SECTION 338(H)(10) S CORPORATION CHECKLISTAICPA

1、section 338(h)(10) s corporation checklist (rev. 9/05)prefacewhen the shareholders of an s corporation decide to dispose of their interests in the corporation in a taxable transaction, they have several alternative methods to effectuate the deal. from a tax perspective, a sale of all of the s corpor

2、ations outstanding stock will result in the same total amount of gain or loss being recognized by the s corporations shareholders as a sale of all of the s corporations assets followed by a complete liquidation of the s corporation. however, with an asset sale, some of the gain may be taxed at ordin

3、ary income tax rates, while with a stock sale the gain would generally be all capital gain. in addition, with an asset sale, the built-in gain tax or passive investment income tax may apply. however, for purposes of determining if the passive investment income tax applies, liquidating distributions

4、are taken into account in determining if the corporation has earnings and profits at the close of the tax year; thus, generally the passive investment income tax will not apply in the year of liquidation. there may also be state and local tax differences between a stock sale and an asset sale follow

5、ed by a complete liquidation.from the buyers perspective, a stock acquisition results in a cost basis in the stock acquired, but not in a step-up (or down) in the basis of the acquired corporations assets. the tax attributes (e.g., net operating loss carryovers and earnings and profits) of the acqui

6、red corporation remain with the corporation. if the buyer acquires assets, the buyers bases in the assets are stepped-up (or down) to reflect the purchase price paid by the buyer for such assets. the buyer does not succeed to the acquired corporations corporate tax attributes.in determining whether

7、to structure the sale of an s corporation as stock sale or as an asset sale followed by a complete liquidation of the corporation, the additional cost of an asset sale from the sellers perspective (e.g., ordinary income taxed at a higher rate and built-in gain tax) is often compared to the benefit o

8、f the basis step-up received by the buyer.non-tax issues also come into play. examples include the need to: determine who has responsibility for disclosed and undisclosed liabilities; decide what happens to unwanted assets; and address the situation of dissident shareholders. in addition, an actual

9、sale of some kinds of assets may not be possible (e.g., certain licenses that are not transferable). state transfer taxes can also weigh against an asset sale.if the target is an s corporation and a stock purchase is desired for non-tax reasons, but an asset purchase is desired for tax reasons, it i

10、s common for the target s corporations shareholders and the acquiring corporation to agree to make an election under section 338(h)(10). regulation section 1.338(h)(10)-1(c) permits corporations making a qualified stock purchase (qsp) of a target s corporation to make an election under section 338(h

11、)(10) jointly with the s corporation shareholders. when this election is made, for tax purposes the sale of the stock by the selling shareholders is ignored. instead, the s corporation is deemed to sell its assets to the acquirer (in the form of new target) and to liquidate, generally under sections

12、 331 and 336. because the targets s status remains in effect throughout this deemed sales process, any gains or losses recognized on the deemed sale flow through to the shareholders (and adjust their stock bases for purposes of determining gain or loss on the deemed liquidation). the deemed asset sa

13、le may cause the built-in gain tax or the passive investment income tax to apply at the s corporation level (but see footnote 1).all shareholders of the target s corporation (selling and non-selling) must consent to the section 338(h)(10) election.it should be noted that an s corporation could also

14、be the acquiring corporation. in that case, the acquiring corporation could make a qualified subchapter s subsidiary (qsub) election with respect to the target, provided it acquires 100 percent of the target stock in the qsp and the target is a domestic corporation and is not an “ineligible corporat

15、ion” as defined in section 1361(b)(2). the qsub election would be effective after the effective date of the section 338(h)(10) deemed asset sale. see regulation sections 1.338-3(c)(1)(i) and 1.1361-4(b)(4).this section 338(h)(10) s corporation checklist is meant to make the experienced tax professio

16、nal aware of certain federal income tax issues arising from a section 338(h)(10) transaction involving an s corporation target. yesnocommentsvalidity of s corporation status 1.is the target corporation an s corporation at the time of the qualified stock purchase?note: only certain target corporation

17、s can participate in a section 338(h)(10) election. members of a consolidated group, affiliated corporations, and s corporations can participate in a section 338(h)(10) transaction. this checklist focuses on s corporation targets. in this regard, if stock of a purported s corporation is purchased in

18、 a qualified stock purchase (qsp), it is critical to ascertain that the target corporation has a valid s election in effect at the time of acquisition if a section 338(h)(10) election is intended._2.has the target s corporation maintained its s status continuously since its most recent election?_3.d

19、etermine continuous s status by examining the following documents: form 2553, election by a small business corporation. make sure all shareholders at the time of the corporations current s election have signed the form. the consents of certain other shareholders may be required. see reg. section 1.1

