New Section 336(e) Election Provides Additional Flexibility in Taxation of Stock Transactions

by Miller & Martin PLLC

On May 15, 2013, the Department of the Treasury issued final regulations regarding a new election now permitted under Section 336(e) of the Internal Revenue Code that allows sellers to elect to treat transactions structured as stock sales for corporate law purposes as asset sales for federal income tax purposes.  This election can apply in certain circumstances where the parties are not eligible to make a similar election under Section 338(h)(10) of the Code.  The election is now available for transactions occurring on or after May 15, 2013.  Consequently, parties involved in transactions involving corporate entities will want to understand the possible availability and impact of the Section 336(e) election on any proposed transaction.
The Section 336(e) election is available to a seller that sells at least 80% of the stock of a corporation (measured by both voting rights and overall value) within a 12 month period.  If the election is filed, the sold corporation is treated as selling its assets to a new corporation for an amount equal to the purchase price paid for the stock plus any assumed liabilities.  The sold corporation is then treated as liquidating and distributing the sale proceeds to the selling shareholders.  As a result, the gain (or loss) inherent in a corporation’s assets is triggered and the selling shareholders, depending upon the circumstances, may or may not incur additional gain or loss upon the deemed liquidating distribution.  The tax results are similar to the results of a transaction involving a Section 338(h)(10) election.  The purchaser is treated as acquiring the new corporation which has a full stepped-up basis in its assets equal to the deemed purchase price paid for the assets.  If elections under both Section 338(h)(10) and Section 336(e) could apply to a transaction, the regime of Section 338(h)(10) is deemed to take precedence.
Both a corporate parent selling the stock of a corporate subsidiary out of a consolidated group and the shareholders of an S corporation selling the S corporation stock are eligible to make the Section 336(e) election.  Significantly, and unlike a Section 338(h)(10) election, the purchaser need not be a corporate entity for the transaction to be eligible for the Section 336(e) election.  Consequently, the Section 336(e) election may be most useful in circumstances where individual or partnership (including limited liability company) acquirers are seeking to acquire the stock of a corporate target while still enjoying the benefit of a step-up in the tax basis in the target corporation’s assets equal to the purchase price paid for the stock.
There are several aspects of the Section 336(e) election that could be significant in a transaction and should be noted:
  • The Section 336(e) election is made unilaterally by the sellers; consequently, for purchasers seeking to take advantage of (or avoid) an election, the acquisition agreement will need to contractually commit the sellers to the desired course of action.
  • All shareholders of an S corporation target must consent to the Section 336(e) election (and gain is triggered to all shareholders upon the election) even if all shareholders are not participating in the sale.
  • The acquired corporation will be treated as a new corporate taxpayer in the hands of the purchasers and, if eligible to be treated as an S corporation, a new S corporation election will need to be filed on its behalf.
  • Although treated as a new corporate taxpayer, the acquired corporation will remain liable as a matter of law for all pre-closing corporate level taxes; responsibility for such taxes should be clearly addressed in the acquisition agreement.
  • A Section 336(e) election should be made on Form 8883 (until a new form is developed) and filed in connection with the tax returns for the pre- and post-closing short-years for the acquired corporation for the year of acquisition.
Although of fairly narrow application, the new Section 336(e) election is likely to be advantageous in particular circumstances and should be carefully considered by taxpayers and their advisors in connection with the planning for purchases and sales of corporate entities.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Miller & Martin PLLC | Attorney Advertising

Written by:

Miller & Martin PLLC

Miller & Martin PLLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.