. Target has
three assets, Asset 1, a Class IV asset, with
a basis of $1,776 and a fair market value of
$2,000, Asset 2, a Class V asset, with a basis
of $2,600 and a fair market value of $2,750,
and Asset 3, a Class V asset, with a basis of
$3,900 and a fair market value of $3,850.
Seller incurred no selling costs on the sale of
the 72 shares of Target common stock to B.
Target has no liabilities. A section 336(e)
election is made.
(ii) Consequences—Deemed Asset Sale.
Because at least 80 percent ((72 + 8)/100) of
Target stock, other than stock described in
section 1504(a)(4), was disposed of (within
the meaning of § 1.336–1(b)(5)) by Seller
during the 12-month disposition period, a
qualified stock disposition occurred. July 1 of
Year 1, the first day on which there was a
qualified stock disposition with respect to
Target stock, is the disposition date.
Accordingly, pursuant to the section 336(e)
election, for Federal income tax purposes,
Seller generally is not treated as selling the
72 shares of Target common stock sold to B
or distributing the 8 shares of Target common
stock distributed to its unrelated
shareholders. However, Seller is still treated
as distributing the 12 shares of Target
common stock distributed to Parent because
Seller and Parent are related persons within
the meaning of § 1.336–1(b)(12) and
accordingly the 12 shares are not part of the
qualified stock disposition. Target is treated
as if, on July 1, it sold all of its assets to an
unrelated person in exchange for the ADADP,
$8,000, which is allocated $2,000 to Asset 1,
$2,500 to Asset 2, and $3,500 to Asset 3 (see
Example 1 of § 1.336–3(g) for the
determination and allocation of ADADP).
(iii) Consequences—Amount and
Allocation of Disallowed Loss. Old Target
realized a net loss of $276 on the deemed
asset disposition ($224 gain realized on Asset
1, $100 loss realized on Asset 2, and $400
loss realized on Asset 3). However, 20 shares
of Target common stock were distributed by
Seller during the 12-month disposition
period (8 shares distributed to Seller’s
unrelated shareholders in the qualified stock
disposition plus 12 shares distributed to
Parent that were not part of the qualified
stock disposition). Therefore, because there
was a net loss realized on the deemed asset
disposition and a portion of the stock of
Target was distributed during the 12-month
disposition period, a portion of the loss on
the deemed sale of each of Target’s loss assets
is disallowed. The total amount of
disallowed loss equals $60 ($276 net loss

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realized on the deemed disposition of Assets
1, 2, and 3 multiplied by the disallowed loss
fraction, the numerator of which is $1,200,
the value on July 1, the disposition date, of
the 20 shares of Target common stock
distributed during the 12-month disposition
period, and the denominator of which is
$5,520, the sum of $4,320, the value on July
1 of the 72 shares of Target common stock
sold to B and $1,200, the value on July 1 of
the 20 shares of Target common stock
distributed during the 12-month disposition
period). The portion of the disallowed loss
allocated to Asset 2 is $12 ($60 total
disallowed loss multiplied by the loss
allocation fraction, the numerator of which is
$100, the loss realized on the deemed
disposition of Asset 2 and the denominator
of which is $500, the sum of the losses
realized on the deemed disposition of Assets
2 and 3). The portion of the disallowed loss
allocated to Asset 3 is $48 ($60 total
disallowed loss multiplied by the loss
allocation fraction, the numerator of which is
$400, the loss realized on the deemed
disposition of Asset 3 and the denominator
of which is $500, the sum of the losses
realized on the deemed disposition of Assets
2 and 3). Accordingly, Old Target recognizes
$224 of gain on Asset 1, recognizes $88 of
loss on Asset 2 (realized loss of $100 less
allocated disallowed loss of $12), and
recognizes $352 of loss on Asset 3 (realized
loss of $400 less allocated disallowed loss of
$48) or a recognized net loss of $216 on the
deemed asset disposition.
Example 2. (i) Facts. The facts are the same
as in Example 1 except that Asset 2 is the
stock of Target Subsidiary, a corporation of
which Target owns 100 of the 110 shares of
common stock, the only outstanding class of
Target Subsidiary stock. The remaining 10
shares of Target Subsidiary stock are owned
by D. The value of Target Subsidiary stock on
July 1 is $27.50 per share. Target Subsidiary
has two assets, Asset 4, a Class IV asset, with
a basis of $800 and a fair market value of
$1,000, and Asset 5, a Class IV asset, with a
basis of $2,200 and a fair market value of
$2,025. Target Subsidiary has no liabilities. A
section 336(e) election with respect to Target
Subsidiary is also made.
(ii) Consequences—Target. The ADADP on
the deemed sale of Target’s assets is
determined and allocated in the same
manner as in Example 1. However, Target’s
loss realized on the deemed sale of Target
Subsidiary is disregarded in determining the
amount of disallowed loss on the deemed
asset disposition of Target’s assets. Thus, the
net loss is only $176 ($224 gain realized on
Asset 1 and $400 loss realized on Asset 3),
and the amount of disallowed loss equals
$38.26 ($176 net loss multiplied by the
disallowed loss fraction with respect to
Target stock, $1,200/$5,520). The entire
disallowed loss is allocated to Asset 3.
(iii) Consequences—Target Subsidiary. The
deemed sale of the stock of Target Subsidiary
is disregarded and instead Target Subsidiary
is deemed to sell all of its assets to an
unrelated person. The ADADP on the
deemed asset disposition of Target
Subsidiary is $2,750, which is allocated $909
to Asset 4 and $1,841 to Asset 5 (see Example
2 of § 1.336–3(g) for the determination and

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allocation of ADADP). Old Target Subsidiary
realized $109 of gain on Asset 4 and realized
$359 of loss on Asset 5 in the deemed asset
disposition. Although Old Target Subsidiary
realized a net loss of $250 on the deemed
asset disposition ($109 gain on Asset 4 and
$359 loss on Asset 5), a portion of this net
loss is disallowed because a portion of Target
stock was distributed during the 12-month
disposition period. For purposes of
determining the amount of disallowed loss
on the deemed sale of the assets of Target
Subsidiary, the portion of the 100 shares of
Target Subsidiary stock deemed sold by
Target pursuant to the section 336(e) election
for Target Subsidiary multiplied by the
disallowed loss fraction with respect to
Target stock is treated as having been
distributed. Thus, for purposes of
determining the amount of disallowed loss
on the deemed asset disposition of Target
Subsidiary’s assets, 21.74 shares of Target
Subsidiary stock (100 shares of Target
Subsidiary stock owned by Target multiplied
by the disallowed loss fraction with respect
to Target stock, $1,200/$5,520) are treated as
having been distributed by Target during the
12-month disposition period. The total
amount of disallowed loss with respect to the
deemed asset disposition of Target
Subsidiary’s assets equals $54 ($250 net loss
realized on the deemed disposition of Assets
4 and 5 multiplied by the disallowed loss
fraction with respect to Target Subsidiary,
the numerator of which is $598, the value on
July 1, the disposition date, of the 21.74
shares of Target Subsidiary stock deemed
distributed during the 12-month disposition
period (21.74 shares × $27.50) and the
denominator of which is $2,750 (the sum of
$2,152, the value on July 1 of the 78.26
shares of Target Subsidiary stock deemed
sold in the qualified stock disposition
pursuant to the section 336(e) election for
Target Subsidiary (78.26 shares × $27.50) and
$598, the value on July 1 of the 21.74 shares
of Target Subsidiary stock deemed
distributed during the 12-month disposition
period)). (The 10 shares of Target Subsidiary
owned by D are not part of the qualified stock
disposition and therefore are not included in
the denominator of the disallowed loss
fraction.) All of the disallowed loss is
allocated to Asset 5, the only loss asset.
Accordingly, Old Target Subsidiary
recognizes $109 of gain on Asset 4 and
recognizes $305 of loss on Asset 5 (realized
loss of $359 less disallowed loss of $54) or
a net loss of $196 on the deemed asset
disposition.
Example 3. (i) Facts. The facts are the
same as in Example 2 except that on August
1 of Year 1, Target sells 50 of its shares of
Target Subsidiary stock and distributes the
remaining 50 shares.
(ii) Consequences. Because the 100 shares
of Target Subsidiary stock that were sold and
distributed on August 1 were deemed
disposed of on July 1 in the deemed asset
disposition of Target, the August 1 sale and
distribution of Target Subsidiary stock are
disregarded in determining the amount of
disallowed loss. Accordingly, the
consequences are the same as in Example 2.

(C) Tiered targets. (i) In the case of
parent-subsidiary chains of corporations

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making section 336(e) elections, the
deemed asset disposition of a higher-tier
subsidiary is considered to precede the
deemed asset disposition of a lower-tier
subsidiary.
(ii) New target—deemed purchase.
New target is treated as acquiring all of
its assets from an unrelated person in a
single transaction at the close of the
disposition date (but before the deemed
liquidation) in exchange for an amount
equal to the adjusted grossed-up basis
(AGUB) as determined under § 1.336–4.
New target allocates the consideration
deemed paid in the transaction in the
same manner as new target would under
§§ 1.338–6 and 1.338–7 in order to
determine the basis in each of the
purchased assets. If new target qualifies
as a small business corporation within
the meaning of section 1361(b) and
wants to be an S corporation, a new
election under section 1362(a) must be
made. Notwithstanding paragraph
(b)(1)(iii) of this section (deemed
liquidation of old target), new target
remains liable for the tax liabilities of
old target (including the tax liability for
the deemed disposition tax
consequences). For example, new target
remains liable for the tax liabilities of
the members of any consolidated group
that are attributable to taxable years in
which those corporations and old target
joined in the same consolidated return.
See § 1.1502–6(a).
(iii) Old target and seller—deemed
liquidation—(A) In general. If old target
is an S corporation, S corporation
shareholders (whether or not they sell or
exchange their stock) take their pro rata
share of the deemed disposition tax
consequences into account under
section 1366 and increase or decrease
their basis in target stock under section
1367. Old target and seller (or S
corporation shareholders) are treated as
if, before the close of the disposition
date, after the deemed asset disposition
described in paragraph (b)(1)(i)(A) of
this section, and while target is owned
by seller or S corporation shareholders,
old target transferred all of the
consideration deemed received from
new target in the deemed asset
disposition to seller or S corporation
shareholders, any S corporation election
for old target terminated, and old target
ceased to exist. The transfer from old
target to seller or S corporation
shareholders is characterized for Federal
income tax purposes in the same
manner as if the parties had actually
engaged in the transactions deemed to
occur because of this section and taking
into account other transactions that
actually occurred or are deemed to
occur. For example, the transfer may be
treated as a distribution in pursuance of

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a plan of reorganization, a distribution
in complete cancellation or redemption
of all of its stock, one of a series of
distributions in complete cancellation
or redemption of all of its stock in
accordance with a plan of liquidation,
or part of a circular flow of cash. In most
cases, the transfer will be treated as a
distribution in complete liquidation to
which sections 331 or 332 and sections
336 or 337 apply.
(B) Tiered targets. In the case of
parent-subsidiary chains of corporations
making section 336(e) elections, the
deemed liquidation of a lower-tier
subsidiary corporation is considered to
precede the deemed liquidation of a
higher-tier subsidiary.
(iv) Seller—distribution of target
stock. In the case of a distribution of
target stock in a qualified stock
disposition, seller (the distributor) is
deemed to purchase from an unrelated
person, on the disposition date,
immediately after the deemed
liquidation of old target, the amount of
stock distributed in the qualified stock
disposition (new target stock) and to
have distributed such new target stock
to its shareholders. Seller recognizes no
gain or loss on the distribution of such
stock.
(v) Seller—retention of target stock. If
seller or an S corporation shareholder
retains any target stock after the
disposition date, seller or the S
corporation shareholder is treated as
purchasing the stock so retained from an
unrelated person (new target stock) on
the day after the disposition date for its
fair market value. The holding period
for the retained stock starts on the day
after the disposition date. For purposes
of this paragraph (b)(1)(v), the fair
market value of all of the target stock
equals the grossed-up amount realized
on the sale, exchange, or distribution of
recently disposed stock of target (see
§ 1.336–3(c)).
(2) Dispositions described in section
355(d)(2) or (e)(2)—(i) Old target—
deemed asset disposition—(A) In
general. This paragraph (b)(2) provides
the Federal income tax consequences of
a section 336(e) election made with
respect to a qualified stock disposition
resulting, in whole or in part, from a
disposition described in section
355(d)(2) or (e)(2). Old target is treated
as selling its assets to an unrelated
person in a single transaction at the
close of the disposition date in exchange
for the ADADP as determined under
§ 1.336–3. ADADP is allocated among
the disposition date assets in the same
manner as ADSP is allocated under
§§ 1.338–6 and 1.338–7 in order to
determine the amount realized from
each of the sold assets. Old target

