# Purchase Price Allocations in Deemed Actual Asset Acquisitions

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URL: https://www.frixlaw.com/law-library/documents/fr%3A99-19930

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** August 10, 1999
- **Citation:** 64 FR 43462

## Text

SUMMARY: This document contains proposed regulations relating to the
allocation of purchase price in deemed and actual asset acquisitions.
The proposed regulations determine the amount realized and the amount
of basis allocated to each asset transferred in a deemed or actual
asset acquisition and affect transactions reported on either Form 8023
or Form 8594.

DATES: Written comments must be received by September 20, 1999.
Requests to speak and outlines of topics to be discussed at the hearing
scheduled for 10 a.m., October 12, 1999, must be received by September
20, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG 107069 97), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG
107069 97), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically via the Internet by selecting the ``Tax Regs''
option on the IRS Home Page, or by submitting comments directly to the
IRS Internet site at http://www.irs.ustreas.gov/tax__regs/
regslist.html. The public hearing will be held in the NYU Classroom,
Room 2615, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Richard
Starke, (202) 622-7790 or Stephen R. Wegener, (202) 622-7530;
concerning submissions of comments, the hearing, and/or to be placed on
the building access list to attend the hearing, Guy R. Traynor (202)
622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)).
Comments on the collections of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224.
Comments on the collections of information should be received by
October 12, 1999.
Comments are specifically requested concerning:
Whether the proposed collections of information are necessary for
the proper performance of the functions of the IRS, including whether
the collections will have a practical utility;
The accuracy of the estimated burden associated with the proposed
collections of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collections of information in these proposed regulations are in
Secs. 1.338-2(d), 1.338-2(e)(4), 1.338-5(d)(3), 1.338-10(a)(4),
1.338(h)(10)-1(d)(2), and 1.1060-1(e)(ii)(A) and (B). The collections
of information are necessary to make an election to treat a sale of
stock as a sale of assets, to calculate and collect the appropriate
amount of tax in a deemed or actual asset acquisition, and to determine
the bases of assets acquired in a deemed or actual asset acquisition.
These collections of information are required to obtain a benefit.
The likely respondents and/or recordkeepers are small businesses or
organizations, businesses, or other for-profit institutions, and farms.
The regulation provides that a section 338 election is made by
filing Form 8023. The burden for this requirement is reflected in the
burden of Form 8023. The regulation also provides that both a seller
and a purchaser must each file an asset acquisition statement on Form
8594. The burden for this requirement is reflected in the burden of
Form 8594. The burden for the collection of information in Sec. 1.338-
2(e)(4) is as follows:

Estimated total annual reporting/recordkeeping burden: 25 hours.
Estimated average annual burden per respondent/recordkeeper: 0.56
hours.
Estimated number of respondents/recordkeepers: 45.
Estimated annual frequency of responses: On occasion.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

A. Evolution of Code and Regulations

Section 338 was added to the Internal Revenue Code of 1954 (Code)
by section 224(a) of the Tax Equity and Fiscal Responsibility Act of
1982, Public Law 97-248 (96 Stat. 324), and amended by section
306(a)(8) of the Technical Corrections Act of 1982, Public Law 97-448
(96 Stat. 2365), and further amended by section 712(k) of the Tax
Reform Act of 1984, Public Law 98-369 (98 Stat. 951). Section 338
replaces any nonstatutory treatment of a stock purchase as an asset
purchase by allowing certain acquiring corporations to elect to treat
qualifying stock purchases as asset acquisitions.
General rules for making elections under section 338 were first
issued in temporary regulations Secs. 5f.338-1, 5f.338-2, and 5f.338-3
published as TD 7942 in the Federal Register on February 8, 1984 (49 FR
4722) (1984-1 C.B. 93). Those rules were amended and redesignated as
Secs. 1.338-1T, 1.338-2T, and 1.338-3T by temporary regulations
published as TD 7975 in the Federal Register on September 6, 1984 (49
FR 35086) (1984-2 C.B. 81).
Treasury Decision 8021, published in the Federal Register on April
25, 1985 (50 FR 16402) (1985-1 C.B. 96), amended Secs. 1.338-1T and
1.338-2T and added Sec. 1.338-4T. These regulations provided guidance
in a question and answer format, most notably in the areas of asset and
stock consistency requirements.
Temporary regulations published as TD 8068 in the Federal Register
on January 8, 1986 (51 FR 741) (1986-1 C.B. 165) amended Secs. 1.338-1T
and

[[Page 43463]]

1.338-4T. The temporary regulations published on January 8, 1986 also
added Sec. 1.338(h)(10)-1T to implement section 338(h)(10), under which
a selling consolidated group can elect to treat certain stock sales as
asset sales.
Sections 1.338-1T and 1.338-4T were again amended by temporary
regulations published as TD 8072 in the Federal Register on January 29,
1986 (51 FR 3583) (1986-1 C.B. 111) (Due to typesetting errors, the
Federal Register republished TD 8072 in its entirety on March 28, 1986
(51 FR 10617)). The temporary regulations published on January 29, 1986
also amended Sec. 1.338(h)(10)-1T and added Secs. 1.338(b)-1T,
1.338(b)-22T, and 1.338(b)-3T. These regulations required the selling
price and basis allocated to each asset to be determined by using a
four class residual method.
On February 12, 1986, temporary regulations published as TD 8074 in
the Federal Register (51 FR 5163) (1986-1 C.B. 126) amended
Secs. 1.338-1T, 1.338-4T, and 1.338(h)(10)-1T and added Sec. 1.338-5T.
These regulations provided guidance on international aspects of section
338.
Sections 1.338-1T, 1.338-2T, 1.338-4T, 1.338-5T, and 1.338(h)(10)-
1T were amended by temporary regulations published as TD 8088 in the
Federal Register on May 16, 1986 (51 FR 17929) (1986-1 C.B. 103).
Sections 1.338-1T, 1.338-3T, 1.338-4T, 1.338-5T, and 1.338(h)(10)-1T
were amended by temporary regulations published as TD 8092 in the
Federal Register on July 1, 1986 (51 FR 23741) (1986-2 C.B. 49). The
temporary regulations published on July 1, 1986 also added
Sec. 1.338(b)-4T. These regulations made miscellaneous conforming
changes and transitional rules relating to making and filing section
338 elections.
Section 1060 was added by section 641 of the Tax Reform Act of
1986, Public Law 99-514 (100 Stat. 2282). Section 1060 requires both
the buyer and the seller of a trade or business to allocate their
consideration paid or received to the assets under the same residual
method prescribed by the section 338 regulations. Also as part of the
1986 act, miscellaneous changes were made to section 338 by section
631, 1275, 1804(e), and 1899A (100 Stat. 2269, 2598, 2800, 2958). The
changes to section 338 were made to conform section 338 with the repeal
of the General Utilities doctrine and to define a qualified stock
purchase by reference to section 1504.
General guidance under section 1060 was provided by Sec. 1.1060-1T,
added by temporary regulations published as TD 8215 on July 18, 1986
(53 FR 27035) (1988-2 C.B. 304). These regulations included direction
on the scope of section 1060 and reiterated the four class residual
method found in the section 338 regulations.
Section 1060 was amended by section 1006(h) of the Technical and
Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3410).
This amendment requires the residual method to be used in the case of a
distribution of partnership property or a transfer of an interest in a
partnership, but only in determining the value of goodwill or going
concern value for purposes of applying section 755. Miscellaneous
changes were again made to section 338 by sections 1006(e)(20),
1012(bb)(5)(A), and 1018(d)(9) of the 1988 act (102 Stat. 3403, 3535,
3581).
Sections 338 and 1060 were amended by section 11323 of the Omnibus
Budget Reconciliation Act of 1990, Public Law 101-508 (104 Stat. 1388-
464). The amendments add certain reporting requirements under sections
338 and 1060. In addition, a provision was added to section 1060 under
which parties are bound by written agreements as to allocations or fair
market values. The legislative history indicates that the parties are
so bound unless the parties can refute the agreement under the
standards set forth in Commissioner v. Danielson, 378 F.2d 771 (3d
Cir.), cert. denied, 389 U.S. 858 (1967) (by presenting proof which in
an action between the parties would be admissible to alter that
construction or to show its unenforceability because of mistake, undue
influence, fraud, duress, etc.). See, H.R. Ways and Means Comm., 101st
Cong., 2d Sess. (Print No. 101-37, Oct. 15, 1990), at 79 .
Temporary regulations published as TD 8339 in the Federal Register
on March 15, 1991 (56 FR 11093) (1991-1 C.B. 52) added Sec. 1.338-6T.
The March 15, 1991, temporary regulations provided relief from
situations in which a corporation making an election under section 338
could be subjected to multiple taxation on the same gain as a result of
the 1986 repeal of the General Utilities doctrine.
On January 12, 1992, a notice of proposed rulemaking (C0-111-90)
under section 338 was published in the Federal Register (57 FR 1409)
(1992-1 C.B. 1000). The notice of proposed rulemaking contained
proposed regulations to replace the question and answer asset and stock
consistency rules of Sec. 1.338-4T and the rules relating to the
international aspects of section 338 found in Sec. 1.338-5T. In
addition, the proposed rules restated the remainder of the temporary
regulations under section 338, except that only minor conforming
changes were made to Secs. 1.338(b)-2T and 1.338(b)-3T.
Section 1060 was again amended by section 13261(e) of the Omnibus
Budget Reconciliation Act of 1993, Public Law 103-66 (107 Stat. 539).
This amendment made changes to section 1060 to conform the rules for
actual asset acquisitions to the amortization of intangibles under
section 197. In addition, the legislative history to section 197
suggested that the residual method should be altered to accommodate
section 197 intangibles (See H.R. Rep. 111, 103d Cong., 1st Sess. 760
(May 23, 1993) (1993-3 C.B. 336).
Sections 1.338-1T, 1.338-2T, 1.338-3T, 1.338-4T, 1.338-5T,
1.338(b)-1T, and 1.338(h)(10)-1T were revised and replaced by
Secs. 1.338-1, 1.338-2, 1.338-3, 1.338-4, 1.338-5, 1.338(b)-1, and
1.338(h)(10)-1, respectively, by final regulations published as TD 8515
in the Federal Register on January 20, 1994 (59 FR 2958) (1994-1 C.B.
89). The final regulations published on January 20, 1994 (TD 8515) also
removed Sec. 1.338-6T and added Sec. 1.338(i)-1. Also, a new
Sec. 1.338-4T was added by temporary regulations published as TD 8516
on January 20, 1994 in the Federal Register (59 FR 2956) (1994-1 C.B.
119). The temporary regulations provided consistency rules applicable
to certain cases involving controlled foreign corporations.
Treasury Decision 8626 amended Sec. 1.338-2 by final regulations
published in the Federal Register on October 27, 1995 (60 FR 54942)
(1995-2 C.B. 34), providing rules governing the treatment of an
intragroup merger following a qualified stock purchase of target stock
when a section 338 election is not made for the target.
Section 1.338-4 was amended and Sec. 1.338-4T was removed by final
regulations published as TD 8710 in the Federal Register on January 23,
1997 (62 FR 3458) (1997-1 C.B. 82).
Sections 1.338(b)-2T, 1.338(b)-3T, and 1.1060-1T were amended by
temporary regulations published as TD 8711 in the Federal Register on
January 16, 1997 (62 FR 2267) (1997-1 C.B. 85). The January 16, 1997,
changes to the regulations adapted the residual method to section 197
by adding a fifth class to the residual method prescribed for deemed
and actual asset acquisitions.

