New Regulations Provide Advantageous Acquisition Structures

New regulations issued by Treasury under Section 336(e)1 permit certain stock acquisitions to be treated as asset purchases, allowing buyers access to stepped-up asset basis and corresponding depreciation and amortization deductions.

Buyers lament that corporate dispositions frequently are structured as stock sales. A stock sale many times is the most practical structure because of difficulties that arise in assigning contracts and licenses, or satisfying regulatory approval, in the asset sale context. Further, sellers often prefer stock sales because they result only in shareholder-level tax. In contrast, asset sales generally result in corporate-level tax on the disposition of the assets and additional shareholder-level tax on the distribution of net proceeds.

Buyers, on the other hand, prefer asset acquisitions from a tax perspective because the assets' basis is stepped up, leading to greater depreciation and amortization tax benefits. In contrast, a stock acquisition provides a buyer with a purchase price basis in the stock acquired but historic (and often lower) asset basis inside the target.

A stock sale treated as an asset sale in which the seller is subject to only one level of tax, therefore, represents the best of both worlds.

For some time, this result has been available under Section 338(h)(10).2 That section, however, requires (among other criteria) that the purchasing entity be a corporation. Thus, unless a non-corporate purchaser forms a corporate acquiring intermediary, asset basis step-up is unavailable in the stock acquisition context for a non-corporate purchaser absent significant restructuring. Section 336(e) changes this and thus changes the playing field in corporate acquisitions.

Section 336(e) Requirements

Under Section 336(e), if a corporate seller or S corporation shareholder disposes of stock of a target corporation in a qualified stock disposition, an election may be made to treat the transaction as a sale of the target corporation's assets. For this purpose, in general:

a seller is a domestic corporation that makes a qualified stock disposition of stock of another corporation an S corporation shareholder is a shareholder of the target corporation (if the target corporation is an S corporation) a disposition of stock includes a sale, exchange or distribution. Notably, for this purpose, certain tax-free and related party transactions are excluded the target corporation must be a domestic corporation (including an...