Stewart Law, P.A.

If  you are acquiring a company through a stock purchase (rather than an asset purchase), remember to consider a 338 election so that you get a new cost basis for increased depreciation deductions and lower income taxes. See below for an explanation of the 338 election.

1. For a 338 election, the buyer has to be a corporation, but there are strategies to help get there, including mergers.
2. The manner in which purchase price is allocated to assets is important, but it is not essential for the buyer and seller to agree.
3. If closely-held business owners are separating, watch the related party rules carefully as these can cause losses to be disallowed.
4. When you are selling a partnership interest, you generally get capital gain treatment, but there are a lot of exceptions to consider.
5. In the service firm setting, choosing the “C corporation” income tax classification still looks like an unlikely bet right now.  With dividend income tax rates set to jump to 39.6% in 2013, the C corporation “double tax” could be around 60%.

While this is not an exhaustive analysis or set of recommendations, it is a starting point for a legal consultation. 

What is a Section 338 Election?

A corporate buyer of C corporation stock may, if it meets certain requirements, make a Sec. 338 election. If made, the company being acquired is treated as having sold all of its assets on the acquisition date for fair market value (FMV) to a new corporation, and thereafter immediately liquidated (Sec. 338(a)(1)).

The acquired company recognizes gain or loss on the “deemed sale” just as if  it had sold its assets.

The deemed sale is treated as occurring after the acquired company’s stock has been sold, and is included in a one-day deemed-sale return that the purchaser must file as owner of new entity; see Sec. 338(h)(9) and Temp. Regs. Sec. 1.338-10T.

The new entity’s Federal income tax liability (which would normally be paid by the acquired company in an actual asset sale) shifts to the purchaser.

The complexities of the Federal income tax code are a specialty of our firm. Please call for a consultation of how this information applies to your situation.