B. Current Regulations

Section 338 allows certain purchasers of stock to treat the
purchases instead as purchases of assets. A purchasing corporation can
elect to treat a stock acquisition as an asset acquisition if it
acquires 80 percent of the total voting

[[Page 43464]]

power and 80 percent of the total value of the stock of a target
corporation (not taking into account certain preferred stock) by
purchase within a 12-month period. If a purchasing corporation makes a
section 338 election, the target is treated as if it (as old target)
sold all of its assets at the close of the acquisition date at fair
market value in a single transaction and (as new target) purchased all
of the assets as of the beginning of day after the acquisition date.
If a purchasing corporation acquires the stock of a target
corporation in a qualified stock purchase and makes a section 338(g)
election (i.e., makes a general section 338 election, not a section
338(h)(10) election), old target's gain or loss from the deemed asset
sale is included in old target's final return unless old target is a
member of a consolidated group or is an S corporation. In the
consolidated and S corporation cases, old target files a special final
return including only the items from the deemed asset sale. Sec. 1.338
1(e). In the consolidated case, that return is consolidated with
neither the selling corporation's nor the purchasing corporation's
consolidated group. In the S corporation case, old target must file the
special final return as a C corporation. The section 338(g) election
(as opposed to a section 338(h)(10) election) generally does not change
the tax treatment of the selling shareholders--that is, they are still
taxed on their stock sale, notwithstanding the purchasing corporation's
section 338(g) election.
In certain cases, the selling shareholders may join with the
purchasing corporation in making a section 338(h)(10) election. Until
1994, a section 338(h)(10) election could be made only for target
corporations that were members of a consolidated group. The 1994
revisions to the section 338 regulations (effective retroactively to
1992 at taxpayers' election) expanded the eligibility for section
338(h)(10) elections to target corporations that are members of an
affiliated group and S corporations. The section 338(h)(10) election
changes the tax treatment of old target and the selling shareholders.
Old target is deemed to sell all its assets in a single transaction
while a member of the selling consolidated group (or while a non-
consolidated affiliate, or while an S corporation owned by the selling
shareholders) and is deemed immediately thereafter to distribute the
proceeds in complete liquidation to the members of the selling
consolidated group who sold the target stock (or to the selling
affiliate or to all the S corporation shareholders). Thus, under
section 338(h)(10), the selling shareholders are not treated as selling
stock but instead realize gain or loss, if any, on the stock in the
deemed liquidation. Sec. 1.338(h)(10)-1(d)(2). Usually, a selling
consolidated group or selling affiliate will recognize no stock gain or
loss on the deemed liquidation under section 332. S corporation
shareholders will include their share of items of income, gain, loss,
or deduction on the deemed asset sale passed through to them under
section 1366, increase or decrease their basis accordingly under
section 1367, and then recognize any remaining gain or loss in their
stock under section 331 (the overall effect of which is to recognize
net gain or loss equal to the amount of built-in gain or loss in their
S corporation stock immediately before the qualified stock purchase).
In the case of a section 338(g) election, old target's total amount
realized for the assets it is deemed to sell (aggregate deemed sale
price or ADSP) is the sum of (a) the purchasing corporation's grossed-
up basis in recently purchased target stock; (b) the liabilities of new
target; and (c) other relevant items. This is the amount to be
allocated among the assets sold for purposes of determining gain or
loss on the assets. Sec. 1.338-3(d)(1) and (2). The liabilities
referred to in (b) are those liabilities assumed by new target, but the
amount thereof taken into account in ADSP is determined as if old
target had sold its assets to an unrelated person for consideration
that included the liabilities. The liabilities include any tax
liability resulting from the deemed asset sale. Secs. 1.338-3(d)(3) and
1.338(b)-1(f). In the case of a section 338(h)(10) election, ADSP is
modified. While not stated explicitly, modified ADSP (MADSP) appears to
exclude any tax liabilities resulting from the deemed asset sale.
Sec. 1.338(h)(10)-1(f).
New target's adjusted grossed-up basis in the assets it is deemed
to purchase (AGUB) is the sum of (a) the purchasing corporation's
grossed-up basis in recently purchased target stock; (b) the purchasing
corporation's basis in nonrecently purchased target stock; (c) the
liabilities of new target; and (d) other relevant items. This is the
amount to be allocated among the assets sold for purposes of
determining the purchaser's basis in the assets. Sec. 1.338(b)-1(c)(1).
Section 1060(a) requires a purchaser and a seller to allocate basis
for any applicable asset acquisition in the same manner as amounts are
allocated to such assets under section 338(b)(5). Section 1060(c)
defines an applicable asset acquisition as any transfer of assets that
constitute a trade or business where the transferee's basis is
determined wholly by reference to the consideration paid for the
assets.
Section 338(b)(5) authorizes the Secretary to issue regulations
prescribing how the deemed purchase price is to be allocated among the
assets. Final and temporary regulations under sections 338(b) and 1060,
as amended, implement this authority. The regulations generally require
that the basis of the acquired (or deemed acquired) assets will be
determined using a five class residual method. Class I consists of cash
and cash equivalents; Class II consists of certificates of deposit,
U.S. Government securities, readily marketable stock or securities, and
foreign currency; Class III includes all assets not included in Class
I, Class II, Class IV, or Class V; Class IV consists of section 197
intangible assets except those in the nature of goodwill and going
concern value; and Class V consists of section 197 intangible assets in
the nature of goodwill and going concern value. The total allocable
basis is first decreased by the amount of Class I assets. Any remaining
amount is allocated proportionally to Class II assets to the extent of
their fair market value. Any remaining amount is then allocated first
to Class III assets and then to Class IV assets in the same manner as
to Class II assets. Finally, any remaining amount is allocated to the
Class V assets. See Secs. 1.338(b)-2T and 1.1060-1T.

Reasons for Change

A. In General

The regulations under section 338 have developed, in large part,
through a series of small changes and additions according to the
priorities of taxpayers' and the government's needs and in response to
statutory amendments to section 338 or other relevant Code sections.
Most of the regulations under section 338 (Secs. 1.338-1, 1.338-2,
1.338-3, 1.338-4, 1.338-5, 1.338(b)-1, 1.338(h)(10)-1, and 1.338(i)-1)
were made final as part of a single package as recently as 1994, but,
with the exception of the consistency rules, most of those regulations
were largely restatements of the existing temporary regulations that
had been developed to that point. The remaining temporary regulations
under section 338 and the temporary regulations under section 1060 have
been substantively changed only once since 1986 and 1988, respectively,
to accommodate the addition of section 197 to the Code. As a result of
the ad hoc manner in which the regulations under sections 338 and 1060
have been amended, the current regulations are

[[Page 43465]]

difficult to follow. Thus the IRS and Treasury determined that a review
of the regulations was appropriate.
In addition, the current regulations have proven problematic in
three major respects: first, in their statement of tax accounting rules
and their relationship to tax accounting rules for asset purchases
outside of section 338, second, in the effects of the allocation rules,
and, third, in their lack of a statement of a complete model for the
deemed asset sale (and, in the case of section 338(h)(10) elections,
the deemed liquidation) from which one can determine the tax
consequences not specifically set forth in the regulations.