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28479

realizes the deemed disposition tax
consequences from the deemed asset
disposition before the close of the
disposition date while old target is
owned by seller.
(1) Old target not deemed to liquidate.
In general, unlike a section 338(h)(10)
election or a section 336(e) election
made with respect to a qualified stock
disposition not described, in whole or
in part, in section 355(d)(2) or (e)(2), old
target is not deemed to liquidate after
the deemed asset disposition.
(2) Exception. If an election is made
under § 1.1502–13(f)(5)(ii)(E), then
solely for purposes of § 1.1502–
13(f)(5)(ii)(C), immediately after the
deemed asset disposition of old target,
old target is deemed to liquidate into
seller.
(B) Gains and losses—(1) Gains.
Except as provided in § 1.338(h)(10)1(d)(8) (regarding the installment
method), old target shall recognize all of
the gains realized on the deemed asset
disposition.
(2) Losses—(i) In general. Except as
provided in paragraphs (b)(2)(i)(B)(2)(ii),
(iii), and (iv) of this section, old target
shall recognize all of the losses realized
on the deemed asset disposition.
(ii) Stock distributions. If target’s
losses realized on the deemed sale of all
of its assets exceed target’s gains
realized (a net loss), the portion of such
net loss attributable to a distribution of
target stock during the 12-month
disposition period is disallowed. The
total amount of disallowed loss and the
allocation of disallowed loss is
determined in the manner provided in
paragraphs (b)(2)(i)(B)(2)(iii) and (iv) of
this section.
(iii) Amount and allocation of
disallowed loss. The total disallowed
loss pursuant to paragraph
(b)(2)(i)(B)(2)(ii) of this section shall be
determined by multiplying the net loss
realized on the deemed asset disposition
by the disallowed loss fraction. The
numerator of the disallowed loss
fraction is the value of target stock,
determined on the disposition date,
distributed by seller during the 12month disposition period, whether or
not a part of the qualified stock
disposition (for example, stock
distributed to a related person), and the
denominator of the disallowed loss
fraction is the sum of the value of target
stock, determined on the disposition
date, disposed of by sale or exchange in
the qualified stock disposition during
the 12-month disposition period and the
value of target stock, determined on the
disposition date, distributed by seller
during the 12-month disposition period,
whether or not a part of the qualified
stock disposition. The amount of the

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disallowed loss allocated to each asset
disposed of in the deemed asset
disposition is determined by
multiplying the total amount of the
disallowed loss by the loss allocation
fraction. The numerator of the loss
allocation fraction is the amount of loss
realized with respect to the asset and
the denominator of the loss allocation
fraction is the sum of the amount of
losses realized with respect to each loss
asset disposed of in the deemed asset
disposition. To the extent old target’s
losses from the deemed asset
disposition are not disallowed under
this paragraph, such losses may be
disallowed under other provisions of
the Internal Revenue Code or general
principles of tax law, in the same
manner as if such assets were actually
sold to an unrelated person.
(iv) Tiered targets. If an asset of target
is the stock of a subsidiary corporation
of target for which a section 336(e)
election is made, any gain or loss
realized on the deemed sale of the stock
of the subsidiary corporation is
disregarded in determining the amount
of disallowed loss. For purposes of
determining the amount of disallowed
loss on the deemed asset disposition by
a subsidiary of target for which a section
336(e) election is made, see paragraph
(b)(1)(i)(B)(2) of this section.
(3) Examples. The following examples
illustrate this paragraph (b)(2)(i)(B).
Example 1. (i) Facts. Seller owns 90 of the
100 outstanding shares of Target common
stock, the only class of Target stock
outstanding. The remaining 10 shares of
Target common stock are owned by C. On
January 1 of Year 1, Seller sells 10 shares of
Target common stock to D for $910. On July
1, in an unrelated transaction, Seller
distributes its remaining 80 shares of Target
common stock to its unrelated shareholders
in a distribution described in section
355(d)(2) or (e)(2). On July 1, the value of
Target common stock is $100 per share.
Target has three assets, Asset 1 with a basis
of $1,220, Asset 2 with a basis of $3,675, and
Asset 3 with a basis of $5,725. Seller incurred
no selling costs on the sale of the 10 shares
of Target common stock to D. Target has no
liabilities. A section 336(e) election is made.
(ii) Consequences. Because at least 80
percent of Target stock ((10 + 80)/100) was
disposed of (within the meaning of § 1.336–
1(b)(5)) by Seller during the 12-month
disposition period, a qualified stock
disposition occurred. July 1 of Year 1, the
first day on which there was a qualified stock
disposition with respect to Target, is the
disposition date. Accordingly, pursuant to
the section 336(e) election, for Federal
income tax purposes, Target is treated as if,
on July 1, it sold all of its assets to an
unrelated person in exchange for the ADADP,
$9,900, as determined under § 1.336–3.
Assume that the ADADP is allocated $2,000
to Asset 1, $3,300 to Asset 2, and $4,600 to
Asset 3 under § 1.336–3. Old Target realized

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a net loss of $720 on the deemed asset
disposition ($780 gain realized on Asset 1,
$375 loss realized on Asset 2, and $1,125 loss
realized on Asset 3). However, because a
portion of Target stock was distributed
during the 12-month disposition period and
there was a net loss on the deemed asset
disposition, a portion of the loss on each of
the loss assets is disallowed. The total
amount of disallowed loss equals $640 ($720
net loss realized on the deemed disposition
of Assets 1, 2, and 3 multiplied by the
disallowed loss fraction, the numerator of
which is $8,000, the value on July 1, the
disposition date, of the 80 shares of Target
common stock distributed by Seller during
the 12-month disposition period, and the
denominator of which is $9,000, the sum of
$1,000, the value on July 1 of the 10 shares
of Target common stock sold to D, and
$8,000, the value on July 1 of the 80 shares
of Target common stock distributed by Seller
during the 12-month disposition period). The
portion of the disallowed loss allocated to
Asset 2 is $160 ($640 total disallowed loss on
the deemed asset disposition multiplied by
the loss allocation fraction, the numerator of
which is $375, the loss realized on the
deemed disposition of Asset 2, and the
denominator of which is $1,500, the sum of
the losses realized on the deemed disposition
of Assets 2 and 3). The portion of the
disallowed loss allocated to Asset 3 is $480
($640 total disallowed loss on the deemed
asset disposition multiplied by the loss
allocation fraction, the numerator of which is
$1,125, the loss realized on the deemed
disposition of Asset 3, and the denominator
of which is $1,500, the sum of the losses
realized on the deemed disposition of Assets
2 and 3). Accordingly, Old Target recognizes
$780 of gain on Asset 1, recognizes $215 of
loss on Asset 2 (realized loss of $375 less
allocated disallowed loss of $160), and
recognizes $645 of loss on Asset 3 (realized
loss of $1,125 less allocated disallowed loss
of $480) or a recognized net loss of $80 on
the deemed asset disposition.
Example 2. (i) Facts. The facts are the
same as in Example 1 except that Asset 2 is
100 shares of common stock of Target
Subsidiary, a wholly-owned subsidiary of
Target. The value of Target Subsidiary
common stock on July 1 is $40 per share.
Target Subsidiary has two assets, Asset 4
with a basis of $500 and Asset 5 with a basis
of $3,000. Target Subsidiary has no
liabilities. A section 336(e) election is also
made with respect to Target Subsidiary.
(ii) Consequences—Target. The ADADP on
the deemed sale of Target’s assets is
determined and allocated in the same
manner as in Example 1. However, Old
Target’s loss realized on the deemed sale of
Target Subsidiary is disregarded in
determining the amount of the disallowed
loss on the deemed asset disposition of Old
Target’s assets. Thus, the realized net loss is
only $345 ($780 gain on Asset 1 and $1,125
loss on Asset 3), and the amount of
disallowed loss equals $307, the $345
realized net loss multiplied by the
disallowed loss fraction with respect to
Target stock, $8,000/$9,000. The entire
disallowed loss is allocated to Asset 3.
Accordingly, Old Target recognizes $780 of

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gain on Asset 1 and recognizes $818 of loss
on Asset 3 (realized loss of $1,125 less
allocated disallowed loss of $307) or a
recognized net loss of $38 on the deemed
asset disposition.
(iii) Consequences—Target Subsidiary.
Because the deemed sale of Target Subsidiary
is not a transaction described in section
355(d)(2) or (e)(2), the tax consequences of
the deemed sale of Target Subsidiary are
determined under paragraph (b)(1) of this
section and not this paragraph (b)(2). The
deemed sale of the stock of Target Subsidiary
is disregarded and instead Target Subsidiary
is deemed to sell all of its assets to an
unrelated person. The ADADP on the
deemed asset disposition of Target
Subsidiary as determined under § 1.336–3 is
$3,300. Assume that the ADADP is allocated
$900 to Asset 4 and $2,400 to Asset 5 under
§ 1.336–3. Old Target Subsidiary realized a
net loss of $200 on the deemed asset
disposition ($400 gain realized on Asset 4
and $600 loss realized on Asset 5). However,
because a portion of Target stock was
distributed during the 12-month disposition
period, for purposes of determining the
amount of disallowed loss on the deemed
sale of the assets of Target Subsidiary, the
portion of the 100 shares of Target Subsidiary
stock deemed sold pursuant to the section
336(e) election for Target Subsidiary
multiplied by the disallowed loss fraction
with respect to Target stock are treated as
having been distributed. Thus, for purposes
of determining the amount of disallowed loss
on the deemed asset disposition of Target
Subsidiary’s assets, 88.89 shares of Target
Subsidiary common stock (100 shares owned
by Target multiplied by the disallowed loss
fraction with respect to Target stock, $8,000/
$9,000) are treated as distributed during the
12-month disposition period. The total
amount of disallowed loss with respect to the
deemed asset disposition of Target
Subsidiary’s assets equals $177.78 ($200 net
loss realized on the deemed disposition of
Assets 4 and 5 multiplied by the disallowed
loss fraction with respect to Target
Subsidiary, the numerator of which is $3,556,
the value on July 1, the disposition date, of
the 88.89 shares of Target Subsidiary
common stock deemed distributed during the
12-month disposition period (88.89 shares ×
$40) and the denominator of which is $4,000
(the sum of $444, the value on July 1 of the
11.11 shares of Target Subsidiary common
stock deemed sold in the qualified stock
disposition pursuant to the section 336(e)
election for Target Subsidiary (11.11 shares ×
$40) and $3,556, the value on July 1 of the
88.89 shares of Target Subsidiary common
stock deemed distributed during the 12month disposition period)). All of the
disallowed loss is allocated to Asset 5, the
only loss asset. Accordingly, Old Target
Subsidiary recognizes $400 of gain on Asset
4 and recognizes $422.22 of loss on Asset 5
(realized loss of $600 less allocated
disallowed loss of $177.78) or a recognized
net loss of $22.22 on the deemed asset
disposition.

