Presenting a live 110 ‐ minute teleconference with interactive Q&A IRC Section 338(h)(10) Election Strategies for Tax Counsel Strategies for Tax Counsel Leveraging the Election in Structuring Acquisitions, Dispositions and Asset and Stock Transfers TUES DAY, DECEMBER 18, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Monty W Walker Principal Walker Business Advisory Services Wichita Falls Texas Monty W. Walker, Principal, Walker Business Advisory Services , Wichita Falls, Texas ervices - M&A, Ernst & Young , Washington, D.C. S hane Kiggen, Manager, Transaction Advisory S Attendees seeking CPE credit must listen to the audio over the telephone. Please refer to the instructions emailed to registrants for dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Strafford Section 338(h)(10) Webinar Tuesday December 18, 2012 Shane Kiggen Ernst & Young shane.kiggen@ey.com h ki @ 202.327.7289 Monty Walker Walker Business Advisory Services mwalker@walkeradvisory.com 940.322.5086
Circular 230 disclaimer • Any US tax advice contained herein was not Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax l law provisions. i i • These slides are for educational purposes only and are not intended, and should not be relied d i d d d h ld b li d upon, as accounting advice. 6
Elections under Section 338 generally g y • Section 338 provides two elective procedures – Section 338(g) and Section 338(h)(10) – to treat a qualifying purchase and sale of stock of an eligible target as a purchase and to treat a qualifying purchase and sale of stock of an eligible target as a purchase and sale of the assets of the target (and, in some cases the target’s subsidiaries) for Federal income (and, in some cases, state) tax purposes • The Federal income tax consequences of, and prerequisites to, making a Section 338(g) q , p q , g (g) election differ markedly from the Federal income tax consequences of, and prerequisites to, making a Section 338(h)(10) election: A Section 338(g) election can be made with respect to a qualifying acquisition of any C corporation; a – Section 338(h)(10) election can be made only with respect to a qualifying acquisition of an 80% corporate ( )( ) y p q y g q p subsidiary or an S corporation – A Section 338(g) election results in both corporate and shareholder level tax; a Section 338(h)(10) election results only in corporate level tax The two levels of tax that attend a Section 338(g) election render it uneconomic in all but a limited set of circumstances ( e.g ., where (g) ( g , • the seller is foreign or the target has net operating or built ‐ in losses sufficient to offset corporate ‐ level gain on the deemed asset sale) – A Section 338(g) election is made unilaterally by the purchasing corporation, and the purchasing corporation bears the incremental tax burden from the gain on the deemed sale of the target's assets; a Section 338(h)(10) election is made jointly by the purchasing corporation and seller, and the seller bears the incremental tax burden from the gain on the deemed sale of the target's assets incremental tax burden from the gain on the deemed sale of the target s assets 7
Section 338(g) Transaction Purchaser Receives Stock Actual: Purchaser Seller Seller Receives Cash Target moves to Purchaser Target Target Deemed Additional Transaction: Deemed Additional Transaction: New Target receives all of Old Target Assets New Old Target Target Old Target receives Cash PLUS New Target assumes liabilities 8
Impact of Section 338(g) Election p (g) New Target receives all of Old Target Assets New Old T Target T Target Old Target receives Cash PLUS New Target assumes liabilities • Target is treated as having sold its assets for Fair Market Value • Target’s unused and remaining tax attributes disappear • Target’s Shareholders treated as selling Target Stock ’ Sh h ld d lli S k • Target’s Shareholders liable for tax on gain from stock sale • Purchaser is liable for tax on gain from deemed asset sale Purchaser is liable for tax on gain from deemed asset sale 9
Section 338(h)(10) Transaction Purchaser Receives Stock Actual: Purchaser Seller Seller Receives Cash Target Target moves to Purchaser Target Deemed: P Purchaser h S ll Seller Old target liquidates New Target receives all of Old Target Assets g g into Seller into Seller New Old Target Target Old Target receives Cash PLUS New Target assumes liabilities g 10
Impact of Section 338(h)(10) Election p ( )( ) Purchaser Seller Old target Old target liquidates New Target receives all of Old into Seller Target Assets New Old Target Target g Old Target receives Cash PLUS New Target assumes liabilities Target’s shareholder’s stock sale is disregarded • • Target is treated as selling assets and ceasing to exist for federal tax purposes • Target’s shareholders are liable for tax on gain from deemed asset sale • Purchaser generally receives step ‐ up in basis on Target’s assets • Target’s unused tax attributes carry over to selling shareholder if member of consolidated filing group 11
Mechanics of the Section 338(h)(10) election ( )( ) • The Section 338(h)(10) election is a joint election by the purchasing corporation ( P ) and the selling consolidated group (or selling affiliate or S corporation shareholders) ( S ) to treat a qualifying purchase and sale of stock of an eligible target ( T ) as a purchase and sale of the assets of T (and, in some cases T’s subsidiaries) for Federal income (and, in some cases, state) tax purposes b idi i ) f d l i ( d i ) • If P and S join in making a Section 338(h)(10) election for T: – T ( Old T ) is treated as transferring all of its assets to an unrelated person in a taxable transaction for an amount generally equal to the consideration received for the stock plus liabilities assumed generally equal to the consideration received for the stock plus liabilities assumed – Old T recognizes gain or loss on the deemed sale of its assets while a member of the S consolidated group – Following the deemed asset sale, but while Old T is still a member of the S consolidated group, Old T is treated as transferring all of its assets (i.e., the deemed sales proceeds) to S and as ceasing to exist • This transfer is characterized for Federal income tax purposes as if the parties had actually engaged in the transactions deemed to occur, taking into account other transactions that actually or were deemed to occur. The principal consequences of this characterization are that, usually, the shareholders will have the tax result attendant to a liquidation of the company – Th The regulations are unclear, but from P’s perspective, the transaction may be viewed as if it created a new (at least l ti l b t f P’ ti th t ti b i d if it t d ( t l t 80% owned) subsidiary ( New T ), which purchased the assets of Old T in a taxable transaction for an amount generally equal to the consideration paid for the stock plus the assumption of T’s liabilities • The principal consequence of this characterization is that, as in any other taxable purchase, New T will take basis in its assets equal to the purchase price, and will generally not succeed to the tax attributes of Old T 12
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