B. Tax Accounting Rules Under Current Regulations

The current regulations include certain rules for accounting for
items in connection with the deemed asset sale. These tax accounting
rules apply for determining the original amounts of and subsequent
adjustments to ADSP and AGUB. For example, the regulations provide
rules governing the treatment of contingent liabilities deemed assumed
by new target. In some respects the tax accounting rules in the current
regulations differ considerably from the tax accounting rules
applicable to actual asset sales.
Link Between Old Target's and New Target's Tax Accounting
Under the current regulations, ADSP is defined as the sum of (a)
the grossed-up basis of the purchasing corporation's recently purchased
target stock, (b) the liabilities of new target, and (c) other relevant
items. Thus, the calculation of ADSP is linked to the tax accounting
treatment of new target or the purchaser of new target in item (a)
above. Such link does not exist, however, in the case of an actual
asset sale between two parties. In actual asset sales the timing and
amount of the seller's amount realized and the timing and amount of the
buyer's basis may differ. For example, with respect to the link under
(a), the current fair market value of promised future contingent
payments that constitute debt is taken into account in amount realized
under Sec. 1.1001-1(g) unless, in rare and extraordinary circumstances,
the fair market value is not reasonably ascertainable. Yet, under
Sec. 1.1012-1(g), the current fair market value of such future
contingent payments is not taken into account currently in the
purchaser's basis.
This link between old target's deemed sales price and the
purchasing corporation's basis in target stock existed in the original
version of section 338, adopted in 1982. In 1984, Congress removed that
link from the statute, providing instead that old target should be
deemed to sell its assets at fair market value. The regulations
originally allowed old target to choose between using the three-part
formula (items (a) through (c)) above to calculate ADSP and treating
the assets as being sold at their fair market value. In 1994, new
regulations eliminated the election, thereafter requiring use of the
three-part formula. Under the current regulations, any contingent
payments for target stock do not become part of AGUB and ADSP until
they become fixed and determinable. However, no rule prevents the
seller from using all its basis to offset the amount realized in the
year of the deemed sale. As a result of the link between old target's
deemed sales price and the purchasing corporation's purchase price, old
target receives open transaction treatment on terms broader than those
available in an actual asset sale. Compare Sec. 15A.453-1(d)(2)(iii)
(``Only in those rare and extraordinary cases involving sales for a
contingent payment obligation in which the fair market value of the
obligation * * * cannot reasonably be ascertained will the taxpayer be
entitled to assert that the transaction is `open.' '')
Liabilities Assumed
The current regulations specify new target's tax accounting
treatment for the assumption of liabilities. New target takes a
liability into account in AGUB only if it is a bona fide liability of
target as of that date that would be properly taken into account in
basis under principles of tax law if new target had acquired old
target's assets from an unrelated person and, as part of the
transaction, had assumed, or taken property subject to, the
liabilities, and the amount thereof is determined on the same basis.
Sec. 1.338(b)-1(f)(1) and (2).
Under Sec. 1.338(b)-3T(a)(1), AGUB is subsequently redetermined
only if an adjustment would be required, under general principles of
tax law, in connection with an actual asset purchase by new target from
an unrelated person. One of the subsequent events enumerated as an
example is the change in a contingent liability of target to one which
is fixed and determinable. Section 1.338(b)-3T(c)(1) provides that a
contingent amount (including contingent liabilities of old target
deemed assumed) is taken into account at the time at which such amount
becomes fixed and determinable. The statement of the latter rule
suggests to some that it overrides the rules based on general
principles of tax law stated in Secs. 1.338(b)-1(f)(2) and 1.338(b)-
3T(a)(1). However, interpreting the fixed and determinable rule in this
manner would be inconsistent with the economic performance rules of
section 461(h), that, in some circumstances, would operate to defer new
target's taking an assumed liability into account until some time after
the liability becomes fixed and determinable. See Secs. 1.461-4(a) and
1.446-1(c)(1)(ii)(B).
Installment Method
The current regulations provide no rules for old target to report
its deemed sale gain under the installment method. Because the parties
could have structured an actual asset sale to qualify for the
installment method, commentators have argued that making the
installment method available when a section 338(h)(10) election is made
would be consistent with the full asset sale model implied by those
rules. Making the installment method available when only a section
338(g) election is made would not be appropriate because the target
shareholders are still treated as selling stock and because target
would get a step-up in basis of assets before it had borne the tax
burden for such step-up.

C. Allocation Rules Under Current Regulations

Fast Pay Assets
The current regulations employ a residual method of allocation.
Under the residual method, the amount of basis to be allocated to
goodwill and going concern value is based entirely on the amount of
basis remaining to be allocated after all other assets have been
allocated basis to the extent of their fair market values. Because
assets other than goodwill and going concern value tend to be more
easily valued, the residual allocation method is intended to result in
less controversy over the value of goodwill and going concern value.
The legislative history of section 1060, adopted in the Tax Reform Act
of 1986, Public Law 99-514, (100 Stat. 2282), noted with approval the
use of the residual method under the section 338(b) regulations and
required that the same method be used in regulations to be prescribed
under section 1060. See S. Rep. No. 313, 99th Cong., 2d Sess., May 29,
1986, at 254. Accordingly, the current regulations place each acquired
asset into one of five asset classes. The total allocable basis is
allocated among the classes starting with the first class and
proceeding to the final, residual class. No asset in any class except
for the residual class can be allocated more than its fair market
value. If the aggregate basis allocable to a particular

[[Page 43466]]

class is less than the aggregate fair market value of the assets within
the class, each asset is allocated an amount in proportion to its fair
market value and nothing is allocated to any junior class.
The residual allocation method presents unique problems when the
cost of the assets, and hence the basis to be allocated thereto, is
less than the aggregate fair market value of the individual assets.
This situation may arise as a result of the use of contingent
consideration for target stock or the deemed assumption of liabilities
that are not yet taken into account. If this is the case, the basis of
the assets is said to be impaired. Under the residual method, the
impairment is borne equally by the assets in the first class in which
the cumulative fair market value exceeds the remaining aggregate basis
available for allocation. As no basis is allocated to assets in junior
classes, they are also impaired. If such an asset is sold, the taxpayer
will realize a gain on its disposition even if its value has not
increased since the acquisition date. Taxpayers may reverse the gain
recognized in later years if the purchasing corporation pays or incurs
additional amounts for target stock or additional target liabilities
deemed assumed are taken into account. For this reason, the gain
recognized is often referred to as phantom income.
The problem is most acute with assets that turn over quickly, such
as accounts receivable and inventory (fast pay assets). Comments
received on the temporary regulations suggested that fast pay assets
should be placed in a more senior class to make it more likely that
basis is allocated equal to the assets' fair market values in order to
alleviate concerns over phantom income.
Top-Down Allocation
Under the current regulations, stock in a subsidiary is generally a
Class III asset. In allocating basis among tiered corporations, an
allocation to the stock of a subsidiary becomes the starting point for
allocation to the assets inside the subsidiary if a section 338
election is also made for the subsidiary. See, e.g., Sec. 1.338-2(b)(4)
of the current regulations. One might refer to this as top-down
allocation. Under a top-down allocation, the basis of assets of a
particular class can be more impaired at one corporate level than at
another. For example, Class III assets in the parent target corporation
might be allocated some basis while Class II assets in its subsidiary
are allocated no basis because Class I assets in the subsidiary have
absorbed all the basis allocated to the stock in the subsidiary, a
Class III asset. The differences in impairment arising from the
differences in the location of assets and liabilities is inconsistent
with the residual method (e.g., liabilities secured by an asset support
basis of all assets in a single corporation) and can lead to the
misallocation of basis.

D. Statement of Complete Model

For purposes of effectuating the statutory purpose of permitting
taxpayers to elect to treat a stock acquisition as an asset
acquisition, section 338 and the current regulations deem certain
transactions to occur. The current regulations' express statement of
these deemed transactions provides the appropriate Federal income tax
consequences for most targets for which a section 338 election is made.
However, as with the tax accounting rules, some taxpayers interpret the
express statements in the current regulations as resulting in tax
consequences different from those had they actually engaged in the
transactions deemed under the regulations to have occurred or as
resulting in the tax consequences specifically stated and not any of
the collateral consequences.

Explanation of Provisions

A. Overview of Changes

The proposed regulations are intended to clarify the treatment of,
and provide consistent rules (where possible) for, both deemed and
actual asset acquisitions under sections 338 and 1060. In addition, the
proposed regulations propose changes to the current regulations to take
into account changes to the tax law made since the different portions
of the current regulations were published. The changes made by the
proposed regulations have four major components: organization of the
regulations; clarification and modification of the accounting rules
applicable to deemed and actual asset acquisitions; modifications to
the residual method mandated for allocating consideration and basis;
and miscellaneous revisions to the current regulations. These changes
are discussed in the order in which they arise in the proposed
regulations. The IRS and Treasury did not address any provisions of the
regulations relating to the consistency rules or the international
aspects of section 338.

B. Organization of Regulations

The proposed regulations change the organization of the regulations
in order to make the rules for all asset acquisitions more
administrable and provide consistent treatment, when appropriate, for
deemed and actual asset acquisitions. In order to make the regulations
more administrable, the proposed regulations redesignate certain of the
final regulations and reorganize and restate the remaining final and
temporary regulations in a manner that is more consistent with the
approach the IRS and Treasury has taken to drafting regulations in
other areas. The proposed regulations also attempt to provide similar
treatment, when appropriate, for deemed and actual asset acquisitions
by stating the relevant concepts once in the regulations under section
338 and cross-referencing those rules in Sec. 1.1060-1 of the proposed
regulations.
New Sec. 1.338-1 includes a scope statement. Section 1.338-1 also
addresses the question of to what extent the deemed asset sale and
other elements of the section 338 regime are considered as actually
having occurred for purposes of application of other Code sections,
such as those relating to retirement plan sponsors. Terminology and
definitions and provisions regarding the mechanics of the section 338
election of current Sec. 1.338-1 have been moved to new Sec. 1.338-2.
The return filing rules of current Sec. 1.338-1 have been moved to
their own section, Sec. 1.338-10. All of the current Sec. 1.338-2 rules
for qualification for making the section 338 election and rules
relating to the effect on continuity of proprietary interest have been
moved to new Sec. 1.338-3.
The rules defining ADSP, as well as various rules relating to
taxation of old target, currently in Sec. 1.338-3, are in Sec. 1.338-4
of the proposed regulations. The rules defining AGUB, currently in
Sec. 1.338(b)-1, are in Sec. 1.338-5. Current Sec. 1.338(b)-3T sets
forth the timing of increases or decreases in ADSP and AGUB; these
timing rules have been moved to new Sec. 1.338-4 (ADSP) and new
Sec. 1.338-5 (AGUB).
Current Secs. 1.338-4 and 1.338-5, dealing with consistency and
with international aspects of section 338, respectively, have been
renumbered Sec. 1.338-8 and 1.338-9, respectively. The substance of
these rules has not been addressed in connection with these proposed
regulations.
Section 1.338-6 of the proposed regulations addresses allocation of
ADSP and AGUB among assets, currently covered by Sec. 1.338(b)-2T. The
rules pertaining to subsequent adjustments to ADSP and AGUB, currently
in Sec. 1.338(b)-3T, are in Sec. 1.338-7 of the proposed regulations.