(C) Tiered targets. In the case of
parent-subsidiary chains of corporations
making section 336(e) elections, the

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deemed asset disposition of a higher-tier
subsidiary is considered to precede the
deemed asset disposition of a lower-tier
subsidiary.
(ii) Old target—deemed purchase—
(A) In general. Immediately after the
deemed asset disposition described in
paragraph (b)(2)(i)(A) of this section, old
target is treated as acquiring all of its
assets from an unrelated person in a
single, separate transaction at the close
of the disposition date (but before the
distribution described in paragraph
(b)(2)(iii)(A) of this section) in exchange
for an amount equal to the AGUB as
determined under § 1.336–4. Old target
allocates the consideration deemed paid
in the transaction in the same manner
as new target would under §§ 1.338–6
and 1.338–7 in order to determine the
basis in each of the purchased assets.
(B) Tiered targets. In the case of
parent-subsidiary chains of corporations
making section 336(e) elections with
respect to a qualified stock disposition
described, in whole or in part, in section
355(d)(2) or (e)(2), old target’s deemed
purchase of all its assets is considered
to precede the deemed asset disposition
of a lower-tier subsidiary.
(C) Application of section 197(f)(9),
section 1091, and other provisions to
old target. Solely for purposes of section
197(f)(9), section 1091, and any other
provision designated in the Internal
Revenue Bulletin by the Internal
Revenue Service (see § 601.601(d)(2)(ii)
of this chapter), old target, in its
capacity as seller of assets in the
deemed asset disposition described in
paragraph (b)(2)(i)(A) of this section,
shall be treated as a separate and
distinct taxpayer from, and unrelated to,
old target in its capacity as acquirer of
assets in the deemed purchase described
in paragraph (b)(2)(ii)(A) of this section
and for subsequent periods.
(iii) Seller—distribution of target
stock—(A) In general. Immediately after
old target’s deemed purchase of its
assets described in paragraph (b)(2)(ii)
of this section, seller is treated as
distributing the stock of old target
actually distributed to its shareholders
in the qualified stock disposition. No
gain or loss is recognized by seller on
the distribution. Additionally, if stock of
target is sold, exchanged, or distributed
outside of the section 355 transaction
but still as part of a qualified stock
disposition described, in whole or in
part, in section 355(d)(2) or (e)(2), no
gain or loss is recognized by seller on
such sale, exchange, or distribution.
(B) Tiered targets. In the case of
parent-subsidiary chains of corporations
making section 336(e) elections with
respect to a qualified stock disposition
described, in whole or in part, in section

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355(d)(2) or (e)(2), the Federal income
tax consequences of the section 336(e)
election for a subsidiary of target shall
be determined under paragraph (b)(1) of
this section unless the stock of the
subsidiary of target is actually disposed
of in a qualified stock disposition
described, in whole or in part, in section
355(d)(2) or (e)(2). The deemed
liquidation of a lower-tier subsidiary
pursuant to paragraph (b)(1)(iii) of this
section is considered to precede the
deemed liquidation of a higher-tier
subsidiary. The deemed liquidation of
the highest tier subsidiary of target is
considered to precede the distribution
of old target stock described in
paragraph (b)(2)(iii)(A) of this section.
(iv) Seller—retention of target stock. If
seller retains any target stock after the
disposition date, seller is treated as
having disposed of the old target stock
so retained, on the disposition date, in
a transaction in which no gain or loss
is recognized, and then, on the day after
the disposition date, purchasing the
stock so retained from an unrelated
person for its fair market value. The
holding period for the retained stock
starts on the day after the disposition
date. For purposes of this paragraph
(b)(2)(iv), the fair market value of all of
the target stock equals the grossed-up
amount realized on the sale, exchange,
or distribution of recently disposed
stock of target (see § 1.336–3(c)).
(v) Qualification under section 355.
Old target’s deemed sale of all its assets
to an unrelated person and old target’s
deemed purchase of all its assets from
an unrelated person will not cause the
distribution of old target to fail to satisfy
the requirements of section 355.
Similarly, any deemed transactions
under paragraph (b)(1) or (b)(2) of this
section that a subsidiary of target is
treated as engaging in will not cause the
distribution of old target to fail to satisfy
the requirements of section 355. For
purposes of applying section
355(a)(1)(D), seller is treated as having
disposed of any stock disposed of in the
qualified stock disposition on the date
seller actually sold, exchanged, or
distributed such stock. Further, seller’s
deemed disposition of retained old
target stock under paragraph (b)(2)(iv) of
this section is disregarded for purposes
of applying section 355(a)(1)(D).
(vi) Earnings and profits. The earnings
and profits of seller and target shall be
determined pursuant to § 1.312–10 and,
if applicable, § 1.1502–33(e). For this
purpose, target will not be treated as a
newly created controlled corporation
and any increase or decrease in target’s
earnings and profits pursuant to the
deemed asset disposition will increase
or decrease, as the case may be, target’s

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earnings and profits immediately before
the allocation described in § 1.312–10.
(c) Purchaser. Generally, the making
of a section 336(e) election will not
affect the Federal income tax
consequences to which purchaser
would have been subject with respect to
the acquisition of target stock if a
section 336(e) election was not made.
Thus, notwithstanding §§ 1.336–
2(b)(1)(i)(A), 1.336–2(b)(1)(iv), and
1.336–2(b)(2)(iii)(A), purchaser will still
be treated as having purchased, received
in an exchange, or received in a
distribution, the stock of target so
acquired on the date actually acquired.
However, see section 1223(1)(B) with
respect to the holding period for stock
acquired pursuant to a distribution
qualifying under section 355 (or so
much of section 356 that relates to
section 355). The Federal income tax
consequences of the deemed asset
disposition and liquidation of target
may affect purchaser’s consequences.
For example, if seller distributes the
stock of target to its shareholders in a
qualified stock disposition for which a
section 336(e) election is made, any
increase in seller’s earnings and profits
as a result of old target’s deemed asset
disposition and liquidation into seller
may increase the amount of a
distribution to the shareholders
constituting a dividend under section
301(c)(1).
(d) Minority shareholders—(1) In
general. This paragraph (d) describes
the treatment of shareholders of old
target other than seller, a member of
seller’s consolidated group, and S
corporation shareholders (whether or
not they sell or exchange their stock of
target). A shareholder to which this
paragraph (d) applies is referred to as a
minority shareholder.
(2) Sale, exchange, or distribution of
target stock by a minority shareholder.
A minority shareholder recognizes gain
or loss (as permitted under the general
principles of tax law) on its sale,
exchange, or distribution of target stock.
(3) Retention of target stock by a
minority shareholder. A minority
shareholder who retains its target stock
does not recognize gain or loss under
this section with respect to its shares of
target stock. The minority shareholder’s
basis and holding period for that target
stock are not affected by the section
336(e) election. Notwithstanding this
treatment of the minority shareholder, if
a section 336(e) election is made, target
will still be treated as disposing of all
of its assets in the deemed asset
disposition.
(e) Treatment consistent with an
actual asset disposition. Except as
otherwise provided, no provision in this

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section shall produce a Federal income
tax result under subtitle A of the
Internal Revenue Code that would not
occur if the parties had actually engaged
in the transactions deemed to occur
because of this section, taking into
account other transactions that actually
occurred or are deemed to occur. See
§ 1.338–1(a)(2) regarding the application
of other rules of law.
(f) Treatment of target under other
provisions of the Internal Revenue Code.
The provisions § 1.338–1(b) apply with
respect to the treatment of new target
after a section 336(e) election, treating
any reference to section 338 or
338(h)(10) as a reference to section
336(e).
(g) Special rules—(1) Target as two
corporations. Although target is a single
corporation under corporate law, if a
section 336(e) election is made, then,
except with respect to a distribution
described in section 355(d)(2) or (e)(2)
and as provided in § 1.338–1(b)(2), two
separate corporations, old target and
new target, generally are considered to
exist for purposes of subtitle A of the
Internal Revenue Code.
(2) Treatment of members of a
consolidated group. For purposes of
§§ 1.336–1 through 1.336–5, all
members of seller’s consolidated group
are treated as a single seller, regardless
of which member or members actually
dispose of any stock. Accordingly, any
dispositions of stock made by members
of the same consolidated group shall be
treated as made by one corporation, and
any stock owned by members of the
same consolidated group and not
disposed of will be treated as stock
retained by seller.
(3) International provisions—(i)
Source and foreign tax credit. The
principles of section 338(h)(16) apply to
section 336(e) elections for targets with
foreign operations to ensure that the
source and foreign tax credit limitation
are properly determined.
(ii) Allocation of foreign taxes—(A)
General rule. Except as provided in
paragraph (g)(3)(ii)(B) of this section, if
a section 336(e) election is made for
target and target’s taxable year under
foreign law (if any) does not close at the
end of the disposition date, foreign tax
paid or accrued by new target with
respect to such foreign taxable year is
allocated between old target and new
target. If there is more than one section
336(e) election with respect to target
during target’s foreign taxable year,
foreign tax paid or accrued with respect
to that foreign taxable year is allocated
among all old targets and new targets.
The allocation is made based on the
respective portions of the taxable
income (as determined under foreign

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law) for the foreign taxable year that are
attributable under the principles of
§ 1.1502–76(b) to the period of existence
of each old target and new target during
the foreign taxable year.
(B) Taxes imposed on partnerships
and disregarded entities. If a section
336(e) election is made for target and
target holds an interest in a disregarded
entity or partnership, the rules of
§ 1.901–2(f)(4) apply to determine the
person who is considered for U.S.
Federal income tax purposes to pay
foreign tax imposed at the entity level
on the income of the disregarded entity
or partnership.
(iii) Disallowance of foreign tax
credits under section 901(m). For rules
that may apply to disallow foreign tax
credits with respect to income not
subject to United States taxation by
reason of a covered asset acquisition,
see section 901(m).
(h) Making the section 336(e)
election—(1) Consolidated group. If
seller(s) and target are members of the
same consolidated group, a section
336(e) election is made by completing
the following requirements:
(i) Seller(s) and target must enter into
a written, binding agreement, on or
before the due date (including
extensions) of the consolidated group’s
consolidated Federal income tax return
for the taxable year that includes the
disposition date, to make a section
336(e) election;
(ii) The common parent of the
consolidated group must retain a copy
of the written agreement;
(iii) The common parent of the
consolidated group must attach the
section 336(e) election statement,
described in paragraphs (h)(5) and (6) of
this section, to the group’s timely filed
(including extensions) consolidated
Federal income tax return for the
taxable year that includes the
disposition date; and
(iv) The common parent of the
consolidated group must provide a copy
of the section 336(e) election statement
to target on or before the due date
(including extensions) of the
consolidated group’s consolidated
Federal income tax return.
(2) Non-consolidated/non-S
corporation target. If target is neither a
member of the same consolidated group
as seller nor an S corporation, a section
336(e) election is made by completing
the following requirements:
(i) Seller and target must enter into a
written, binding agreement, on or before
the due date (including extensions) of
seller’s or target’s Federal income tax
return for the taxable year that includes
the disposition date, whichever is

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earlier, to make a section 336(e)
election;
(ii) Seller and target each must retain
a copy of the written agreement; and
(iii) Seller and target each must attach
the section 336(e) election statement,
described in paragraphs (h)(5) and (6) of
this section, to its timely filed
(including extensions) Federal income
tax return for the taxable year that
includes the disposition date. However,
seller’s section 336(e) election statement
may disregard paragraph (h)(6)(xii) of
this section (concerning a gain
recognition election).
(3) S corporation target. A section
336(e) election for an S corporation
target is made by completing the
following requirements:
(i) All of the S corporation
shareholders, including those who do
not dispose of any stock in the qualified
stock disposition, and the S corporation
target must enter into a written, binding
agreement, on or before the due date
(including extensions) of the Federal
income tax return of the S corporation
target for the taxable year that includes
the disposition date, to make a section
336(e) election;
(ii) S corporation target must retain a
copy of the written agreement; and
(iii) S corporation target must attach
the section 336(e) election statement,
described in paragraphs (h)(5) and (6) of
this section, to its timely filed
(including extensions) Federal income
tax return for the taxable year that
includes the disposition date.
(4) Tiered targets. In the case of
parent-subsidiary chains of corporations
making section 336(e) elections, in order
to make a section 336(e) election for a
lower-tier target (target subsidiary), the
requirements described in paragraph
(h)(1) or (h)(2), of this section,
whichever is applicable to the qualified
stock disposition of target subsidiary,
must be satisfied. The written agreement
described in paragraph (h)(1) or (h)(2) of
this section for the section 336(e)
election with respect to target subsidiary
may be either a separate written
agreement between target subsidiary
and the corporation deemed to dispose
of the stock of target subsidiary or may
be included in the written agreement
between seller(s) (or the S corporation
shareholders) and target.
(5) Section 336(e) election
statement—(i) In general. The section
336(e) election statement must be
entitled ‘‘THIS IS AN ELECTION
UNDER SECTION 336(e) TO TREAT
THE DISPOSITION OF THE STOCK OF
[insert name and employer
identification number of target] AS A
DEEMED SALE OF SUCH
CORPORATION’S ASSETS.’’ The

