IRC 336(e) Elections for S Corporation Targets: Basis Step-Up Treatment for Qualified Stock Dispositions

Description

The Section 336(e) election allows acquirers of a company to achieve a step-up in the tax basis of the target company’s assets. Similar to the longer established Section 338(h)(10) election, the 336(e) election allows equivalent tax consequences across a broader spectrum of target companies with a simpler transaction structure.

A 336(e) election permits a purchaser to treat a “qualified stock disposition” (QSD) as a purchase of the target’s assets. Unlike Section 338(h)(10), which is only available to corporations purchasing other corporations, a 336(e) election is available to partnerships, S corporations and individuals. An S corporation stock disposition may qualify as a QSD if 80% or more of the vote and value of the stock is disposed of in a single or series of specified transactions.

The rules governing whether a disposition meets the criteria for step-up treatment can be complicated, with some everyday transactions excluded from being considered a QSD. Additionally, there are challenges with determining the eligible date range for making required elections, as well as traps in identifying the tax impact of QSDs where less than 100% of the S corporation stock is disposed.

Tax advisers must have a grasp of the specific rules and reporting requirements of making a 336(e) election to avoid costly tax consequences due to a QSD failure.

Listen as our experienced panel provides a thorough and practical guide to the planning opportunities and reporting challenges of making a Section 336(e) step-up election in the acquisition of a target S corporation.