[[Page 43467]]

Section 1.338(h)(10)-1 has not been renumbered.

C. Section 1.338-1 General Principles; Status of Old Target and New
Target

Regulations' Scope Statement
The scope statement describes the general model of the deemed asset
sale and other aspects of the regulations used as the basis for the
rules in the proposed regulations. This statement of the model should
assist the reader generally in the correct interpretation and
application of the regulations. This section also provides that old
target and new target (as well as any other affected parties, for
example, when a section 338(h)(10) election is made) are to determine
the tax consequences as if they had actually engaged in the
transactions deemed under the section 338 regulations to have occurred.
Thus, the proposed regulations clarify that old target's deemed asset
sale may result in tax consequences for old target and new target (such
as income and deduction) in addition to old target's gain or loss
realized on its deemed sale of assets. For example, if target is an
insurance company for which a section 338 election is made, the deemed
asset sale would be characterized and taxed as an assumption-
reinsurance transaction under applicable Federal income tax law. See
Sec. 1.817-4(d).
The proposed regulations make minor amendments to the list of
sections in subtitle A for purposes of which old target and new target
are considered the same corporation, notwithstanding the deemed asset
sale between the two. Such changes generally are with respect to
retirement plan and similar provisions.
Anti-Abuse Rule
The proposed regulations incorporate an anti-abuse rule giving the
Commissioner, for purposes of calculating ADSP and AGUB and allocating
ADSP and AGUB among assets, the authority under certain circumstances
(a) to treat as not being part of target's assets those added to the
pool of target's assets before the deemed asset sale and (b) to treat
as being part of target's assets those removed from the pool of
target's assets before the deemed asset sale. The Commissioner's
authority to treat assets added to the pool as not being part of the
pool exists when the property is transferred to old target in
connection with the transactions resulting in the application of the
residual method if such property is, within 24 months after the deemed
asset sale, (a) not owned by new target but owned, directly or
indirectly, by a member of the affiliated group of which new target is
a member, or (b) owned by new target but held or used to more than an
insignificant extent in connection with an activity conducted, directly
or indirectly, by another member of the affiliated group of which new
target is a member in combination with other property acquired,
directly or indirectly, from the transferor of the property to old
target. The Commissioner's authority to treat assets removed from the
pool as being part of the pool exists where the property is removed in
connection with the transactions resulting in the application of the
residual method if the removed property, within 24 months after the
deemed asset sale, (a) is owned by new target, or (b) is owned,
directly or indirectly, by a member of the affiliated group of which
new target is a member and continues after the election to be held or
used to more than an insignificant extent in connection with one or
more of the activities of new target.

D. Section 1.338-2 Nomenclature and Definitions; Mechanics of the
Section 338 Election

Definitions
Four definitions of terms already used in the current regulations
have been added to the proposed regulations under section 338. These
terms are acquisition date asset, deemed asset sale, deemed sale gain,
and deemed sale return. The scope of some of these terms has been
expanded from their usage in the current regulations. For example,
deemed asset sale refers to the transaction deemed under the section
338 regulations to occur between old target and new target and deemed
sale gain, refers to, in the aggregate, the Federal income tax
consequences (generally, the income, gain, deduction, and loss) of the
deemed asset sale. Deemed sale gain can also refer to the Federal
income tax consequences of the transfer of a particular individual
asset in the deemed asset sale. The expanded definition of deemed sale
gain in conjunction with the rules in Sec. 1.338-7(c) of the proposed
regulations (Sec. 1.338(b)-3T(h) of the current regulations) provides a
mechanism for target (or, in the case of a section 338(h)(10) election,
the member of the selling consolidated group, the selling affiliate, or
the S corporation shareholders to which such income, loss, or other
amount is attributable) to report items that are properly taken into
account after the acquisition date. One such item would be the
deduction for an assumed liability of old target that it could not
deduct under its method of accounting on or before the acquisition
date.
The definition of purchasing corporation has been clarified to
include new target (new T) with respect to its deemed purchase of stock
in its own subsidiary.
The definition of selling group in Sec. 1.338-2 of the proposed
regulations and related provisions in Sec. 1.338(h)(10)-1 of the
proposed regulations provide that a section 338(h)(10) election may be
made for target notwithstanding that it was at some time during the
year in which the acquisition date occurs the common parent of its
affiliated or consolidated group, so long as it is not the common
parent on the acquisition date.

E. Section 1.338-3 Qualification for the Section 338 Election

More Than a Nominal Amount Paid for Purchase of Stock
The IRS and Treasury have received many informal comments in which
guidance was requested on whether a section 338 election may be made
for a target that is insolvent. In order to have a purchase of a share
of stock in target, the proposed regulations generally require that
more than a nominal amount of consideration be paid for the stock. With
respect to target affiliates, one cannot adequately determine whether
more than a nominal amount of consideration is paid for the stock
because the amount paid is not determined in an arm's length
transaction but instead under the allocation rules of the regulations.
Consequently, the proposed regulations provide that stock in a target
affiliate acquired by new target in the deemed asset sale of target's
own assets is considered purchased if, under general principles of tax
law, new target is considered to own stock of the target affiliate
meeting the requirements of section 1504(a)(2), notwithstanding that no
purchase price may be allocated to target's stock in the target
affiliate. For a discussion of the tax consequences when a qualified
stock purchase is made of an insolvent corporation and a section
338(h)(10) election is made, see the discussion of section 338(h)(10)
elections later in this preamble.
Time for Testing Relationship
A section 338 election may be made only with respect to a
transaction that qualifies as a purchase within the meaning of section
338(h)(3). Under section 338(h)(3)(iii), the parties to the transaction
must be unrelated in order for a transaction to qualify as a purchase.
The statute is unclear,

[[Page 43468]]

however, as to when the relationship between the parties is tested. The
proposed regulation provides that the relationship is tested
immediately after the transaction. This rule gives effect to the
statutory objective of preventing a transferor from obtaining the
benefits of a section 338 election while retaining a significant
interest, directly or indirectly, in the property transferred. This
rule also furthers the statutory objective of affording similar tax
treatment to section 338 deemed asset sales and actual asset sales. For
example, under this rule, if an actual sale of assets would qualify as
a reorganization under section 368(a)(1)(D) (with a carryover of basis
and other attributes), taxpayers are not able to reach a different
result by structuring the transaction as a stock sale and electing
under section 338.

F. Sections 1.338 4 and 1.338 5 Aggregate Deemed Sale Price; Various
Aspects of Taxation of the Deemed Asset Sale; Adjusted Grossed-up Basis

Breaking the Link Between ADSP and AGUB
Under the current regulations, the first element in the definition
of ADSP is the grossed-up basis of the purchasing corporation's
recently purchased target stock. The combination of the link between
the definitions of ADSP and AGUB with the rule in the current
regulations that contingent payments are taken into account in AGUB as
they become fixed and determinable effectively affords old target open-
transaction treatment, which treatment generally is inconsistent with
Secs. 15A.453-1(d)(2)(iii) and 1.1001 1(g)(2). The proposed regulations
remove the link in the current regulations between calculation of the
first element of ADSP and the purchaser's basis in recently purchased
target stock.
The new first element in the calculation of ADSP is the grossed-up
amount realized on the sale to the purchasing corporation of the
purchasing corporation's recently purchased target stock. Amount
realized is determined as if old target itself were the selling
shareholder. Also, notwithstanding that the sellers of the target
shares may use the installment method of section 453 to report their
gain on the stock, old target may not use the installment method in the
calculation of the first element of ADSP.
Time and Amount Combined
The proposed regulations provide that general principles of tax law
apply in determining the timing and amount of the elements of ADSP, and
that ADSP is redetermined at such time and in such amount as an
increase or decrease would be required, under general principles of tax
law, to the individual constituent elements of the definition of ADSP.
The proposed regulations also provide a parallel rule for AGUB.
Substantively, the two statements are designed to eliminate special
accounting rules included in the current section 338 regulations-such
as the current regulations' fixed and determinable rule for the timing
of taking into account contingent amounts-and to bring taxation of old
target's deemed asset sale closer to the taxation of an actual asset
sale. In contrast to the current regulations, the proposed regulations
state in one location all the rules for determining ADSP and AGUB.
Both the breaking of the link between the calculation of ADSP and
the purchaser's basis in recently purchased stock and the removal of
the fixed and determinable rule for contingent liabilities may often
result in increased disparities between ADSP and AGUB.
Liabilities
The current regulations appear to presume that any tax liability of
old target incurred on its deemed asset sale is a liability assumed by
new target if a section 338(h)(10) election is not made but is not a
liability assumed by new target if a section 338(h)(10) election is
made. These presumptions apparently required that the definition of
ADSP be modified in current Sec. 1.338(h)(10)-1. The proposed
regulations make clear that, whether or not a section 338(h)(10)
election is made, old target's tax liability is deemed not assumed by
new target only if the parties have agreed that (or the tax or non-tax
rules operate such that) the seller, and not target, will bear the
economic cost of that tax liability. This is because the legal burden
for the tax would otherwise remain with target. Thus, the proposed
regulations remove the term MADSP from Sec. 1.338(h)(10)-1, and extend
the use of the term ADSP to that regulation.
Under the proposed regulations, the amount of liabilities of old
target taken into account to calculate ADSP is determined as if old
target had sold its assets to an unrelated person for consideration
that included the unrelated person's assumption of, or taking subject
to, the liabilities. Similarly, they provide that, in order to be taken
into account in AGUB, a liability must be a liability of target that is
properly taken into account in basis under general principles of tax
law that would apply if new target had acquired its assets from an
unrelated person for consideration that included the assumption of, or
taking subject to, the liability. Regarding the timing of taking such
liabilities into account, the proposed regulations provide that general
principles of tax law apply in determining the timing and amount of the
elements of ADSP and AGUB. Thus, for example, under general principles
of tax law, a particular liability might not be taken into account in
basis when a purchaser buys an asset subject to such liability, but
might be taken into account at some later date; such timing controls
the timing of including the liability in AGUB. Accordingly, the current
rule in the regulations that liabilities are taken into account in
calculating AGUB, and apparently ADSP, only when such liabilities
become fixed and determinable is removed in the proposed regulations.
Costs
The treatment of selling costs for old target and acquisition costs
for new target is modified. For old target, it is made clear that when
grossing-up the selling shareholders' amount realized where not all the
target stock is recently purchased by the purchaser, the amount of
selling costs by which that grossed-up amount realized is reduced is
not itself grossed-up. For new target, the definition of AGUB is
changed such that when the purchaser's basis in recently purchased
stock is grossed-up, acquisition costs are no longer also grossed-up.
Grossing-up the selling shareholders' selling costs or the
purchasing corporation's acquisition costs would result in costs not
actually incurred reducing old target's amount realized for the assets
or increasing new target's cost basis in the assets. The IRS and
Treasury do not believe that these results are appropriate because
there is no evidence that the purchasing corporation's costs to acquire
an amount of target stock sufficient for there to be a qualified stock
purchase would increase proportionately if it acquired all of the
target stock and the deemed asset sale mechanism allows taxpayers to
avoid many of the costs that would be incurred in an actual asset sale.
Accordingly, the IRS and Treasury have exercised the authority under
section 338(b)(2) to prevent the grossing-up of selling costs and
acquisitions costs.
Other Relevant Items
The element other relevant items is removed from the definitions of
both ADSP and AGUB as it no longer serves any function. In the current
regulations, this element reduces ADSP for the purchasing corporation's
acquisition