20、362-6(b)(2). have appropriate consents been reviewed?_ did both spouses sign the election form if they live in a community property state?_ with respect to the last question, are both spouses qualified shareholders?_ if a qualified subchapter s trust (qsst) was a shareholder on the date of the s ele

21、ction, did the current beneficiary (rather than the trustee(s) sign the election form?_ was a valid qsst election made by the current beneficiary?_ under reg. section 1.1362-6(b)(2)(iv) if an electing small business trust (esbt) is a shareholder on the date of the s election, the trustee is required

22、 to consent to the s election. if the grantor portion of the esbt (see reg. section 1.641(c)-1(b)(1) consists of s stock, the deemed owner of the grantor portion also must consent to the s election. has this rule been followed?_ was a valid esbt election made by the trustee?_ examine the corporation

23、s “governing provisions” and ask the target to provide a distribution schedule for each of its shareholders on a year-by-year basis. do the governing provisions provide that each outstanding share of stock has identical rights to distribution and liquidation proceeds and were distributions made on a

24、 pro rata basis? if not, could the non-pro rata distributions result in a second class of stock? see reg. section 1.1361-1(l) to determine whether a potential second class of stock exists. note that payment of varying amounts to s corporation shareholders in a transaction for which a section 338(h)(

25、10) election has been made will not violate the one class of stock requirement, provided the varying amounts have been negotiated at arms length with the purchaser. have these things been done?_ have you reviewed any shareholder agreements, buy-sell agreements or redemption agreements to determine w

26、hether these instruments have created a second class of stock?_ have you reviewed the liabilities and equity sections of the balance sheet to make sure that no instruments, obligations or arrangements exist that could result in a second class of stock? see reg. section 1.1361-1(l)(4)._ have you revi

27、ewed any stock option plans to determine if call options are outstanding and whether a second class of stock exists?_ have you reviewed all trust shareholder agreements to make sure the trusts are eligible s corporation shareholders?_ have you reviewed past year tax returns, including schedules k-1,

28、 for possible disqualifying transactions, e.g., pre-1997 ownership of 80% or more of the stock of a domestic or foreign corporation?_4.has there been an inadvertent termination (or an invalid election) of s status? if so, request a private letter ruling from the irs seeking a waiver of the invalid e

29、lection or termination. (see rev. proc. 2003-43, 2003-1 c.b. 998, for certain automatic waivers.) if applicable, has this been done?_validity of qsub election5.if the target s corporation has a purported qsub, have you verified that the qsub election has been properly filed and that no event has ter

30、minated that election?_6.if the status of a subsidiary as a qsub is uncertain, have you considered making a protective section 338(h)(10) election with respect to the subsidiary?_qualified stock purchases7.with respect to the anticipated acquisition, will the requirements for a qsp be met?note: if t

31、he acquisition is not a qsp, a section 338 election cannot be made and cost basis in the targets assets will not be obtained._has 80% or more (vote and value) of the targets stock been acquired? note: if the acquisition takes place in multiple steps that could be characterized as a reorganization un

32、der the step-transaction doctrine, see temp. reg section 1.338(h)(10)-1t(c)(2),(e)examples (11)-(14). see also rev. rul. 90-95, 1990-2 c.b. 67, and rev. rul. 2001-46, 2001-2 c.b. 321._ is the acquirer a c or s corporation?_ has the acquiring corporation “purchased” the stock of the target s corporat

33、ion?note: section 338(d)(3) requires, among other things, that a qsp be effected through a “purchase.” in general, stock is “purchased” if the acquiring corporation acquires the stock from an unrelated person and receives a cost basis in the stock. see section 338(h)(3) and reg. section 1.338-3(b)._

34、8.has the equity interest of a shareholder of the target s corporation been completely terminated during the s corporations final taxable year but prior to the qsp?_ if so, have the s corporation, the terminated shareholder, and other affected shareholders agreed to a section 1377(a)(2) closing of t

35、he books for income allocation purposes?_ if so, is the new management of the s corporation (new target) contractually obligated to effectuate the section 1377(a)(2) election by attaching an appropriate statement to old targets timely filed original or amended final return?_ if a section 1377(a)(2)

36、election has not been made with respect to a previous termination of a shareholders interest, has such an election been considered?_note: if a shareholders entire interest in an s corporation is terminated during a taxable year, the corporation may elect under section 1377(a)(2) to “close its books”

37、 with respect to the affected shareholder(s) at the close of the day of such termination. all affected shareholders and the corporation must agree. regulation section 1.1377-1(b)(5) requires the election to be attached to a timely filed or amended return for the taxable year. if the s corporation is

