IRC 338(g) Elections for Buyers of Controlled Foreign Corporation Stock in Wake of Major Changes

Description

The Section 338(g) election has long been a favored tax planning tool in sales of a CFC to or from a U.S. seller. The election permits acquirers of CFC stock to take a step-up in the tax basis of the target company's assets. However, key provisions in the 2017 tax reform law have introduced changes to the economic calculus of making the election.

When a buyer makes the 338(g) election, the result is a deemed closing of the tax year of the target CFC on the date of sale, with all of the target's legacy tax attributes eliminated. The seller reports gain on the deemed sale of its assets, including any Subpart F income and GILTI. The election also requires the seller to include any Subpart F income or GILTI earned before the date of sale. Absent an election, the buyer would be liable for Subpart F income and GILTI for the entire year of sale, less current year earnings included in the seller's income.

However, the lowering of corporate rates, along with a move to a more territorial system of tax and the introduction of Section 1248(j), means that in some transactions, buyers and sellers both must re-evaluate the benefits of a 338(g) election. In certain circumstances, a buyer may want to increase target E&P to claim a dividends-received deduction. The changes may also increase the tax cost to U.S. sellers of CFC stock. Tax advisers must be able to recognize the impact the new provisions make to CFC stock sale transactions under various scenarios.

Listen as our experienced panel details how the 2017 tax reform law changed the value calculation for determining whether a buyer of CFC stock should make a Section 338(g) election.