[[Page 43469]]

costs that would otherwise be taken into account because the
purchaser's basis in recently purchased stock was an element in
calculation of both ADSP and AGUB. This element becomes unnecessary
with the removal of the link between ADSP and AGUB.

G. Section 1.338-6 Allocation of ADSP and AGUB Among Target Assets

Allocation of ADSP and AGUB Generally
Apart from a change in the number of classes, the proposed
regulations generally do not represent a substantive change in the
system of allocation of ADSP and AGUB. The proposed regulation states
the allocation rules that apply equally to ADSP and AGUB and then
states the modifications to those common allocation rules for AGUB.
Transaction Costs
Generally, the definition of fair market value is the price at
which a willing seller will transfer an asset to a willing buyer.
Therefore, the fair market value of a particular asset to a seller is
not different from the fair market value of the same asset to a buyer,
even though the economic value of the asset to each would reflect the
selling costs or acquisition costs. A seller may reduce its amount
realized on an asset and a buyer may increase its cost basis in an
asset for the transaction costs specifically allocable to the asset in
an actual asset sale. Because the underlying transaction in section 338
is actually a stock sale, the costs incurred are not specifically
allocable to any individual asset deemed transferred, but rather to the
stock. Therefore, in applying the residual method to a deemed asset
sale, transaction costs are accounted for only by decreasing the total
amount realized by the seller or increasing the total cost basis of the
buyer. In contrast, see the discussion of the treatment of transaction
costs in an actual asset acquisition below.
IRS Challenges to Asset Fair Market Value
Drawing from the existing rules under section 1060, the proposed
regulations provide that the IRS may challenge a taxpayer's
determination of the fair market value of any asset by any appropriate
method and take into account all factors, including any lack of adverse
tax interests between the parties.
Number and Content of Classes
The seven classes under the proposed regulations are as follows:
Class I, cash and cash equivalents; Class II, actively traded personal
property as defined in section 1092(d), certificates of deposit, and
foreign currency; Class III, accounts receivable, mortgages, and credit
card receivables which arise in the ordinary course of business; Class
IV, stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of taxpayer if on hand at
the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or
business; Class V, all assets not in Class I, II, III, VI, or VII;
Class VI, all section 197 intangibles except goodwill or going concern
value; and Class VII, goodwill and going concern value.
AGUB Less Than the Amount of Class I Assets
The proposed regulations clarify that, if the total AGUB (or
consideration in an applicable asset acquisition under section 1060) to
be allocated is less than the amount of Class I assets (i.e., cash and
cash equivalents), then new target (or the purchaser in an applicable
asset acquisition under section 1060) immediately recognizes ordinary
income to that extent.
Marketable Securities
The current regulations include marketable stock and securities, as
defined in Sec. 1.351-1(c)(3), in Class II. Marketable stock and
securities are included in Class II because a value can be easily
assigned at any given time by looking at the value at which those
instruments were trading on a securities exchange. Since the time Class
II was first defined, financial markets have evolved and a greater
variety of financial instruments can be readily valued in the same
manner. The proposed regulations instead defines Class II with respect
to actively traded personal property as defined under section 1092(d)
because the regulations under that section have a more comprehensive
definition of public financial markets.
Fast Pay Assets
The IRS and Treasury are aware that many taxpayers engage in
transactions solely to avoid the impairment problems with fast-pay
assets. In addition, the IRS spends time evaluating whether such
transactions are subject to challenge under the section 338 regulations
or general principles of tax law. In order to address these concerns,
the proposed regulations create two new classes of assets between
current Classes II and III, one for accounts receivable, mortgages, and
credit card receivables which arise in the ordinary course of business
and another for stock in trade of the taxpayer or other property of a
kind which would properly be included in the inventory of taxpayer if
on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of its
trade or business.
Residual Class
In the current regulations, Class V, the residual class, is
comprised of section 197 intangibles in the nature of goodwill and
going concern value. Class IV is comprised of all section 197
intangibles except those in the nature of goodwill and going concern
value. Because many section 197 intangibles would have been
characterized by the IRS as assets in the nature of goodwill and going
concern value prior to the enactment of section 197, the current
regulations provide somewhat ambiguous guidance as to the line between
current Class IV and current Class V. Accordingly, the proposed
regulations remove the phrase ``in the nature of.'' Furthermore, in
rare circumstances, goodwill or going concern value is not a section
197 intangible. The residual class should include all goodwill and
going concern value to ensure that the residual method serves the
purpose of reducing valuation controversies. Therefore, the proposed
regulations define the residual class as goodwill and going concern
value without any reference to whether those assets would qualify as
section 197 assets.
In TD 8711, supra, the IRS amended the current regulations to adapt
the residual method to section 197 by creating a new Class IV for
section 197 intangibles other than goodwill or going concern value and
providing that goodwill and going concern value would remain in a true
residual class. The proposed regulations retain this distinction in
renumbered Class VI and Class VII. Allocating goodwill and going
concern value to Class VII avoids the need for determining the value of
goodwill and going concern value through a non-residual method.
Allocation of AGUB When Gain Recognition Election Available but Not
Made
When the purchaser of the target stock holds nonrecently purchased
target stock and no section 338(h)(10) election is made, the purchaser
has the option of making or not making the gain recognition election.
(If a section 338(h)(10) election is made, the making of the gain
recognition election is automatic rather than elective.) The proposed
regulations retain these rules. The current regulations have a special
allocation rule when the failure to make

[[Page 43470]]

the gain recognition election leaves AGUB less than ADSP (that is, when
the purchaser's nonrecently purchased stock was bought at a lower price
than the recently purchased stock). Under the special allocation rule,
AGUB, after reduction by the amount of Class I assets, is allocated
among all other assets, regardless of their class, in proportion to
their fair market values. (For this purpose, the fair market value of
assets in the residual class (current Class V) is deemed to be the
excess, if any, of the hypothetical purchase price over the sum of the
Class I assets and the fair market values of the Class II, III, and IV
assets. The hypothetical purchase price is the AGUB that would result
if a gain recognition election were made.)
If, looking at the hypothetical purchase price, full fair market
value was paid on the acquisition date for assets in each class above
the residual class, the current regulation's special allocation rule
spreads the impairment that arises because no gain recognition election
was made equally among all assets in classes below Class I. However,
if, looking at the hypothetical purchase price, full fair market value
was not paid on the acquisition date for assets in each class above the
residual class, this rule spreads the impairment that arises because no
gain recognition election was made as well as the impairment that
arises from the bargain purchase equally among all assets in classes
below Class I. In the latter case, the prioritization of classes under
the residual method becomes irrelevant by the failure to make a gain
recognition election. Prior to the enactment of section 197, the effect
of the current regulations generally would have been to shift basis
from depreciable or amortizable assets to nondepreciable,
nonamortizable assets.
The proposed regulations modify the special allocation rule to
minimize this effect. Generally, under the modified special allocation
rule, the portion of AGUB (after reduction by the amount of Class I
assets) to be allocated to each Class II, III, IV, V, VI, and VII asset
is determined by multiplying (a) the amount that would be allocated to
such asset under the general rules for allocation of AGUB were AGUB
increased to equal the hypothetical purchase price by (b) a fraction,
the numerator of which is actual AGUB (after reduction by the amount of
Class I assets) and the denominator of which is the hypothetical
purchase price (after reduction by the amount of Class I assets). The
reason for the modification is to spread only the impairment that
arises because no gain recognition election was made equally among all
assets in classes below Class I.
The IRS and Treasury request comments as to whether any special
allocation rule has continuing merit.