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section 336(e) election statement must
include the information described in
paragraph (h)(6) of this section. The
relevant information for each S
corporation shareholder and,
notwithstanding paragraph (g)(2) of this
section, each consolidated group
member that disposes of or retains target
stock must be set forth individually, not
in the aggregate.
(ii) Target subsidiaries. In the case of
a section 336(e) election for a target
subsidiary, a separate statement must be
filed for each target subsidiary. In
preparing the section 336(e) election
statement with respect to a target
subsidiary, any reference to seller in
paragraph (h)(6) of this section should
be considered a reference to the
corporation deemed to dispose of the
stock of the target subsidiary and any
reference to target in paragraphs (h)(5)(i)
and (h)(6) of this section should be
considered a reference to the target
subsidiary.
(6) Contents of section 336(e) election
statement. The section 336(e) election
statement must include:
(i) The name, address, taxpayer
identifying number (TIN), taxable year,
and state of incorporation (if any) of the
seller(s) or the S corporation
shareholder(s);
(ii) The name, address, employer
identification number (EIN), taxable
year, and state of incorporation of the
common parent, if any, of seller(s);
(iii) The name, address, EIN, taxable
year, and state of incorporation of target;
(iv) The name, address, TIN, taxable
year, and state of incorporation (if any)
of any 80-percent purchaser;
(v) The name, address, TIN, taxable
year, and state of incorporation (if any)
of any purchaser that holds nonrecently
disposed stock within the meaning of
§ 1.336–1(b)(18);
(vi) The disposition date;
(vii) The percentage of target stock
that was disposed of by each seller or S
corporation shareholder in the qualified
stock disposition;
(viii) The percentage of target stock
that was disposed of by each seller or S
corporation shareholder in the qualified
stock disposition on or before the
disposition date;
(ix) A statement regarding whether
target realized a net loss on the deemed
asset disposition;
(x) If target realized a net loss on the
deemed asset disposition, a statement
regarding whether any stock of target or
that of any higher-tier corporation up
through the highest-tier corporation for
which a section 336(e) election was
made by any seller(s) or S corporation
shareholder(s) was distributed during
the 12-month disposition period. If so,

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also provide a statement regarding
whether any stock of target or that of
any higher-tier corporation up through
the highest-tier corporation for which a
section 336(e) election was made was
actually sold or exchanged (rather than
deemed sold in a deemed asset
disposition) by any seller(s) or S
corporation shareholder(s) in a qualified
stock disposition;
(xi) The percentage of target stock that
was retained by each seller or S
corporation shareholder after the
disposition date;
(xii) The name, address, and TIN of
any purchaser that made a gain
recognition election pursuant to
§ 1.336–4(c). A copy of the gain
recognition election statement must be
retained by the filer of the section 336(e)
election statement designated as the
appropriate party in § 1.336–4(c)(3); and
(xiii) A statement that each of the
seller(s) or S corporation shareholder(s)
(as applicable) and target have executed
a written, binding agreement to make a
section 336(e) election.
(7) Asset Allocation Statement. Old
target and new target must report
information concerning the deemed sale
of target’s assets on Form 8883, ‘‘Asset
Allocation Statement Under Section
338,’’ (making appropriate adjustments
to report the results of the section 336(e)
election), or on any successor form
prescribed by the Internal Revenue
Service, in accordance with forms,
instructions, or other appropriate
guidance provided by the Internal
Revenue Service. In addition, in the
case of a section 336(e) election as the
result of a transaction described in
section 355(d)(2) or (e)(2), old target
should file two Forms 8883, (or
successor forms), one in its capacity as
the seller of the assets in the deemed
asset disposition described in paragraph
(b)(2)(i) of this section and one in its
capacity as the purchaser of the assets
in the deemed purchase described in
paragraph (b)(2)(ii) of this section.
(8) Examples. The following examples
illustrate the provisions of paragraph (h)
of this section.
Example 1. (i) Facts. Seller owns all of the
stock of Target and Target owns all of the
stock of Target Subsidiary. Seller is the
common parent of a consolidated group that
includes Target. However, Target Subsidiary
is not included in the consolidated group
pursuant to section 1504(a)(3). On Date 1,
Seller sells 80 percent of its Target stock to
A and distributes the remaining 20 percent
of Target stock to Seller’s unrelated
shareholders.
(ii) Making of election for Target. Because
Seller and Target are members of a
consolidated group, in order to make a
section 336(e) election for the qualified stock
disposition of Target, the requirements of

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28483

paragraph (h)(1) of this section must be
satisfied. On or before the due date of Seller
group’s consolidated Federal income tax
return that includes Date 1, Seller and Target
must enter into a written, binding agreement
to make a section 336(e) election; Seller must
retain a copy of the written agreement; Seller
must attach the section 336(e) election
statement to the group’s timely filed
consolidated return for the taxable year that
includes Date 1, and Seller must provide a
copy of the section 336(e) election statement
to Target on or before the due date (including
extensions) of the consolidated return.
(iii) Making of election for Target
Subsidiary. Because Target and Target
Subsidiary do not join in the filing of a
consolidated Federal income tax return and
Target Subsidiary is not an S corporation, in
order to make a section 336(e) election for the
qualified stock disposition of Target
Subsidiary, the requirements of paragraph
(h)(2) of this section must be satisfied. On or
before the due date of Seller group’s
consolidated Federal income tax return that
includes Date 1, or Target Subsidiary’s
Federal income tax return that includes Date
1, whichever is earlier, either Target
Subsidiary must join in the written
agreement described in paragraph (ii) of this
Example 1 to make a section 336(e) election
with respect to the qualified stock
disposition of Target Subsidiary or Target
and Target Subsidiary must enter into a
separate written, binding agreement to make
a section 336(e) election with respect to the
qualified stock disposition of Target
Subsidiary; Seller (as agent of the
consolidated group that includes Target) and
Target Subsidiary each must retain a copy of
the written agreement; and Seller (as agent of
the consolidated group that includes Target)
and Target Subsidiary each must attach the
section 336(e) election statement with respect
to the qualified stock disposition of Target
Subsidiary to its timely filed Federal income
tax return for the taxable year that includes
Date 1. In preparing the section 336(e)
election statement, paragraph (i) of the
statement should include the relevant
information for Target, paragraph (ii) of the
statement should include the relevant
information for Seller, paragraph (iii) of the
statement should include the relevant
information for Target Subsidiary, paragraphs
(vii) through (xi) of the statement should
provide information for both Seller’s actual
sale and distribution of Target stock as well
as information for Target’s deemed sale of
Target Subsidiary stock, and paragraph (xiii)
of the statement should include a statement
that Seller, Target, and Target Subsidiary, or
Target and Target Subsidiary, whichever is
appropriate, have executed a written, binding
agreement to make a section 336(e) election
with respect to the qualified stock
disposition of Target Subsidiary.
Example 2. (i) Facts. A and B each own 45
percent and C owns the remaining 10 percent
of the stock of S Corporation Target, an S
corporation. S Corporation Target owns 80
percent of the stock of Target Subsidiary and
D owns the remaining 20 percent. On Date
1, A and B each sell all of their S Corporation
Target stock to an unrelated individual. C
retains his 10 percent of the stock of S
Corporation Target.

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(ii) Making of election for S Corporation
Target. Because S Corporation Target is an S
corporation, in order to make a section 336(e)
election for the qualified stock disposition of
S Corporation Target, the requirements of
paragraph (h)(3) of this section must be
satisfied. On or before the due date of S
Corporation Target’s Federal income tax
return that includes Date 1, A, B, C, and
Target must enter into a written, binding
agreement to make a section 336(e) election;
S Corporation Target must retain a copy of
the written agreement; and S Corporation
Target must attach the section 336(e) election
statement to its timely filed Federal income
tax return for the taxable year that includes
Date 1.
(iii) Making of election for Target
Subsidiary. Because Target Subsidiary is
neither a member of the same consolidated
group as S Corporation Target nor is an S
corporation, in order to make a section 336(e)
election for the qualified stock disposition of
Target Subsidiary, the requirements of
paragraph (h)(2) of this section must be
satisfied. On or before the due date of S
Corporation Target’s Federal income tax
return that includes Date 1, or Target
Subsidiary’s Federal income tax return that
includes Date 1, whichever is earlier, either
Target Subsidiary must join in the written
agreement described in paragraph (ii) of this
Example 2 to make a section 336(e) election
with respect to the qualified stock
disposition of Target Subsidiary or S
Corporation Target and Target Subsidiary
must enter into a separate written, binding
agreement to make a section 336(e) election
with respect to the qualified stock
disposition of Target Subsidiary; S
Corporation Target and Target Subsidiary
each must retain a copy of the written
agreement; and S Corporation Target and
Target Subsidiary each must attach the
section 336(e) election statement to its timely
filed Federal income tax return for the
taxable year that includes Date 1. In
preparing the section 336(e) election
statement, paragraph (i) of the statement
should include the relevant information for
S Corporation Target, paragraph (iii) of the
statement should include the relevant
information for Target Subsidiary, paragraphs
(vii) through (xi) of the statement should
provide information for both A’s and B’s
actual sale and C’s actual retention of S
Corporation Target stock as well as
information for S Corporation Target’s
deemed sale of Target Subsidiary stock, and
paragraph (xiii) of the statement should
include a statement that A, B, C, S
Corporation Target, and Target Subsidiary, or
S Corporation Target and Target Subsidiary,
whichever is appropriate, have executed a
written, binding agreement to make a section
336(e) election with respect to the qualified
stock disposition of Target Subsidiary.

(i) [Reserved]
(j) Protective section 336(e) election.
Taxpayers may make a protective
election under section 336(e) in
connection with a transaction. Such an
election will have no effect if the
transaction does not constitute a
qualified stock disposition, as defined

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in § 1.336–1(b)(6), but will otherwise be
binding and irrevocable.
(k) Examples. The following examples
illustrate the provisions of this section.
Example 1. Sale of 100 percent of Target
stock. (i) Facts. Parent owns all 100 shares of
Target’s only class of stock. Target’s only
assets are two parcels of land. Parcel 1 has
a basis of $5,000 and Parcel 2 has a basis of
$4,000. Target has no liabilities. On July 1 of
Year 1, Parent sells all 100 shares of Target
stock to A for $100 per share. Parent incurs
no selling costs and A incurs no acquisition
costs. On July 1, the value of Parcel 1 is
$7,000 and the value of Parcel 2 is $3,000.
A section 336(e) election is made.
(ii) Consequences. The sale of Target stock
constitutes a qualified stock disposition. July
1 of Year 1 is the disposition date.
Accordingly, pursuant to the section 336(e)
election, for Federal income tax purposes,
rather than treating Parent as selling the stock
of Target to A, the following events are
deemed to occur. Target is treated as if, on
July 1, it sold all of its assets to an unrelated
person in exchange for the ADADP of
$10,000, which is allocated $7,000 to Parcel
1 and $3,000 to Parcel 2 (see §§ 1.336–3 and
1.338–6 for determination of amount and
allocation of ADADP). Target recognizes gain
of $2,000 on Parcel 1 and loss of $1,000 on
Parcel 2. New Target is then treated as
acquiring all its assets from an unrelated
person in a single transaction in exchange for
the amount of the AGUB of $10,000, which
is allocated $7,000 to Parcel 1 and $3,000 to
Parcel 2 (see §§ 1.336–4, 1.338–5, and 1.338–
6 for determination of amount and allocation
of AGUB). Old Target is treated as liquidating
into Parent immediately thereafter,
distributing the $10,000 deemed received in
exchange for Parcel 1 and Parcel 2 in a
transaction qualifying under section 332.
Parent recognizes no gain or loss on the
liquidation. A’s basis in New Target stock is
$100 per share, the amount paid for the
stock.
Example 2. Sale of 80 percent of Target
stock. (i) Facts. The facts are the same as in
Example 1 except that Parent only sells 80
shares of its Target stock to A and retains the
other 20 shares.
(ii) Consequences. The results are the same
as in Example 1 except that Parent also is
treated as purchasing from an unrelated
person on July 2, the day after the disposition
date, the 20 shares of Target stock (New
Target stock) not sold to A, for their fair
market value as determined under § 1.336–
2(b)(1)(v) of $2,000 ($100 per share).
Example 3. Distribution of 100 percent of
Target stock. (i) Facts. The facts are the same
as in Example 1 except that instead of on July
1 Parent selling 100 shares of Target stock to
A, Parent distributes 100 shares to its
shareholders, all of whom are unrelated to
Parent, in a transaction that does not qualify
under section 355. The value of Target stock
on July 1 is $100 per share.
(ii) Consequences. The distribution of
Target stock constitutes a qualified stock
disposition. July 1 of Year 1 is the disposition
date. Accordingly, pursuant to the section
336(e) election, for Federal income tax
purposes, rather than treating Parent as

