(a) Scope. This section provides rules on whether certain acquisitions of stock are qualified stock purchases and on other miscellaneous issues under section 338.
(b) Rules relating to qualified stock purchases -
(1)
Purchasing corporation
requirement. An individual cannot make a qualified stock purchase of
target. Section 338(d)(3) requires, as a condition of a qualified stock
purchase, that a corporation purchase the stock of target. If an individual
forms a corporation (new P) to acquire target stock, new P can make a qualified
stock purchase of target if new P is considered for tax purposes to purchase
the target stock. Facts that may indicate that new P does not purchase the
target stock include new P's merging downstream into target, liquidating, or
otherwise disposing of the target stock following the purported qualified stock
purchase.
(2)
Purchase. The term purchase has the same
meaning as in section 338(h)(3). Stock in a target (or target affiliate) may be
considered purchased if, under general principles of tax law, the purchasing
corporation is considered to own stock of the target (or target affiliate)
meeting the requirements of section 1504(a)(2), notwithstanding that no amount
may be paid for (or allocated to) the stock.
(3)
Acquisitions of stock from
related corporations -(i)
In
general. Stock acquired by a purchasing corporation from a related
corporation (R) is generally not considered acquired by purchase. See section
338(h)(3)(A)(iii).
(ii)
Time for testing relationship. For purposes of section
338(h)(3)(A)(iii), a purchasing corporation is treated as related to another
person if the relationship specified in section 338(h)(3)(A)(iii) exists-
(A) In the case of a single transaction
immediately after the purchase of target stock;
(B) In the case of a series of acquisitions
otherwise constituting a qualified stock purchase within the meaning of section
338(d)(3), immediately after the last acquisition in such series; and
(C) In the case of a series of transactions
effected pursuant to an integrated plan to dispose of target stock, immediately
after the last transaction in such series.
(iii)
Cases where section
338(h)(3)(C) applies-acquisitions treated as purchases. If section
338(h)(3)(C) applies and the purchasing corporation is treated as acquiring
stock by purchase from R, solely for purposes of determining when the stock is
considered acquired, target stock acquired from R is considered to have been
acquired by the purchasing corporation on the day on which the purchasing
corporation is first considered to own that stock under section 318(a) (other
than section 318(a)(4)).
(iv)
Examples. The following examples illustrate this paragraph
(b)(3):Example 1.
(i) S is the parent of a group of
corporations that are engaged in various businesses. Prior to January 1, Year
1, S decided to discontinue its involvement in one line of business. To
accomplish this, S forms a new corporation, Newco, with a nominal amount of
cash. Shortly thereafter, on January 1, Year 1, S transfers all the stock of
the subsidiary conducting the unwanted business (T) to Newco in exchange for
100 shares of Newco common stock and a Newco promissory note. Prior to January
1, Year 1, S and Underwriter (U) had entered into a binding agreement pursuant
to which U would purchase 60 shares of Newco common stock from S and then sell
those shares in an Initial Public Offering (IPO). On January 6, Year 1, the IPO
closes.
(ii) Newco's acquisition of
T stock is one of a series of transactions undertaken pursuant to one
integrated plan. The series of transactions ends with the closing of the IPO
and the transfer of all the shares of stock in accordance with the agreements
Immediately after the last transaction effected pursuant to the plan, S owns 40
percent of Newco, which does not give rise to a relationship described in
section 338(h)(3)(A)(iii). See § 1.338-3. Accordingly, S and Newco are not
related for purposes of section 338(h)(3)(A)(iii).
(iii) Further, because Newco's basis in the T
stock is not determined by reference to S's basis in the T stock and because
the transaction is not an exchange to which section 351, 354, 355, or 356
applies, Newco's acquisition of the T stock is a purchase within the meaning of
section 338(h)(3).
Example
2.(i) On January 1 of
Year 1, P purchases 75 percent in value of the R stock. On that date, R owns 4
of the 100 shares of T stock. On June 1 of Year 1, R acquires an additional 16
shares of T stock. On December 1 of Year 1, P purchases 70 shares of T stock
from an unrelated person and 12 of the 20 shares of T stock held by
R.
(ii) Of the 12 shares of T stock
purchased by P from R on December 1 of Year 1, 3 of those shares are deemed to
have been acquired by P on January 1 of Year 1, the date on which 3 of the 4
shares of T stock held by R on that date were first considered owned by P under
section 318(a)(2)(C) (i.e., 4 * .75). The remaining 9 shares of T stock
purchased by P from R on December 1 of Year 1 are deemed to have been acquired
by P on June 1 of Year 1, the date on which an additional 12 of the 20 shares
of T stock owned by R on that date were first considered owned by P under
section 318(a)(2)(C) (i.e., (20 * .75)-3). Because stock acquisitions by P
sufficient for a qualified stock purchase of T occur within a 12-month period
(i.e., 3 shares constructively on January 1 of Year 1, 9 shares constructively
on June 1 of Year 1, and 70...