38、 the target of a qsp for which a section 338(h)(10) election is made, the management of new target files the tax return for the target corporations taxable year that ends on the date of the qsp. thus, the “old” shareholders of the s corporation may want to contractually require that new target attac

39、h the election to the form 1120s. note that a similar issue arises in the case of a “qualifying disposition” under reg. section 1.1368-1(g).9.will all target shareholders sell their stock to the acquiring corporation?_ if not, have the non-selling shareholders determined how they will pay tax on ass

40、et gains allocated to them, as well as gain or loss on the deemed liquidation, when the section 338(h)(10) election is made and the s corporation is deemed to have sold its assets and liquidated?_filing requirements10.will new t file the final s corporation return of old t?notes: new t is responsibl

41、e for filing old ts final form 1120s. the old t shareholders should negotiate with p, prior to the qsp, the content of the final form 1120s. new t is liable for old ts federal income tax liabilities, including the tax liability for the deemed sale tax consequences, notwithstanding the deemed liquida

42、tion of old t. reg. sections 1.338(h)(10)-1(d)(2) and 1.338-1(b)(3)(i). under section 6011(a) and reg. section 1.6011-1(a) such person liable for the tax is responsible for the proper filing of returns. although new t and old t generally are treated as two separate corporations for purposes of subti

43、tle a of the code, new t generally is treated as a continuation of old t for purposes other than subtitle a. reg. section 1.338-1(a)(1), (b)(1), (b)(3). “procedure and administration” is in subtitle f; thus, new t is a continuation of old t for this purpose._11. will the final form 1120s for the old

44、 target s corporation be filed by the 15th day of the third month following the month of the qsp?_12. will p and all target s corporation shareholders (even those who do not sell their stock) jointly make a section 338(h)(10) election on form 8023, elections under section 338 for corporations making

45、 qualified stock purchases? note: see rev. proc 2003-33, 2003-1 c.b. 803, for automatic extension for making a section 338(h)(10) election). _ will the form 8023 be filed by the 15th day of the 9th month following the month of the qsp?_note: penalties for failure to file or pay tax are waived if the

46、 final return of the old target s is filed and the tax paid by the due date of the form 8023. in that case, interest on any underpayment runs from the original due date of the final return to the date of payment. see reg. section 1.338-10(b).note: form 8023 is no longer required to be attached to ei

47、ther old targets, new targets, or purchasing corporations income tax returns.13.will form 8023 be ready for signature at the closing of the acquisition? note: from the buyers perspective, the target shareholders should not be allowed to walk away from the closing table with cash in hand without havi

48、ng signed the form 8023. if the parties have not yet decided to actually file the election form (due by the 15th day of the ninth month following the month of the qsp), the executed form can be held by either the buyers or sellers attorney until such a decision is made. if the selling shareholders h

49、ave already agreed to the section 338(h)(10) election, as a matter of convenience it makes sense for all selling shareholders to sign the election at closing.note: with respect to a transaction subject to a section 338 election, the irs requires that form 8883, asset allocation statement under secti

50、on 338, be filed with the income tax returns of old target and new target for the tax periods that include the deemed sale and purchase. the form requires information about the allocation of adsp (aggregate deemed sale price) and agub (adjusted grossed-up basis)._installment sales14.did the consider

51、ation received for the s stock include non-marketable installment obligations that are not payable on demand? if yes:_ did the target s corporation, with respect to the deemed asset sale, recognize the full gain or loss on s assets that are not subject to installment method treatment?_ did the targe

52、t s corporation properly account for depreciation recapture under section 453(i)?_ did the target s corporation properly take into account a deemed payment on the installment obligation under the liabilities-in-excess-of-basis rule of reg. section 15a.453-1(b)(3)(i)?note: when some or all of the tar

53、get stock is sold for an installment obligation and a section 338(h)(10) election is made, reg. section 1.338(h)(10)-1(d)(8) makes the section 453 installment sale method of accounting available to the old target, provided the deemed asset sale would otherwise qualify for installment sale reporting.

54、 section 453 generally applies to gain (not loss) from a sale of property where at least one of the payments will be received in a future year. property disqualified from installment treatment includes inventories of personal property, real property held for sale to customers in the ordinary course

55、of the corporations trade or business, and publicly traded stock or securities. if a sale or other disposition of the installment note occurs, gain or loss will generally be recognized. in general, the installment obligation may not be payable on demand or readily tradable for section 453 to apply. if a liquidation occurs within a 12-month period and section 331 applies, then the receipt of certain installment obligations by a shareholder is not deemed a liquidation payment. instead, under section 453(h), payments made to the shareholder pursuant to the installment obligation are