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distributing the stock of Target to its
shareholders, the following events are
deemed to occur. Target is treated as if, on
July 1, it sold all of its assets to an unrelated
person in exchange for the ADADP of
$10,000, which is allocated $7,000 to Parcel
1 and $3,000 to Parcel 2 (see §§ 1.336–3 and
1.338–6 for determination of amount and
allocation of ADADP). Target recognizes gain
of $2,000 on Parcel 1 and loss of $1,000 on
Parcel 2. Because Target’s losses realized on
the deemed asset disposition do not exceed
Target’s gains realized on the deemed asset
disposition, Target can recognize all of the
losses from the deemed asset disposition (see
§ 1.336–2(b)(1)(i)(B)). New Target is then
treated as acquiring all its assets from an
unrelated person in a single transaction in
exchange for the amount of the AGUB of
$10,000, which is allocated $7,000 to Parcel
1 and $3,000 to Parcel 2 (see §§ 1.336–4,
1.338–5, and 1.338–6 for determination of
amount and allocation of AGUB). Old Target
is treated as liquidating into Parent
immediately thereafter, distributing the
$10,000 deemed received in exchange for
Parcel 1 and Parcel 2 in a transaction
qualifying under section 332. Parent
recognizes no gain or loss on the liquidation.
On July 1, immediately after the deemed
liquidation of Target, Parent is deemed to
purchase from an unrelated person 100
shares of New Target stock and distribute
those New Target shares to its shareholders.
Parent recognizes no gain or loss on the
deemed distribution of the shares under
§ 1.336–2(b)(1)(iv). The shareholders receive
New Target stock as a distribution pursuant
to section 301 and their basis in New Target
stock received is its fair market value
pursuant to section 301(d).
Example 4. Distribution of 80 percent of
Target stock. (i) Facts. The facts are the same
as in Example 3 except that Parent
distributes only 80 shares of Target stock to
its shareholders and retains the other 20
shares.
(ii) Consequences. The results are the same
as in Example 3 except that Parent is treated
as purchasing on July 1 only 80 shares of
New Target stock and as distributing only 80
shares of New Target stock to its shareholders
and then as purchasing (and retaining) on
July 2, the day after the disposition date, 20
shares of New Target stock at their fair
market value as determined under § 1.336–
2(b)(1)(v), $2,000 ($100 per share).
Example 5. Part sale, part distribution. (i)
Facts. Parent owns all 100 shares of Target’s
only class of stock. Target has two assets,
both of which are buildings used in its
business. Building 1 has a basis of $6,000 and
Building 2 has a basis of $5,100. Target has
no liabilities. On January 1 of Year 1, Parent
sells 50 shares of Target to A for $88 per
share. Parent incurred no selling costs with
respect to the sale of Target stock and A
incurred no acquisition costs with respect to
the purchase. On July 1 of Year 1, when the
value of Target stock is $120 per share,
Parent distributes 30 shares of Target to
Parent’s unrelated shareholders. Parent
retains the remaining 20 shares. On July 1,
the value of Building 1 is $7,800 and the
value of Building 2 is $4,200. A section
336(e) election is made.

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(ii) Consequences. Because the sale of the
50 shares and the distribution of the 30
shares occurred within a 12-month
disposition period, the 80 shares of Target
stock sold and distributed were disposed of
in a qualified stock disposition. July 1 of Year
1 is the disposition date. On July 1, Target
is treated as if it sold its assets to an
unrelated person in exchange for the ADADP,
$10,000 ($8,000 ((50 shares × $88) + (30
shares × $120))/.80 ($9,600 (80 shares ×
$120)/$12,000 (100 shares × $120))), which is
allocated to Buildings 1 and 2 in proportion
to their fair market values, $6,500 to Building
1 and $3,500 to Building 2 (see §§ 1.336–3
and 1.338–6 for determination of amount and
allocation of ADADP). Target realizes a gain
of $500 on the deemed sale of Building 1
($6,500–$6,000). Target realizes a loss of
$1,600 on the deemed sale of Building 2
($3,500–$5,100). Target recognizes all of its
gains on the deemed asset disposition.
However, because 30 shares of Target stock
were distributed during the 12-month
disposition period and there was a net loss
of $1,100 realized on the deemed disposition
of Buildings 1 and 2, $413 of the loss on the
deemed sale is disallowed (see § 1.336–
2(b)(1)(i)(B)(2) for the determination of the
disallowed loss amount). New Target is then
treated as acquiring all its assets from an
unrelated person in a single transaction in
exchange for the amount of the AGUB,
$10,000 ($8,000 ((50 shares × $88) + (30
shares × $120)) × 1.25 ((100–0)/80)), which is
allocated to Buildings 1 and 2 in proportion
to their fair market values, $6,500 to Building
1 and $3,500 to Building 2 (see §§ 1.336–4,
1.338–5, and 1.338–6 for determination of
amount and allocation of AGUB). Old Target
is treated as liquidating into Parent
immediately after the deemed asset
disposition, distributing the $10,000 deemed
received in exchange for its assets in a
transaction qualifying under section 332.
Parent recognizes no gain or loss on the
liquidation. Parent is then deemed to
purchase 30 shares of New Target stock from
an unrelated person on July 1, and to
distribute those 30 New Target shares to its
shareholders. Parent recognizes no gain or
loss on the deemed distribution of the 30
shares under § 1.336–2(b)(1)(iv). Parent is
then deemed to purchase (and retain) on July
2, the day after the disposition date, 20
shares of New Target stock at their fair
market value as determined under § 1.336–
2(b)(1)(v), $2,000 ($100 per share (20 shares
multiplied by $100 fair market value per
share ($10,000 grossed-up amount realized
on the sale and distribution of 80 shares of
target stock divided by 100 shares)). A is
treated as having purchased the 50 shares of
New Target stock on January 1 of Year 1 at
a cost of $88 per share, the same as if no
section 336(e) election had been made.
Parent’s shareholders are treated as receiving
New Target stock on July 1 of Year 1 as a
distribution pursuant to section 301 and their
basis in New Target stock received is $120
per share, its fair market value, pursuant to
section 301(d), the same as if no section
336(e) election had been made.
Example 6. Sale of Target stock by
consolidated group members. (i) Facts.
Parent owns all of the stock of Sub and 50

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of the 100 outstanding shares of Target stock.
Sub owns the remaining 50 shares of Target
stock. Target’s assets have an aggregate basis
of $9,000. Target has no liabilities. Parent,
Sub, and Target file a consolidated Federal
income tax return. On February 1 of Year 1,
Parent sells 30 shares of its Target stock to
A for $2,400. On March 1 of Year 1, Sub sells
all 50 shares of its Target stock to B for
$5,600. Neither Parent nor Sub incurred any
selling costs. Neither A nor B incurred any
acquisition costs. A section 336(e) election is
made.
(ii) Consequences. Because Parent and Sub
are members of the same consolidated group,
their sale of Target stock is treated as made
by one seller (see paragraph (g)(2) of this
section), and the sales of Target stock
constitute a qualified stock disposition.
March 1 of Year 1 is the disposition date. For
Federal income tax purposes, Parent and Sub
are not treated as selling the stock of Target
to A and B, respectively. Instead, the
following events are deemed to occur. Old
Target is treated as if, on March 1, it sold all
its assets to unrelated person in exchange for
the ADADP, $10,000 (see § 1.336–3 for
determination of ADADP), recognizing a net
gain of $1,000. New Target is then treated as
acquiring all its assets from an unrelated
person in a single transaction in exchange for
the amount of the AGUB, $10,000 (see
§§ 1.336–4 and 1.338–5 for the determination
of AGUB). Old Target is treated as liquidating
into Parent and Sub immediately thereafter,
distributing the $10,000 deemed received in
exchange for its assets in a transaction
qualifying under section 332 (see § 1.1502–
34). Neither Parent nor Sub recognizes gain
or loss on the liquidation. Parent is then
treated as purchasing from an unrelated
person on March 2, the day after the
disposition date, the 20 shares of Target stock
(New Target stock) retained for their fair
market value as determined under § 1.336–
2(b)(1)(v), $2,000 ($100 per share). A is
treated as having purchased 30 shares of New
Target stock on February 1 of Year 1 at a cost
of $2,400 ($80 per share), the same as if no
section 336(e) election had been made. B is
treated as having purchased 50 shares of New
Target stock on March 1 of Year 1 at a cost
of $5,600 ($112 per share), the same as if no
section 336(e) election had been made.
Example 7. Sale of Target stock by nonconsolidated group members. (i) Facts. The
facts are the same as in Example 6 except that
Parent, Sub, and Target do not join in the
filing of a consolidated Federal income tax
return.
(ii) Consequences. Because Parent and Sub
do not join in the filing of a consolidated
Federal income tax return and no single
seller sells, exchanges, or distributes Target
stock meeting the requirements of section
1504(a)(2), the transaction does not constitute
a qualified stock disposition. The section
336(e) election made with respect to the
disposition of Target stock has no effect.
Example 8. Distribution of 80 percent of
Target stock in complete redemption of a
greater-than-50-percent shareholder. (i)
Facts. A and B own 51 and 49 shares,
respectively, of Seller’s only class of stock.
Seller owns all 100 shares of Target’s only
class of stock. Seller distributes 80 shares of

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Target stock to A in complete redemption of
A’s 51 shares of Seller in a transaction that
does not qualify under section 355. A section
336(e) election is made.
(ii) Consequences. Prior to the redemption,
Seller and A would be related persons
because, under section 318(a)(2)(C), any stock
of a corporation that is owned by Seller
would be attributed to A because A owns 50
percent or more of the value of the stock of
Seller. However, for purposes of §§ 1.336–1
through 1.336–5, the determination of
whether Seller and A are related is made
immediately after the redemption of A’s
stock. See §§ 1.336–1(b)(5)(iii) and 1.338–
3(b)(3)(ii)(A). After the redemption, A no
longer owns any stock of Seller. Accordingly,
A and Seller are not related persons, as
defined in § 1.336–1(b)(12), and the
distribution of Target stock constitutes a
qualified stock disposition. For Federal
income tax purposes, rather than Seller
distributing the stock of Target to A, the
following is deemed to occur. Old Target is
treated as if it sold its assets to an unrelated
person. New Target is then treated as
acquiring all its assets from an unrelated
person in a single transaction. Immediately
thereafter, Old Target is treated as liquidating
into Seller in a transaction qualifying under
section 332. Seller recognizes no gain or loss
on the liquidation. Seller is then treated as
purchasing 80 shares of New Target stock
from an unrelated person and then
distributing the 80 shares of New Target
stock to A in exchange for A’s 51 shares of
Seller stock. Seller recognizes no gain or loss
on the distribution of New Target stock
pursuant to § 1.336–2(b)(1)(iv). Seller is then
treated as purchasing from an unrelated
person on the day after the disposition date
the 20 shares of Target stock (New Target
stock) retained for their fair market value as
determined under § 1.336–2(b)(1)(v). The
Federal income tax consequences to A are the
same as if no section 336(e) election had been
made.
Example 9. Pro-rata distribution of 80
percent of Target stock. (i) Facts. A and B
own 60 and 40 shares, respectively, of
Seller’s only class of stock. Seller owns all
100 shares of Target’s only class of stock.
Seller distributes 48 shares of Target stock to
A and 32 shares of Target stock to B in a
transaction that does not qualify under
section 355. A section 336(e) election is
made.
(ii) Consequences. Any stock of a
corporation that is owned by Seller would be
attributed to A under section 318(a)(2)(C)
because, after the distribution, A owns 50
percent or more of the value of the stock of
Seller. Therefore, after the distribution, A
and Seller are related persons, as defined in
§ 1.336–1(b)(12), and the distribution of
Target stock to A is not a disposition.
Because only 32 percent of Target stock was
sold, exchanged, or distributed to unrelated
persons, there has not been a qualified stock
disposition. Accordingly, the section 336(e)
election made with respect to the distribution
of Target stock has no effect.