H. Section 1.338-7 Allocation of Redetermined ADSP and AGUB Among
Target Assets

In General
Section 1.338(b)-3T of the current regulations addresses subsequent
adjustments to ADSP and AGUB. In the proposed regulations, these rules,
contained in Sec. 1.338-7, have been streamlined and some of their
content has been moved to the sections defining ADSP and AGUB,
Secs. 1.338-4 and 1.338-5 respectively. The proposed regulations
eliminate the use of the term adjustment event used in certain
provisions of the current regulations. Instead, the proposed
regulations provide simply that when general principles of tax law
require a change in the amount of any of the various elements of ADSP
or AGUB (discussed earlier), the new ADSP or AGUB amount is reapplied
to produce new allocations to the assets. This generally is not
intended as a substantive change to the current rules for subsequent
adjustments provided in Sec. 1.338(b)-3T.
Item-Specific Adjustments
The current regulations at Sec. 1.338(b)-3T contain special rules
for changes to AGUB (and thus, indirectly, to ADSP) that relate to the
income produced by intangible assets. The special rules apply for
purposes of allocating an increase or decrease in AGUB or ADSP to the
extent (a) the contingency that results in the increase or decrease
directly relates to income produced by a particular intangible asset
(contingent income asset) and (b) the increase or decrease is related
to such contingent income asset and not to other target assets. The
special rules consist of two provisions that vary from the normal rules
of Sec. 1.338(b)-3T. Under the first provision, the fair market value
of the contingent income asset at the beginning of the day after the
acquisition date is redetermined at the time of the increase or
decrease in AGUB or ADSP (but only those circumstances that resulted in
the increase or decrease to AGUB or ADSP are taken into account in the
redetermination). Under the second, the increase or decrease in AGUB or
ADSP is allocated first to the contingent income asset, not to all
assets generally under the normal allocation rules. Any portion that
cannot be so allocated because of the fair market value limitation (as
redetermined) is allocated under the normal allocation rules.
The intent of this rule was to accommodate the uncertainties in the
valuation of contingent income assets. The rule produces an allocation
that would have resulted if the parties had known on the acquisition
date the fair market value of the contingent income asset (as
determined, with hindsight, on the date of the adjustment event) and
paid on the acquisition date the increased or decreased consideration.
The IRS and Treasury weighed the usefulness of this rule with its
complexity and decided that the proposed regulations should not include
any item-specific adjustment rule. Commentators, if they believe that
the item-specific adjustment rule continues to serve a useful function
that justifies its retention, should identify in their comments in what
circumstances the rule has proven useful or could prove useful.
Commentators should also identify what provisions would be necessary
for an effective item-specific adjustment rule.

I. Section 1.338(h)(10)-1 Deemed Asset Sale and Liquidation

Model
The proposed regulations explain the effects of the section
338(h)(10) election on the parties involved. The proposed regulations
discuss the effects of the section 338(h)(10) election on the
purchasing corporation, the effects on new target, the effects on old
target, and the effects on old target's shareholders (including non-
selling shareholders).
As with the rest of the proposed regulations, proposed
Sec. 1.338(h)(10)-1 describes the model on which taxation of the
section 338(h)(10) election is based. Under the proposed regulations,
old target is treated as transferring all of its assets by sale to an
unrelated person. Old target recognizes the deemed sale gain while a
member of the selling consolidated group, or owned by the selling
affiliate, or owned by the S corporation shareholders (both those who
actually sell their shares and any who do not). Old target is then
treated as transferring all of its assets to members of the selling
consolidated group, the selling affiliate, or S corporation
shareholders and ceasing to exist. If target is an S corporation, the
deemed asset sale and deemed liquidation are considered as occurring
while it is still an S corporation. The proposed regulations treat all
parties concerned as if the fictions the section 338(h)(10) regulations
deem to occur actually did occur, or as closely thereto as possible.
The structure of this model

[[Page 43471]]

should help taxpayers answer any questions not explicitly addressed by
the proposed regulations. Also, old target generally is barred by the
proposed regulations from obtaining any tax benefit from the section
338(h)(10) election that it would not obtain if it actually sold its
assets and liquidated.
The treatment of S corporation targets which own one or more
qualified subchapter S subsidiaries (as defined in section 1361(b)(3))
is also addressed, as is the treatment of tiered targets (i.e., the
order of their deemed asset sales and deemed liquidations).
Deemed Liquidation
The current regulations provide that, when a section 338(h)(10)
election is made, old target is deemed to sell all of its assets and
distribute the proceeds in complete liquidation. The term complete
liquidation is generally considered to be a term of art in tax law. The
proposed regulations instead provide that old target transferred all of
its assets to members of the selling consolidated group, the selling
affiliate, or S corporation shareholders and ceased to exist, making it
clear that the transaction following the deemed asset sale does not
automatically qualify as a distribution in complete liquidation under
either section 331 or 332. This is meant to clarify any inference one
might draw from previous regulations that section 332 treatment is
automatic under section 338(h)(10) in the case of an affiliated or
consolidated group. For example, if S owns all of the stock of T, T is
insolvent because of its indebtedness to S, P acquires T from S in a
qualified stock purchase, and, as a condition of the sale, S cancels
the debt owed it by T, and P and S make a section 338(h)(10) election
for target, T's deemed liquidation would not qualify under section 332
because S would not be considered to receive anything in return for its
stock in T. Rev. Rul. 68-602 (1968-2 C.B. 135).
Special S Corporation Issues
The current regulations provide that, notwithstanding the purchase
of 80 percent of the shares of an S corporation by a purchasing C
corporation, the S corporation continues to be considered an S
corporation for purposes of determining the tax effects of the section
338(h)(10) election to old target and its S corporation shareholders.
For example, old target reports to its shareholders under section 1366
the tax effects of its deemed asset sale, and the shareholders adjust
their stock basis pursuant to section 1367. The proposed regulations
clarify that when the target itself is an S corporation immediately
before the acquisition date, any direct and indirect subsidiaries of
target with respect to which qualified subchapter S subsidiary
elections are in effect are considered to remain qualified subchapter S
subsidiaries for purposes of target's and its S corporation
shareholders' reporting the effects of target's deemed sale of assets
and deemed liquidation. No similar rule applies when a qualified
subchapter S subsidiary, as opposed to the S corporation that is its
owner, is the target corporation. The IRS and Treasury request comments
as to whether it would be beneficial to make section 338(h)(10)
elections available for acquisitions of qualified subchapter S
subsidiaries and as to how the section 338(h)(10) regulations should be
modified to accommodate the unique taxation of these entities.
The proposed regulations clarify the effects of the section
338(h)(10) election on both selling and non-selling S corporation
shareholders. For example, the proposed regulations clarify that all S
corporation shareholders, selling or not, must consent to the making of
the section 338(h)(10) election, particularly because the non-selling
shareholders have to include their proportionate share of the deemed
sale gain under section 1366. Form 8023 will be corrected to reflect
this requirement.
Availability of the Section 453 Installment Method
When some or all of the target stock is purchased for an
installment obligation and a section 338(h)(10) election is made, the
proposed regulations make the section 453 installment method available
to old target in its deemed asset sale, as long as the deemed asset
sale would otherwise qualify for installment sale reporting. Solely for
purposes of the application of section 453 and related provisions to
the deemed asset sale and subsequent deemed corporate liquidation under
section 338(h)(10), old target generally is considered to receive from
new target in the deemed asset sale consideration consisting of the
installment obligation given to old target shareholders in exchange for
recently purchased stock, the assumption of, or taking subject to, old
target liabilities, and cash. Thus, regardless of its actual character,
any consideration conveyed by the purchaser to the selling shareholders
other than installment obligations is considered to have been in cash,
including for instance the purchaser's assumption of, or taking subject
to, liabilities of the selling shareholders. In addition, the amount of
any grossing-up under Sec. 1.338-4(d) of the proposed regulations is
deemed to be in the form of cash. For purposes of section 453, new
target is considered to be the obligor on the installment obligation
the purchasing corporation actually issued. The provisions of sections
453(h), 453B(d), and 453B(h) may then apply to old target and its
shareholders with respect to the deemed liquidation of old target
following the deemed asset sale. In the deemed liquidation, a selling
shareholder who actually received an installment obligation in the
stock sale is deemed to receive that installment obligation as part of
the liquidating distribution; the other shareholders are deemed to
receive none of the installment obligation.
The proposed regulations provide that old target generally is
barred from obtaining any tax benefit from the section 338(h)(10)
election that it would not obtain if it actually sold its assets and
liquidated. This bar extends to the application of section 453. In
other words, the results of application of section 453 to old target
should be as close as possible to those that would occur if old target
actually sold its assets for an installment obligation of the
purchaser. Thus, for example, the installment method of section 453
applies unless old target affirmatively elects out of the installment
method.
As another example, Sec. 15A.453-1(b)(2)(iv) provides that any
obligation created subsequent to the taxpayer's acquisition of the
property and incurred or assumed by the taxpayer or placed as an
encumbrance on the property in contemplation of disposition of the
property is not qualifying indebtedness if the arrangement results in
accelerating recovery of the taxpayer's basis in the installment sale.
Old target would be subject to this test with respect to its debts new
target is deemed to assume or take subject to.
Further, the rule of section 453A requiring payment of interest
will apply in the same manner as it would apply if target actually sold
all its assets in return for consideration that included an installment
obligation from the purchaser and then distributed in complete
liquidation all the consideration received.
Tiered Targets
The proposed regulations provide that, in the case of parent-
subsidiary chains of corporations making section 338(h)(10) elections,
the deemed asset sale at the parent level is considered to precede that
at the subsidiary level. The proposed regulations then provide,
however, that the deemed liquidation of

[[Page 43472]]

the subsidiary is considered to precede the deemed liquidation of the
parent.
Additional Information Required
The proposed regulations provide that the Commissioner may exercise
the authority granted in section 338(h)(10)(C)(iii) to require the
provision of any information deemed necessary to carry out the
provisions of section 338(h)(10) by requiring submission of information
on any tax reporting form. The IRS and Treasury are considering
requiring that the information about the amount and allocation of AGUB
and ADSP currently submitted on the election form (Form 8023) instead
be submitted by the purchaser and seller(s) separately on their income
tax returns, and is interested in comments on this approach.

