Sales Transactions of Controlled Foreign Corporation Stock: Avoiding Tax Impact For Buyers and Sellers

Navigating Sections 338(g) Elections and 901(m) Limitations for Buyers and Section 1248 Recharacterization Rules for Sellers

Recording of a 90-minute CLE/CPE webinar with Q&A

Conducted on Wednesday, March 22, 2017
Recorded event now available

This CLE webinar will provide tax counsel with a practical guide to navigating the IRS rules governing sales transactions involving controlled foreign corporation (CFC) stock. The panel will discuss the IRC 901(m), limitations on foreign tax credit benefits of a Section 338(g) election for buyers of CFC stock, detail the mechanics of dividend recharacterization on sales, and identify relief available under Section 1248(b).


Sales transactions of CFC stock shares can create unforeseen and costly tax consequences for both purchasers and sellers of CFC shares. Tax counsel structuring purchase transactions must be aware of available tax benefits and possible tax costs in exchanges of CFC stock.

Buyers of CFC shares generally may make an election under IRC Section 338(g) to treat the purchase as a formation of a new foreign corporation that has acquired all assets and assumes all liabilities of the foreign target.

This allows the purchaser to take a step-up of the assets to fair market value, avoiding any U.S. tax costs with the election and boosting the value of foreign tax credits due to the basis differential between the U.S. and the country where the CFC is located. However, Section 901(m) serves to limit those credits, and tax counsel must grasp the impact of the foreign tax credit limitation.

For sellers of CFC shares, Section 1248 can have a dramatic tax impact on the U.S. treatment of sale gains. The Section 1248 rules require a seller to treat gain recognized on the sale or exchange as a dividend under certain conditions.

However, Section 1248(b) limits the impact of the dividend recharacterization on a covered sale. But, this provision applies only to sales of stock in a CFC located in a country that does not have a bilateral income tax treaty with the United States.

Where CFC shares are owned in a partnership interest, the sale of that partnership share can create still further complexities for the taxpayer in determining treatment of the sale gain. Tax counsel must have a thorough understanding of the tax treatment of CFC sale gains to avoid costly tax consequences.

Listen as our experienced panel provides a thorough and practical guide to structuring tax-efficient purchases and sales of CFC shares.


  1. Structuring purchase transactions when making a Section 338(g) election
  2. Section 901(m) limitations on 338(g) benefits
  3. Post-acquisition restructuring
  4. Scenarios where a 338(g) election is not optimal tax strategy
  5. Section 1248 dividend recharacterization rules
  6. Section 1248(b) relief
  7. Partnership interests owning CFC shares


The panel will discuss these and other important topics:

  • When should a buyer of a CFC target not make a Section 338(g) election?
  • What are the mechanics of making a Section 338(g) election in a purchase transaction?
  • How does Section 901(m) operate to limit the tax benefits of a 338(g) election?
  • When does Section 1248 dividend re-characterization apply?
  • How does Section 1248(b) operate to limit the tax impact of dividend recharacterization?
  • Special considerations for sales of partnership interests where the partnership owns stock in a CFC

Learning Objectives

After completing this course, you will be able to:

  • Identify the tax mechanics of a 338(g) election when CFC stock shares are purchased
  • Decide when a purchaser should not make a Section 338(g) election
  • Discern the impact of the Section 901(m) limitations on the basis adjustment of a 338(g) election
  • Recognize the dividend recharacterization rules of Section 1248
  • Determine when the Section 1248 rules do and do not apply


William R. Skinner, Partner
Fenwick & West, Mountain View, Calif.

Mr. Skinner focuses his practice on U.S. international taxation, with a particular emphasis on tax planning and international corporate transactions. He has broad experience in international tax issues for U.S. corporations, foreign corporations, and high net-worth individuals, and has represented clients across a variety of industries. He teaches international taxation as an adjunct professor in San Jose State University’s MST program, and speaks and writes frequently on international and corporate tax issues.

Alison N. Dougherty, J.D., LL.M., Director
Aronson, Rockville, Md.

Ms. Dougherty has extensive experience assisting clients with U.S. tax reporting and compliance for offshore assets and foreign accounts. She specializes in international tax compliance, planning and structuring as a subject matter leader of her firm's international tax practice. Her responsibilities include U.S. Federal and multi-state tax compliance for C corporations, S corporations, partnerships and individuals. She also provides transactional tax planning and structuring services.

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Tax Law Advisory Board

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Capell Barnett Matalon & Schoenfeld

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Texas A&M University Law

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Patrick Derdenger

Tax Partner

Steptoe & Johnson

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Cummings & Lockwood

Lynn Fowler


Kilpatrick Townsend & Stockton

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Hinckley Allen

J. Leigh Griffith

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Waller Lansden Dortch & Davis

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Mark S. Lange



Joseph C. Mandarino


Smith Gambrell & Russell

Lori Mathison

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Steptoe & Johnson

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Susan Seabrook


Buchanan Ingersoll & Rooney

Peter Stathopoulos

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Sutherland Asbill & Brennan

Amanda Wilson


Lowndes Drosdick Doster Kantor & Reed

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