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TKELLEY on DSK3SPTVN1PROD with RULES

§ 1.336–3 Aggregate deemed asset
disposition price; various aspects of
taxation of the deemed asset disposition.

(a) Scope. This section provides rules
under section 336(e) to determine the
aggregate deemed asset disposition price
(ADADP) for Target. ADADP is the
amount for which old Target is deemed
to have sold all of its assets in the
deemed asset disposition. ADADP is
allocated among Target’s assets in the
same manner as the aggregate deemed
sale price (ADSP) is allocated under
§ 1.338–6 to determine the amount for
which each asset is deemed to have
been sold. If a subsequent increase or
decrease is required under general
principles of tax law with respect to an
element of ADADP, the redetermined
ADADP is allocated among Target’s
assets in the same manner as
redetermined ADSP is allocated under
§ 1.338–7.
(b) Determination of ADADP—(1)
General rule. ADADP is the sum of—
(i) The grossed-up amount realized on
the sale, exchange, or distribution of
recently disposed stock of Target; and
(ii) The liabilities of old Target.
(2) Time and amount of ADADP—(i)
Original determination. ADADP is
initially determined at the beginning of
the day after the disposition date of
Target. General principles of tax law
apply in determining the timing and
amount of the elements of ADADP.
(ii) Redetermination of ADADP.
ADADP is redetermined at such time
and in such amount as an increase or
decrease would be required, under
general principles of tax law, for the
elements of ADADP. For example,
ADADP is redetermined because of an
increase or decrease in the amount
realized on the sale or exchange of
recently disposed stock of Target or
because liabilities not originally taken
into account in determining ADADP are
subsequently taken into account.
Increases or decreases with respect to
the elements of ADADP result in the
reallocation of ADADP among Target’s
assets in the same manner as ADSP
under § 1.338–7.
(c) Grossed-up amount realized on the
disposition of recently disposed stock of
Target—(1) Determination of amount.
The grossed-up amount realized on the
disposition of recently disposed stock of
Target is an amount equal to—
(i) The sum of —
(A) With respect to recently disposed
of stock of Target that is not distributed
in the qualified stock disposition, the
amount realized on the sale or exchange
of such recently disposed stock of
Target, determined as if seller or S
corporation shareholders were required
to use old Target’s accounting methods

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and characteristics and the installment
method were not available and
determined without regard to the selling
costs taken into account under
paragraph (c)(1)(iii) of this section, and
(B) With respect to recently disposed
of stock of Target that is distributed in
the qualified stock disposition, the fair
market value of such recently disposed
stock of Target determined on the date
of each distribution;
(ii) Divided by the percentage of
Target stock (by value, determined on
the disposition date) attributable to the
recently disposed stock;
(iii) Less the selling costs incurred by
seller or S corporation shareholders in
connection with the sale or exchange of
recently disposed stock that reduce its
amount realized on the sale or exchange
of the stock (for example, brokerage
commissions and any similar costs to
sell the stock).
(2) Example. The following example
illustrates this paragraph (c):
Example. Target has two classes of stock
outstanding, voting common stock and
preferred stock described in section
1504(a)(4). Seller owns all 100 shares of each
class of stock. On March 1 of Year 1, Seller
sells 10 shares of Target voting common
stock to A for $75. On April 1 of Year 2,
Seller distributes 15 shares of Target voting
common stock with a fair market value of
$120 to B. On May 1 of Year 2, Seller
distributes 10 shares of Target voting
common stock with a fair market value of
$110 to C. On July 1 of Year 2, Seller sells
55 shares of Target voting common stock to
D for $550. On July 1 of Year 2, the fair
market value of all the Target voting common
stock is $1,000 ($10 per share) and the fair
market value of all the preferred stock is $600
($6 per share). Seller incurs $20 of selling
costs with respect to the sale to A and $60
of selling costs with respect to the sale to D.
The grossed-up amount realized on the sale,
exchange, or distribution of recently
disposed stock of Target is calculated as
follows: The sum of the amount realized on
the sale or exchange of recently disposed
stock sold or exchanged (without regard to
selling costs) and the fair market value of the
recently disposed stock distributed is $780
($120 + $110 + $550) (the 10 shares sold to
A on March 1 of Year 1 is not recently
disposed stock because it was not disposed
of during the 12-month disposition period).
The percentage of Target stock by value on
the disposition date attributable to recently
disposed stock equals 50% ($800 (80 shares
of recently disposed stock × $10, the fair
market value of each share of Target common
stock on the disposition date)/$1,600 ($1,000
(the total value of Target’s common stock on
the disposition date) + $600 (the total value
of Target’s preferred stock on the disposition
date))). The grossed-up amount realized
equals $1,500 (($780/.50)¥$60 selling costs).

(d) Liabilities of old Target—(1) In
general. In general, the liabilities of old
Target are measured as of the beginning

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of the day after the disposition date.
However, if a Target for which a section
336(e) election is made engages in a
transaction outside the ordinary course
of business on the disposition date after
the event resulting in the qualified stock
disposition of Target or a higher-tier
corporation, Target and all persons
related thereto (either before or after the
qualified stock disposition) under
section 267(b) or section 707 must treat
the transaction for all Federal income
tax purposes as occurring at the
beginning of the day following the
transaction and after the deemed
disposition by old Target. In order to be
taken into account in ADADP, a liability
must be a liability of Target that is
properly taken into account in amount
realized under general principles of tax
law that would apply if old Target had
sold its assets to an unrelated person for
consideration that included the
discharge of its liabilities. See § 1.1001–
2(a). Such liabilities may include
liabilities for the tax consequences
resulting from the deemed asset
disposition.
(2) Time and amount of liabilities.
The time for taking into account
liabilities of old Target in determining
ADADP and the amount of the liabilities
taken into account is determined as if
old Target had sold its assets to an
unrelated person for consideration that
included the discharge of the liabilities
by the unrelated person. For example, if
no amount of a Target liability is
properly taken into account in amount
realized as of the beginning of the day
after the disposition date, the liability is
not initially taken into account in
determining ADADP, but it may be
taken into account at some later date.
(e) Deemed disposition tax
consequences. Gain or loss on each asset
in the deemed asset disposition is
computed by reference to the ADADP
allocated to that asset. ADADP is
allocated in the same manner as is
ADSP under § 1.338–6. Although
deemed disposition tax consequences
may increase or decrease ADADP by
creating or reducing a tax liability, the
amount of the tax liability itself may be
a function of the size of the deemed
disposition tax consequences. Thus,
these determinations may require trial
and error computations.
(f) Other rules apply in determining
ADADP. ADADP may not be applied in
such a way as to contravene other
applicable rules. For example, a capital
loss cannot be applied to reduce
ordinary income in calculating the tax
liability on the deemed asset disposition
for purposes of determining ADADP.
(g) Examples. The following examples
illustrate this section.

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Federal Register / Vol. 78, No. 94 / Wednesday, May 15, 2013 / Rules and Regulations
Example 1. (i) Facts. The facts are the
same as in Example 1 of § 1.336–
2(b)(1)(i)(B)(3), that is, Parent owns 60 of the
100 outstanding shares of the common stock
of Seller, Seller’s only class of stock
outstanding. The remaining 40 shares of the
common stock of Seller are held by
shareholders unrelated to Seller or each
other. Seller owns 95 of the 100 outstanding
shares of Target common stock, and all 100
shares of Target preferred stock that is
described in section 1504(a)(4). The
remaining 5 shares of Target common stock
are owned by A. On January 1 of Year 1,
Seller sells 72 shares of Target common stock
to B for $3,520. On July 1 of Year 1, Seller
distributes 12 shares of Target common stock
to Parent and 8 shares to its unrelated
shareholders in a distribution described in
section 301. Seller retains 3 shares of Target
common stock and all 100 shares of Target
preferred stock immediately after July 1. The
value of Target common stock on July 1 is
$60 per share. The value of Target preferred
stock on July 1 is $36 per share. Target has
three assets, Asset 1, a Class IV asset, with
a basis of $1,776 and a fair market value of
$2,000, Asset 2, a Class V asset, with a basis
of $2,600 and a fair market value of $2,750,
and Asset 3, a Class V asset, with a basis of
$3,900 and a fair market value of $3,850.
Seller incurred no selling costs on the sale of
the 72 shares of Target common stock to B.
Target has no liabilities. A section 336(e)
election is made.
(ii) Determination of ADADP. The ADADP
on the deemed asset disposition of Target is
determined as follows. The grossed-up
amount realized on the sale, exchange, or
distribution of recently disposed stock of
Target is $8,000, the sum of $3,520, the
amount realized on the sale to B of the 72
shares of Target common stock and $480, the
fair market value on the date distributed of
the 8 shares of Target common stock
distributed to Seller’s unrelated shareholders
in the qualified stock disposition, divided by
.50, the percentage of Target stock by value,
determined on the disposition date,
attributable to the recently disposed stock
($4,800 (80 shares of Target common stock
disposed of in the qualified stock disposition
× $60, the value of a share of Target common
stock on the disposition date) divided by
$9,600 ((100, the total number of shares of
Target common stock × $60, the value of a
share of Target common stock on the
disposition date) + (100, the total number of
shares of Target preferred stock × $36, the
value of a share of Target preferred stock on
the disposition date))), minus $0, Seller’s
selling costs in connection with the sale of
the 72 shares of Target common stock sold
to B. The $8,000 grossed-up amount realized
on the sale, exchange, or distribution of
recently disposed stock of Target is then
added to the liabilities of Old Target, $0, to
arrive at the ADADP, $8,000.
(iii) Allocation of ADADP. The ADADP of
$8,000 is allocated first to Asset 1, the Class
IV asset, but not in excess of Asset 1’s fair
market value, $2,000. The remaining ADADP
of $6,000 is allocated between Assets 2 and
3, both Class V assets, in proportion to their
fair market values, but not in excess of their
fair market values. Because the total fair

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market value of Assets 2 and 3, $6,600,
exceeds the ADADP remaining after
allocation of a portion of the ADADP to Asset
1, the $6,000 remaining ADADP is allocated
to Assets 2 and 3 in proportion to their
respective fair market values. Accordingly,
$2,500 is allocated to Asset 2 ($6,000 ×
($2,750/($2,750 + $3,850))) and $3,500 is
allocated to Asset 3 ($6,000 × ($3,850/($2,750
+ $3,850))).
Example 2. (i) Facts. The facts are the
same as in Example 1 except that Asset 2 is
the stock of Target Subsidiary, a corporation
of which Target owns 100 of the 110 shares
of common stock, the only outstanding class
of Target Subsidiary stock. The remaining 10
shares of Target Subsidiary stock are owned
by D. The value of Target Subsidiary stock on
July 1 is $27.50 per share. Target Subsidiary
has two assets, Asset 4, a Class IV asset, with
a basis of $800 and a fair market value of
$1,000, and Asset 5, a Class IV asset, with a
basis of $2,200 and a fair market value of
$2,025. Target Subsidiary has no liabilities. A
section 336(e) election with respect to Target
Subsidiary is also made.
(ii) Determination of ADADP. The ADADP
on the deemed asset disposition of Target
Subsidiary is determined as follows. The
grossed-up amount realized on the sale,
exchange, or distribution of recently
disposed stock of Target Subsidiary is $2,750,
($2,500 ADADP allocable to Asset 2, the 100
shares of the stock of Target Subsidiary
owned by Target, divided by .909, the
percentage of Target Subsidiary stock by
value, determined on the disposition date,
attributable to the recently disposed stock
($2,750 (100 shares of the stock of Target
Subsidiary deemed disposed in the qualified
stock disposition × $27.50, the value of a
share of Target Subsidiary stock on the
disposition date) divided by $3,025 (110, the
total number of shares of Target Subsidiary
stock × $27.50, the value of a share of Target
Subsidiary stock on the disposition date)),
minus $0, Seller’s selling costs in connection
with the deemed sale of the 100 shares of
Target Subsidiary stock). The $2,750 grossedup amount realized on the sale, exchange, or
distribution of recently disposed stock of
Target Subsidiary is then added to the
liabilities of Old Target Subsidiary, $0, to
arrive at the ADADP of Target Subsidiary,
$2,750.
(iii) Allocation of ADADP. Because Assets
4 and 5 are each assets of the same class, and
the total fair market value of Assets 4 and 5
exceeds the $2,750 ADADP of Target
Subsidiary, the $2,750 ADADP is allocated to
Assets 4 and 5 in proportion to their
respective fair market values. Accordingly,
$909 is allocated to Asset 4 ($2,750 ×
($1,000/($1,000 + $2,025))) and $1,841 is
allocated to Asset 5 ($2,750 × ($2,025/($1,000
+ $2,025))).
Example 3. (i) Seller owns all 100 of the
outstanding shares of the common stock of
Target, the only class of Target stock
outstanding. On January 1 of Year 1, Seller
sells 10 shares of Target stock to A for $6,000
($600 per share). On August 1 of Year 1,
Seller distributes the remaining 90 shares of
Target stock to its unrelated shareholders in
a transaction described in section 355(d)(2)
or (e)(2). The value of Target stock on August