J. Section 1.1060-1

Definition of Trade or Business
Section 1060 applies to the direct or indirect transfer of a trade
or business. Under the current regulations, a group of assets
constitutes a trade or business if the use of such assets would
constitute an active trade or business for purposes of section 355.
Further, even if a group of assets would not qualify as an active trade
or business for purposes of section 355, a group of assets will
constitute a trade or business for purposes of section 1060 if goodwill
or going concern value could attach under any circumstances. The
current regulations set out factors that will be considered in
determining whether goodwill or going concern could attach.
Although the current regulations set out factors, there are still
ambiguities regarding when goodwill or going concern value could
attach. For example, Sec. 1.1060-1T(b)(2) has been misinterpreted to
mean that a trade or business exists only when basis is allocated to
goodwill or going concern value under the residual method. Under the
misinterpretation, a taxpayer would be required to filter every bulk
asset purchase through the residual allocation method in order to
determine whether the transaction is subject to section 1060. The
proposed regulations clarify that a trade or business is present if
goodwill or going concern value could attach to the group of assets,
regardless of whether any value will eventually be allocated to the
residual class (Class VII).
In addition, the proposed regulations provide that the presence of
assets in the nature of section 197 assets is a factor to be considered
in determining whether goodwill or going concern value could attach.
This clarification recognizes that many section 197 assets would have
been considered part of goodwill or going concern value at the time
Congress enacted section 1060. However, the proposed regulations make
it clear that the transfer of an isolated section 197 asset will not be
subject to section 1060.
The proposed regulations clarify that an applicable asset
acquisition can occur even if the trade or business is transferred from
seller to purchaser in a series of related transactions and that the
residual method must be applied once to all of the assets transferred
in a series of related transactions. The proposed regulations also
incorporate the principles of the anti-abuse rule from Sec. 1.338-1(c)
of the proposed regulations to determine which assets must be included
for purposes of applying the residual method.
Asymmetrical Transfers of Assets
Section 1060 applies to the direct or indirect acquisition of a
trade or business when the purchaser's basis in the assets (other than
assets to which section 1031 applies) is determined wholly by reference
to the consideration paid by the purchaser. This rule clarifies that a
purchaser of assets in an applicable asset acquisition is subject to
the allocation rules set out in Secs. 1.338-6 and 1.338-7 even if the
transferor in the transaction is treated as transferring something
different from the assets the transferee is treated as receiving. For
example, Rev. Rul. 99-6 (1999-6 I.R.B. 6) concerns the purchase, by one
person, of all of the interests in a limited liability company which is
classified as a partnership under Sec. 301.7701-3. The revenue ruling
sets forth two situations and holds that each seller is treated as
having transferred its interests in the partnership, while each
purchaser is treated as having purchased the assets of the limited
liability company. The proposed regulations make it clear that each
purchaser described in Rev. Rul. 99-6 must use the residual method
prescribed under Secs. 1.338-6 and 1.338-7 to allocate the
consideration paid for the purchased assets (provided that the asset
transfer otherwise qualifies as an applicable asset acquisition).
Multiple Trades or Businesses Transferred in a Single Transaction
The current regulations are silent on the proper application of the
residual method to situations when a seller transfers a group of assets
that could be categorized as constituting more than one trade or
business. The proposed regulations clarify that, as long as any part of
the assets are a trade or business, all of the assets are to be treated
as a single trade or business for purposes of applying the residual
method. Therefore, the residual method should be applied once to all of
the assets transferred, rather than to blocks of the assets separately.
This rule is intended to reduce valuation conflicts regarding how much
consideration should be allocated to each separate group of assets. By
treating all of the assets as a single trade or business, all assets in
Classes I through VI can receive full fair market value allocation
before the goodwill of any trade or business is allocated basis. In
addition, this rule brings actual asset acquisitions into conformity
with deemed asset acquisitions by allocating consideration paid across
all assets acquired, without looking to the trade or business with
which they are associated.
Miscellaneous Changes
The proposed regulations incorporate two miscellaneous changes
addressing issues that have arisen under the current regulations.
First, the proposed regulations include any covenants entered into
between the seller and the purchaser in connection with an applicable
asset acquisition as an asset transferred as part of a trade or
business even though, to the seller, the covenant is a contract for
services. As a result, sellers must include any covenants in the asset
pool for purposes of applying the residual method, thus allowing for
greater symmetry to be achieved between the purchaser and seller.
Second, the like-kind exchange rule in the current regulation has
been expanded. Under this expanded rule, if an applicable asset
acquisition includes property that is transferred subject to any
provision of the Code or regulations that has the tax effect of section
1031, the tax treatment determined under such provision is given
effect. The residual method is then applied to the remaining assets and
consideration exchanged.
In addition, the proposed regulations no longer separately state
the residual allocation method. Instead, proposed Sec. 1.1060-1
incorporates the residual method by cross reference to proposed
regulations Secs. 1.338-6 and 1.338-7. Proposed regulation Sec. 1.1060-
1 only sets out rules in which the treatment of an actual asset
acquisition differs from the treatment of a deemed asset acquisition.
By cross-referencing the section 338 regulations rather than separately
stating the residual method, the proposed regulations ensure that
deemed and actual asset acquisitions will be treated similarly to the
extent possible.

[[Page 43473]]

Transaction Costs
Under the current regulations, consideration is allocated to each
asset to the extent of that asset's fair market value as long as there
is sufficient consideration to provide full allocation of basis to each
asset in the class. The fair market value limitation and the residual
allocation method of the current regulations do not permit costs
associated with specific assets to be allocated to those assets. For
example, if a purchaser incurred costs to acquire an asset and section
1060 did not apply to the acquisition, the basis of that asset would be
increased to reflect those costs. However, the fair market value
limitation under the current regulations would limit a purchaser's
basis in the asset to its fair market value. The proposed regulations
allow the buyer and seller to adjust their allocation of consideration
to particular assets for costs incurred which are specifically
identified with those assets. Thus, the total amount the seller
allocates to an asset for which it incurs specifically identifiable
costs would be less than its fair market value and, for the buyer,
greater than its fair market value. The parties are not allowed to
apportion costs associated generally with the overall transaction to
specific assets. A similar rule is not necessary, and therefore not
included, under section 338, because the underlying transaction is a
stock sale. Any costs associated with a deemed asset sale are of the
type generally associated with the overall sale of stock and,
therefore, the parties would not be allowed to apportion those costs to
specific assets under the rule.
Written Allocation Agreements
After the current regulations were adopted, Congress amended
section 1060 to provide that a written agreement allocating purchase
price is binding on both parties. See section 1060(a). The legislative
history indicates that parties must report consistent with their
agreed-upon allocations, unless the parties are able to refute the
agreement under the standards set forth in Commissioner v. Danielson,
378 F.2d 771 (3d Cir.), cert. denied, 389 U.S. 858 (1967). The proposed
regulations incorporate the Danielson standard by reference.

Specific Requests for Comments and Matters Under Study

A. Examples in the Section 338 and Section 1060 Regulations

The proposed regulations, for the most part, retain the examples of
the current regulations. The retained examples are updated to reflect
the changes in the location, terminology, and substance of the
regulations which they illustrate. Some examples have been dropped as
it was thought that they were unnecessary. Comments are requested as to
whether any of the retained examples (or new examples) are superfluous
and whether other examples are necessary to illustrate the regulations.

B. Discharge of Indebtedness Income in the Case of Tiered Targets Under
Section 338 and the Current Regulations

Taxpayers may inadvertently experience adverse tax consequences
when there is intercompany indebtedness owing between tiered targets
acquired in the same qualified stock purchase. Such consequences might
include the realization of discharge of indebtedness income and changes
to the issue price of the indebtedness. The latter could affect the
total amount of AGUB to be allocated.
For example, assume that T owns 100 percent of the stock of T1, T
and T1 do not file a consolidated return, and T is indebted to T1.
Assume also that P acquires all the stock of T in a qualified stock
purchase and makes section 338 elections for both T and T1. Under
Sec. 1.338-2(b)(4), first old T is considered to sell its assets to new
T, and new T is deemed to assume the debt of old T to old T1. Next, old
T1 is deemed to sell its assets to new T1. New T1 thus may be
considered to acquire debt owed by new T (to old T1) at a time when new
T1 is related to new T.
Under section 108(e)(4), this may trigger discharge of indebtedness
income for new T if new T1's adjusted basis in the acquired debt is
less than the amount of the debt (see Sec. 1.108-2(f)(1)). That might
occur when the T stock is purchased partly for contingent consideration
not originally taken into account in AGUB. A variety of similar issues
may arise under Sec. 1.1502 13(g).
The IRS and Treasury solicit comments on whether the application of
section 108(e)(4) and Sec. 1.1502-13(g) is appropriate in these
circumstances and how one might best address these consequences.