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1 is $560 per share. Target has two assets,
Asset 1, which is stock in trade of Target, a
Class IV asset, with a basis of $15,000 and
a value of $50,000, and Asset 2, which is
stock in a publicly traded, unrelated
corporation, a Class II asset, with a basis of
$38,000 and a value of $16,000. Target has
no liabilities other than any liabilities for
Federal tax on account of the deemed asset
disposition. Assume Target’s Federal tax rate
for any gain or income on the deemed asset
disposition is 34 percent. Seller had no
selling costs in connection with its sale of the
10 shares of Target stock. A section 336(e)
election is made.
(ii) Because at least 80 percent of Target
stock was disposed of (within the meaning of
§ 1.336–1(b)(5)) by Seller during the 12month disposition period, a qualified stock
disposition occurred. August 1 of Year 1 is
the disposition date. Accordingly, pursuant
to the section 336(e) election, for Federal
income tax purposes, Target is treated as if,
on August 1, it sold all of its assets to an
unrelated person in exchange for the ADADP.
(iii) Under these facts, although a portion
of the qualified stock disposition was the
result of a stock distribution, because the
grossed-up amount realized on the
disposition of recently disposed stock of
Target, $56,400 (($6,000 + ($560 × 90))/1)
exceeds Target’s total basis in its assets, none
of the losses realized on the deemed asset
disposition are disallowed under § 1.336–
2(b)(2)(i)(B)(2). Because the grossed-up
amount realized on the disposition of
recently disposed stock of Target exceeds the
value of Asset 2, the ADADP allocated to
Asset 2 equals the value of Asset 2, $16,000,
and Target realizes a $22,000 loss on the
deemed disposition of Asset 2. None of this
loss is disallowed under section 1091. See
§ 1.336–2(b)(2)(ii)(C). Accordingly, Target
recognizes a $22,000 loss on the deemed
disposition of Asset 2.
(iv) The ADADP allocated to Asset 1 is
determined as follows (for purposes of this
Example 3, TotADADP is the total ADADP
for the deemed asset disposition, A1ADADP
is the tentative amount of the total ADADP
allocated to Asset 1, A2ADADP is the amount
of the total ADADP allocated to Asset 2, G
is the grossed-up amount realized on the
disposition of recently disposed stock of
Target, L is Target’s liabilities other than
Target’s tax liability for the deemed
disposition tax consequences, TR is the
applicable tax rate, and B1 is the adjusted
basis of Asset 1 and B2 is the adjusted basis
of Asset 2):
TotADADP = G + L + (TR ×
(TotADADP¥B1¥B2))
A1ADADP = TotADADP¥A2ADADP
A2ADADP = $16,000
A1ADADP = TotADADP¥$16,000
G = ($6,000 + ($560 × 90))/1
G = $56,400
TotADADP = $56,400 + 0 + (.34 ×
(TotADADP¥$15,000¥$38,000))
TotADADP = $56,400 +
.34TotADADP¥$18,020
.66TotADADP = $38,380
TotADADP = $58,152
A1ADADP = $42,152
(v) Because A1ADADP, $42,152, does not
exceed the value of Asset 1, $50,000, the

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entire A1ADADP is allocated to Asset 1. Old
Target thus realizes and recognizes a gain of
$27,152 on the deemed disposition of Asset
1 ($42,152¥$15,000).

TKELLEY on DSK3SPTVN1PROD with RULES

§ 1.336–4

Adjusted grossed-up basis.

(a) Scope. Except as provided in
paragraphs (b) and (c) of this section or
as the context otherwise requires, the
principles of paragraphs (b) through (g)
of § 1.338–5 apply in determining the
adjusted grossed-up basis (AGUB) for
target and the consequences of a gain
recognition election. AGUB is the
amount for which new target is deemed
to have purchased all of its assets in the
deemed purchase under § 1.336–
2(b)(1)(ii) or the amount for which old
target is deemed to have purchased all
of its assets in the deemed purchase
under § 1.336–2(b)(2)(ii). AGUB is
allocated among target’s assets in
accordance with § 1.338–6 to determine
the price at which the assets are deemed
to have been purchased. If a subsequent
increase or decrease with respect to an
element of AGUB is required under
general principles of tax law,
redetermined AGUB is allocated among
target’s assets in accordance with
§ 1.338–7.
(b) Modifications to the principles in
§ 1.338–5. Solely for purposes of
applying §§ 1.336–1 through 1.336–4,
the principles of § 1.338–5 are modified
as follows—
(1) Purchasing corporation;
purchaser. Any reference to the
purchasing corporation shall be treated
as a reference to a purchaser, as defined
in § 1.336–1(b)(2).
(2) Acquisition date; disposition date.
Any reference to the acquisition date
shall be treated as a reference to the
disposition date, as defined in § 1.336–
1(b)(8).
(3) Section 338 election; section
338(h)(10) election; section 336(e)
election. Any reference to a section 338
election or a section 338(h)(10) election
shall be treated as a reference to a
section 336(e) election, as defined in
§ 1.336–1(b)(11).
(4) New target; old target. In the case
of a disposition described in section
355(d)(2) or (e)(2), any reference to new
target shall be treated as a reference to
old target in its capacity as the
purchaser of assets pursuant to the
section 336(e) election.
(5) Recently purchased stock; recently
disposed stock. Any reference to
recently purchased stock shall be
treated as a reference to recently
disposed stock, as defined in § 1.336–
1(b)(17). In the case of a distribution of
stock, for purposes of determining the
purchaser’s grossed-up basis of recently
disposed stock, the purchaser’s basis in

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recently disposed stock shall be deemed
to be such stock’s fair market value on
the date it was acquired.
(6) Nonrecently purchased stock;
nonrecently disposed stock. Any
reference to nonrecently purchased
stock shall be treated as a reference to
nonrecently disposed stock, as defined
in § 1.336–1(b)(18).
(c) Gain recognition election—(1) In
general. Any holder of nonrecently
disposed stock of target may make a
gain recognition election. The gain
recognition election is irrevocable. Each
owner of nonrecently disposed stock
determines its basis amount, and
therefore the gain recognized pursuant
to the gain recognition election, by
applying §§ 1.338–5(c) and 1.338–
5(d)(3)(ii) by reference to its own
recently disposed stock and nonrecently
disposed stock, and not by reference to
all recently disposed stock and
nonrecently disposed stock.
(2) 80-percent purchaser. If a section
336(e) election is made for target, any
80-percent purchaser and all persons
related to the 80-percent purchaser are
automatically deemed to have made a
gain recognition election for its
nonrecently disposed target stock.
(3) Non-80-percent purchaser. If not
automatically deemed made under
paragraph (c)(2) of this section, a gain
recognition election is made by a non80-percent purchaser providing, on or
before the due date for filing the section
336(e) election statement by the
appropriate party, a gain recognition
election statement, as described in
paragraph (c)(4) of this section, to the
appropriate party. If seller and target are
members of the same consolidated
group, seller is the appropriate party
and the common parent of the
consolidated group must retain the gain
recognition election statement. If seller
and target are members of the same
affiliated group but do not join in the
filing of a consolidated Federal income
tax return, or if target is an S
corporation, target is the appropriate
party and target must retain the gain
recognition election statement. If a non80-percent purchaser makes a gain
recognition election, all related persons
to the non-80-percent purchaser must
also make a gain recognition election.
Otherwise, the gain recognition election
for the non-80-percent purchaser will
have no effect.
(4) Gain recognition election
statement. A gain recognition election
statement must include the following
declarations (or substantially similar
declarations):
(i) [Insert name, address, and taxpayer
identifying number of person for whom
gain recognition election is actually

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being made] has elected to recognize
gain under § 1.336–4(c) with respect to
[his, hers, or its] nonrecently disposed
stock.
(ii) [Insert name of person for whom
gain recognition election is actually
being made] agrees to report any gain
under the gain recognition election on
[his, hers, or its] Federal income tax
return (including an amended return, if
necessary) for the taxable year that
includes the disposition date of [insert
name and employer identification
number of target].
(d) Examples. The following examples
illustrate the provisions of this section.
Example 1. On January 1 of Year 1, Seller
owns 85 shares of Target stock, A owns 8
shares, B owns 4 shares, and C owns the
remaining 3 shares. Each of A’s 8 shares, B’s
4 shares, and C’s 3 shares have a $5 basis.
Assume that Target has no liabilities. On July
1 of Year 2, Seller sells 70 shares of Target
stock to A for $10 per share. On September
1 of Year 2, Seller sells 5 shares of Target
stock to B and 5 shares of Target stock to C
for $14 per share. A section 336(e) election
is made. A does not make a gain recognition
election. A incurs $25 of acquisition costs
and B and C each incur $10 of acquisition
costs in connection with their respective
Year 2 purchases. These costs are capitalized
in the basis of Target stock. September 1 of
Year 2 is the disposition date. Because A
owns at least 10 percent of Target stock on
September 1, the disposition date, and A’s
original 8 shares of Target stock owned on
January 1 of Year 1 were not disposed of in
the qualified stock disposition, A’s original 8
shares of Target stock are nonrecently
disposed stock. Although B’s original 4
shares and C’s original 3 shares were not
disposed of in the qualified stock disposition,
because neither B nor C owns, with the
application of section 318(a), other than
section 318(a)(4), at least 10 percent of the
total voting power or value of Target stock on
the disposition date, their original shares are
not nonrecently disposed stock. The grossedup basis of recently disposed Target stock is
$1,011, determined as follows: The
purchasers’ (A, B, and C) aggregate basis in
the recently disposed target stock,
determined without regard to acquisition
costs, is $840 ((70 × $10) + (5 × $14) + (5 ×
$14)). This amount is multiplied by a
fraction, the numerator of which is 100
minus 8, the percentage of Target stock that
is nonrecently disposed stock, and the
denominator of which is 80, the percentage
of Target stock attributable to recently
disposed stock ($840 × 92/80 = $966). This
amount is then increased by the $45 of
acquisition costs incurred by A, B, and C to
arrive at the $1,011 grossed-up basis of
recently disposed Target stock ($966 + $45 =
$1,011). New Target’s AGUB is $1,051, the
sum of $1,011, the grossed-up basis of
recently disposed Target stock and $40 (8 ×
$5), A’s basis in his nonrecently disposed
Target stock.
Example 2. The facts are the same as in
Example 1 except that A makes a gain
recognition election. Pursuant to the gain

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Federal Register / Vol. 78, No. 94 / Wednesday, May 15, 2013 / Rules and Regulations
recognition election, A is treated as if he sold
on September 1 of Year 2, the disposition
date, his 8 shares of nonrecently disposed
Target stock for the basis amount, and A’s
basis in nonrecently disposed target stock
immediately after the deemed sale is the
basis amount. A’s basis amount equals his
basis in his recently disposed Target stock
without regard to acquisition costs, $700 (70
× $10), multiplied by a fraction, the
numerator of which is 100 minus 8, the
percentage of Target stock, by value,
determined on the disposition date, which is
A’s nonrecently disposed Target stock, and
the denominator of which is 70, the
percentage of Target stock, by value,
determined on the disposition date, which is
A’s recently disposed stock, which is then
multiplied by a fraction, the numerator of
which is 8, the percentage of Target stock, by
value, determined on the disposition date,
attributable to A’s nonrecently disposed
Target stock and the denominator of which
is 100 minus the numerator amount.
Accordingly, A’s basis amount is $80 ($700
× 92/70 × 8/92). A therefore recognizes gain
of $40 under the gain recognition election
($80 basis amount minus A’s $40 basis in his
nonrecently disposed stock prior to the gain
recognition election). New Target’s AGUB is
$1,091, the sum of $1,011, the grossed-up
basis of all recently disposed Target stock
and $80, A’s basis in his nonrecently
disposed Target stock pursuant to the gain
recognition election.
Example 3. (i) The facts are the same as
in Example 3 of § 1.336–3(g), that is, Seller
owns all 100 of the outstanding shares of the
common stock of Target, the only class of
Target stock outstanding. On January 1 of
Year 1, Seller sells 10 shares of Target stock
to A for $6,000 ($600 per share). On August
1 of Year 1, Seller distributes the remaining
90 shares of Target stock to its unrelated
shareholders in a transaction described in
section 355(d)(2) or (e)(2). The value of
Target stock on August 1 is $560 per share.
Target has two assets, Asset 1, which is stock
in trade of Target, a Class IV asset, with a
basis of $15,000 and a value of $50,000, and
Asset 2, which is stock in a publicly traded,
unrelated corporation, a Class II asset, with
a basis of $38,000 and a value of $16,000.
Target has no liabilities other than any
liabilities for Federal tax on account of the
deemed asset disposition. Assume Target’s
Federal tax rate for any gain or income on the
deemed asset disposition is 34 percent. Seller
had no selling costs in connection with its
sale of the 10 shares of Target stock. A
section 336(e) election is made. In addition,
A incurred $100 of acquisition costs with
respect to the purchase of the 10 shares of
Target stock. Target’s AGUB in the assets
deemed acquired pursuant to § 1.336–
2(b)(2)(ii)(B) is determined as follows (for
purposes of this Example 3, GRD is the
grossed-up basis of recently disposed stock,
BND is the basis in nonrecently disposed
stock, TotL is Target’s total liabilities,
including Target’s tax liability, and X is the
A’s total acquisition costs):
AGUB = GRD + BND + TotL
GRD = ($6,000 + ($560 × 90)) × ((100 ¥ 0)/
100) + X
GRD = ($6,000 + $50,400) × (100/100) + $100

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GRD = $56,500
BND = $0
TotL = .34 × ($27,152 (Target’s gain
recognized on deemed disposition of
Asset 1) ¥ $22,000 (Target’s loss
recognized on deemed disposition of
Asset 2)) (see Example 3 of § 1.336–3(g)
for determination of Target’s gain and
loss recognized on deemed disposition of
Assets 1 and 2)
TotL = $1,752
AGUB = $56,500 + $0 + $1,752
AGUB = $58,252
(ii) The AGUB allocated to Asset 2 is
$16,000, the value of Asset 2. Because the
excess of the total AGUB, $58,252, over the
portion of the AGUB allocated to Asset 2,
$16,000, does not exceed the value of Asset
1, the AGUB allocated to Asset 1 is such
excess, $42,252.
§ 1.336–5

Effective/applicability date.

The provisions of §§ 1.336–1 through
1.336–4 apply to any qualified stock
disposition for which the disposition
date is on or after May 15, 2013.
■ Par. 3. Section 1.338–0 is amended by
adding entries for §§ 1.338–1(e) and
1.338–5(h) to read as follows:
§ 1.338–0

*

*

Outline of topics.

*

*

*

§ 1.338–1 General principles; status of old
target and new target.

*

*

*

*

*

(e) Effective/applicability date.

*

*

§ 1.338–5

*

*

*

*

*

Adjusted grossed-up basis.

*

*

*

(h) Effective/applicability date.

*

*
*
*
*
Par. 4. Section 1.338–1 is amended by
adding three new sentences after the
parenthetical that follows the third
sentence of paragraph (a)(1), by revising
the first sentence in paragraph (c)(1),
and adding a new paragraph (e) to read
as follows:

■

§ 1.338–1 General principles; status of old
target and new target.

(a) * * *
(1) * * * However, if, as a result of
the deemed purchase of old target’s
assets pursuant to a section 336(e)
election, there would be both a qualified
stock purchase and a qualified stock
disposition (as defined in § 1.336–
1(b)(6)) of the stock of a subsidiary of
target, neither a section 338(g) election
nor a section 338(h)(10) election may be
made with respect to the qualified stock
purchase of the subsidiary. Instead, a
section 336(e) election may be made
with respect to such purchase. See
§ 1.336–1(b)(6)(ii). * * *
*
*
*
*
*
(c) * * *
(1) In general. The rules of this
paragraph (c) apply for purposes of

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28489

applying the regulations under sections
336(e), 338, and 1060. * * *
*
*
*
*
*
(e) Effective/applicability date.
Paragraphs (a)(1) and (c)(1) of this
section are applicable to any qualified
stock disposition for which the
disposition date (as defined in § 1.336–
1(b)(8)) is on or after May 15, 2013.
■ Par. 5. Section 1.338–5 is amended by
revising the first sentence in paragraph
(d)(3)(ii) and by adding a new paragraph
(h) to read as follows:
§ 1.338–5

Adjusted grossed-up basis.

*

*
*
*
*
(d) * * *
(3) * * *
(ii) Basis amount. The basis amount is
equal to the amount in paragraphs (c)(1)
and (2) of this section (the purchasing
corporation’s grossed-up basis in
recently purchased target stock at the
beginning of the day after the
acquisition date determined without
regard to the acquisition costs taken into
account in paragraph (c)(3) of this
section) multiplied by a fraction the
numerator of which is the percentage of
target stock (by value, determined on
the acquisition date) attributable to the
purchasing corporation’s nonrecently
purchased target stock and the
denominator of which is 100 percent
minus the numerator amount. * * *
*
*
*
*
*
(h) Effective/applicability date.
Paragraph (d)(3)(ii) of this section is
applicable to any qualified stock
purchase or qualified stock disposition
(as defined in § 1.336–1(b)(6)) for which
the acquisition date or disposition date
(as defined in § 1.336–1(b)(8)),
respectively, is on or after May 15, 2013.
■ Par. 6. Section 1.901–2 is amended by
redesignating paragraph (f)(5) as
paragraph (f)(6), adding a new
paragraph (f)(5), and revising the first
sentence in paragraph (h)(4) to read as
follows:
§ 1.901–2 Income, war profits, or excess
profits tax paid or accrued.

*

*
*
*
*
(f) * * *
(5) Allocation of foreign taxes in
connection with elections under section
336(e) or 338. For rules relating to the
allocation of foreign taxes in connection
with elections made pursuant to section
336(e), see § 1.336–2(g)(3)(ii). For rules
relating to the allocation of foreign taxes
in connection with elections made
pursuant to section 338, see § 1.338–
9(d).
*
*
*
*
*
(h) * * *
(4) Paragraphs (f)(3), (f)(4), and (f)(6)
of this section apply to foreign taxes

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Federal Register / Vol. 78, No. 94 / Wednesday, May 15, 2013 / Rules and Regulations

paid or accrued in taxable years
beginning after February 14, 2012.
* * *
■ Par. 7. Section 1.1502–13 is amended
by:
■ 1. Revising the heading of paragraph
(f)(5)(ii)(C).
■ 2. Revising the first sentence in
paragraph (f)(5)(ii)(C)(1).
■ 3. Adding a new sentence at the end
of paragraph (m).
The revisions and addition read as
follows:
§ 1.1502–13

Intercompany transactions.

*

*
*
*
*
(f) * * *
(5) * * *
(ii) * * *
(C) Section 338(h)(10) and Section
336(e).— (1) In general. This paragraph
(f)(5)(ii)(C) applies to a deemed
liquidation of T under section 332 as the
result of an election under section
338(h)(10) or section 336(e). * * *
*
*
*
*
*
(m) Effective/applicability date. * * *
Paragraph (f)(5)(ii)(C) of this section is
applicable to any qualified stock
disposition (as defined in § 1.336–
1(b)(6)) for which the disposition date
(as defined in § 1.336–1(b)(8)) is on or
after May 15, 2013.
*
*
*
*
*
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Approved: May 9, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2013–11522 Filed 5–10–13; 4:15 pm]
BILLING CODE 4830–01–P

PENSION BENEFIT GUARANTY
CORPORATION
29 CFR Part 4022
Benefits Payable in Terminated SingleEmployer Plans; Interest Assumptions
for Paying Benefits
Pension Benefit Guaranty
Corporation.
ACTION: Final rule.

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AGENCY:

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This final rule amends the
Pension Benefit Guaranty Corporation’s
regulation on Benefits Payable in
Terminated Single-Employer Plans to
prescribe interest assumptions under
the regulation for valuation dates in
June 2013. The interest assumptions are
used for paying benefits under
terminating single-employer plans
covered by the pension insurance
system administered by PBGC.
DATES: Effective June 1, 2013.
FOR FURTHER INFORMATION CONTACT:
Catherine B. Klion
(Klion.Catherine@pbgc.gov), Assistant
General Counsel for Regulatory Affairs,
Pension Benefit Guaranty Corporation,
1200 K Street NW., Washington, DC
20005, 202–326–4024. (TTY/TDD users
may call the Federal relay service tollfree at 1–800–877–8339 and ask to be
connected to 202–326–4024.)
SUPPLEMENTARY INFORMATION: PBGC’s
regulation on Benefits Payable in
Terminated Single-Employer Plans (29
CFR part 4022) prescribes actuarial
assumptions—including interest
assumptions—for paying plan benefits
under terminating single-employer
plans covered by title IV of the
Employee Retirement Income Security
Act of 1974. The interest assumptions in
the regulation are also published on
PBGC’s Web site (http://www.pbgc.gov).
PBGC uses the interest assumptions in
Appendix B to Part 4022 to determine
whether a benefit is payable as a lump
sum and to determine the amount to
pay. Appendix C to Part 4022 contains
interest assumptions for private-sector
pension practitioners to refer to if they
wish to use lump-sum interest rates
determined using PBGC’s historical
methodology. Currently, the rates in
Appendices B and C of the benefit
payment regulation are the same.
The interest assumptions are intended
to reflect current conditions in the
financial and annuity markets.
Assumptions under the benefit
payments regulation are updated
monthly. This final rule updates the
benefit payments interest assumptions
for June 2013.1
SUMMARY:

1 Appendix B to PBGC’s regulation on Allocation
of Assets in Single-Employer Plans (29 CFR part

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The June 2013 interest assumptions
under the benefit payments regulation
will be 0.75 percent for the period
during which a benefit is in pay status
and 4.00 percent during any years
preceding the benefit’s placement in pay
status. In comparison with the interest
assumptions in effect for May 2013,
these interest assumptions represent a
decrease of 0.25 percent in the
immediate annuity rate and are
otherwise unchanged.
PBGC has determined that notice and
public comment on this amendment are
impracticable and contrary to the public
interest. This finding is based on the
need to determine and issue new
interest assumptions promptly so that
the assumptions can reflect current
market conditions as accurately as
possible.
Because of the need to provide
immediate guidance for the payment of
benefits under plans with valuation
dates during June 2013, PBGC finds that
good cause exists for making the
assumptions set forth in this
amendment effective less than 30 days
after publication.
PBGC has determined that this action
is not a ‘‘significant regulatory action’’
under the criteria set forth in Executive
Order 12866.
Because no general notice of proposed
rulemaking is required for this
amendment, the Regulatory Flexibility
Act of 1980 does not apply. See 5 U.S.C.
601(2).
List of Subjects in 29 CFR Part 4022
Employee benefit plans, Pension
insurance, Pensions, Reporting and
recordkeeping requirements.
In consideration of the foregoing, 29
CFR part 4022 is amended as follows:
PART 4022—BENEFITS PAYABLE IN
TERMINATED SINGLE-EMPLOYER
PLANS
1. The authority citation for part 4022
continues to read as follows:

■

4044) prescribes interest assumptions for valuing
benefits under terminating covered single-employer
plans for purposes of allocation of assets under
ERISA section 4044. Those assumptions are
updated quarterly.

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