C. Ideas for Revision of Application of the Residual Method of
Allocation Under Section 338 in the Case of Tiered Targets

In General
The IRS and Treasury are studying ways of addressing the allocation
of ADSP and AGUB in the case of tiered targets making section 338
elections. Set forth below is the framework for one potential method
that would equalize the amount of impairment for assets in a given
class without regard to which target corporation owns the assets. This
method uses a lookthrough approach. The method is incomplete, raises
difficult issues, and is more complicated than the current rules. For
these reasons, the proposed regulations do not adopt the method.
However, the IRS and Treasury request comments as to the value and
feasibility of the method; how best to resolve its issues; and what
alternative approaches might be better. For instance, would it be
better to have a complicated special method such as that described
below that operates in every case of tiered targets or, as the proposed
regulations do, retain the approach of the current regulations with the
addition of an anti-abuse rule, the goal of which is to restrict
movement of assets in advance of the qualified stock purchase
undertaken to benefit from the shortcomings of the current top-down
rules?
Essentially, the lookthrough approach referred to above would
revise the treatment of Classes I through V (referring to the class
numbering system of the proposed regulations). In allocating to these
senior classes, the tiered targets would be aggregated for purposes of
calculating the overall purchase price and allocating that amount among
the individual assets. This rule would apply to a target (referred to
as the parent target) and to those of its lower tier subsidiaries for
which a section 338 election is also made (referred to as subsidiary
targets). Stock in subsidiaries for which section 338 elections are not
or cannot be made would continue to be treated for all purposes as a
Class V asset (or Class II if publicly traded)--in other words, such
entities would not participate in the aggregation.
The method would thereafter switch back to the normal top-down
system for allocation to assets in Classes VI and VII, because the
process of dividing up the amount allocated to the aggregate goodwill
of all the targets under the residual method would be antithetical to
the notion that goodwill is best valued by looking at what value is
left over rather than being separately valued, and because both Class
VI and VII assets generally get the same 15 year amortization period
pursuant to section 197-hence determining which of those two classes or
assets within the classes receives a given dollar of basis is
relatively insignificant.
An issue in applying the method is how to treat liabilities owed by
one group member to another. The IRS and Treasury request comments as
to whether such liabilities should be

[[Page 43474]]

treated for all allocation purposes as not debt but as stock in the
debtor-member held by the creditor-member, and whether to do so even if
the creditor-member is a subsidiary of the debtor-member.
One possible method of implementing the method is set forth in
greater detail, below. Possible method of implementation of the
lookthrough approach
The first step under the method would be to calculate the total
amount to be allocated (ADSP and AGUB). Under the method, this would be
the sum of (a) the amount realized or basis, as appropriate, of the
parent target stock (grossed-up as appropriate to reflect stock not
recently purchased, etc.) and (b) liabilities.
In the second step, all Class I through Class V assets in the
parent target and subsidiary targets (other than stock of subsidiary
targets) would be combined into aggregate Classes I, II, III, IV, and
V. Then, the total basis would be allocated (as basis is under the
current system, except that the allocation would be across such joint
classes, not merely within individual members) first to Class I assets,
then, if there is any remainder, to Class II assets, then, if there is
any remainder, to Class III assets, then, if there is any remainder, to
Class IV assets, and then, if there is any remainder, to Class V
assets. The allocations thus made to individual Class I through V
assets would be the final, binding allocations to them.
In the third step, if there were no amount of the total basis
remaining to be allocated to Class VI and VII assets, one would proceed
to determine the basis in subsidiary target stock. If the aggregate
amount assigned to all the subsidiary's Class I through V assets
pursuant to the second step above exceeded the amount of the
subsidiary's liabilities, then the amount of the excess would become
its parent's basis in that subsidiary's stock.
If the aggregate amount were, however, less than the liabilities,
then the stock basis would be zero. A subissue is whether in such case
other action should also be taken: whether, in the case of a
consolidated group, an excess loss account should be created equal to
the amount of the shortfall; and whether, if the tiered entities do not
join in filing a consolidated return but other nonconsolidated
investment adjustment rules apply, future positive basis increases
should be denied to the extent of the excess loss account that would
have been created under the method had they been filing consolidated.
The rule could apply, for example, to increases in basis of controlled
foreign corporations for undistributed earnings taxed currently under
subpart F.
Under the method, if there were an amount of the total ADSP or AGUB
remaining to be allocated to Class VI and VII assets, then one would
proceed to allocate basis to Class VI and VII assets. At this point,
the aggregating of members' assets into joint classes would be
abandoned and the method would revert to a top-down system similar to
that of current rules. The process is top-down in that any basis not
already allocated to the parent target's Class I through V assets
(other than subsidiary target stock) would be allocated among its Class
VI and VII assets and subsidiary target stock, then the subsidiary
target would in turn make its own allocation of its own basis among its
own Class VI and VII assets and any stock it might own in other
subsidiary targets.
Certain adjustments, as yet undetermined, would have to be made to
this method for minority interests outstanding in subsidiaries.
Possible Disadvantages of the Method
The method has drawbacks:
(1) Complexity. The method is more complicated than the existing
rules. When, for example, there is a subsequent change in the amount of
a liability of a subsidiary target that changes the amount of AGUB or
ADSP, under the method one would recalculate the allocations to all the
assets of the parent target and all subsidiary targets, not just the
assets of the indebted subsidiary target and its own subsidiary
targets.
Also, questions arise regarding subsequent changes in AGUB and
ADSP, with respect to subsidiary targets already disposed of. What if,
for instance, at the time of a subsequent adjustment to AGUB or ADSP,
the group had already disposed of the stock of a particular subsidiary
target should one change the allocation to that former subsidiary's
assets? Separately, in determining whether AGUB or ADSP has changed,
should one take into account changes in the amount of liabilities of
former subsidiary targets? How would the group be made aware of such
changes?
(2) Lack of inside-outside basis conformity. The current system,
although it tolerates large disparities in the allocations to identical
assets based on location, assures conformity between stock basis and
net asset basis. The look-through approach does so only in a
consolidated setting (employing excess loss accounts to do so).
(3) The method would not eliminate all allocation disparities. The
method would not completely eliminate disparate allocations based on
location within the acquired group, because it applies only to tiered
targets. Similar disparities can exist in acquisitions of sister
corporations or in mixed stock and asset purchases. The method does not
include a mechanism for equalizing basis impairment in such cases.
Thus, the method would not fully solve the disparity problem. (Note,
however, that the new anti-abuse rule included in the proposed
regulations may operate in some cases.)

Proposed Effective Date

The regulations are proposed to be effective on the date that final
regulations are published in the Federal Register and apply to
qualified stock purchases or applicable asset acquisitions occurring on
or after the date that final regulations are published in the Federal
Register.

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. An initial
regulatory flexibility analysis has been prepared pursuant to 5 U.S.C.
section 604 for the collections of information in this Treasury
Decision. The analysis is set forth below under the heading ``Initial
Regulatory Flexibility Analysis.'' Pursuant to section 7805(f) of the
Code, these regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.

Initial Regulatory Flexibility Analysis

This regulatory action is intended to simplify and clarify the
current rules relating to both deemed and actual asset acquisitions.
The current rules were developed over a long period of time and have
been repeatedly amended. The IRS and Treasury believe these proposed
regulations will significantly improve the clarity of the rules
relating to both deemed and actual asset acquisitions.
The major objective of the proposed regulations is to modify the
rules for allocating purchase price in both deemed and actual asset
acquisitions. In addition, the proposed regulations replace the general
rules for electing to treat a stock sale as an asset sale.
These collections of information may affect small businesses if the
stock of a corporation which is a small entity is acquired in a
qualified stock purchase or if a trade or business which is also a
small business is transferred in a

[[Page 43475]]

taxable transaction. Form 8023 (on which an election to treat a stock
sale as an asset sale is filed) has been submitted to and approved by
the Office of Management and Budget. With respect to Form 8023, the IRS
estimated that 201 forms would be filed each year and that each
taxpayer would require 12.98 hours to comply. Form 8594 (on which a
sale or acquisition of assets constituting a trade or business is
reported) has also been submitted to and approved by the Office of
Management and Budget. With respect to Form 8594, the IRS estimated
that 20,000 forms would be filed each year and that each taxpayer would
require 12.25 hours to comply. These estimates have been made available
for public comment and no public comments have been received. These
proposed regulations do not impose new requirements on small businesses
and, in fact, should lessen any difficulties associated with the
existing reporting requirements by clarifying the rules associated with
deemed and actual asset acquisitions.
The collections of information require taxpayers to file an
election in order to treat a stock sale as an asset sale. In addition,
taxpayers must file a statement regarding the amount of consideration
allocated to each class of assets under the residual method. The
professional skills that would be necessary to make the election or
allocate the consideration would be the same as those required to
prepare a return for the small business.
Consideration was given to limiting the reporting requirements
under section 1060 to trades or businesses meeting a threshold level of
business activity. However, any threshold derived without further
information would be arbitrary. Instead, the proposed regulations
authorize the Commissioner to exclude certain transactions from the
reporting requirements.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are timely submitted to the IRS. The IRS and
Treasury request comments on the clarity of the proposed rule and how
it may be made easier to understand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled for October 12, 1999, beginning
at 10 a.m. in the NYU Classroom, Room 2615, Internal Revenue Service
Building, 1111 Constitution Avenue, NW., Washington, DC. Due to
building security procedures, visitors must enter at the 10th Street
entrance, located between Constitution and Pennsylvania Avenues, NW. In
addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 15 minutes before the
hearing starts. For information about having your name placed on the
building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this preamble.
The IRS recognizes that persons outside the Washington, DC, area
may also wish to testify at the public hearing through
teleconferencing. Requests to include teleconferencing sites must be
received by September 20, 1999. If the IRS receives sufficient
indications of interest to warrant teleconferencing to a particular
city, and if the IRS has teleconferencing facilities available in that
city on the date the public hearing is to be scheduled, the IRS will
try to accommodate the requests. The IRS will publish the locations of
any teleconferencing sites in an announcement in the Federal Register.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must request to speak, and
submit written comments and an outline of the topics to be discussed
and the time to be devoted to each topic (a signed original and eight
(8) copies) by September 20, 1999. A period of ten minutes will be
allocated to each person for making comments. An agenda showing the
scheduling of the speakers will be prepared after the deadline for
receiving outlines has passed. Copies of the agenda will be available
free of charge at the hearing.
Drafting information. The principal authors of these proposed
regulations are Richard Starke and Stephen R. Wegener, Office of the
Assistant Chief Counsel (Corporate). However, other personnel from the
IRS and Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are proposed to be amended as
follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by
removing the entries for 1.338(b)-1, 1.338(b)-3T, and 1.1060 1T and by
adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.338-6 also issued under 26 U.S.C. 337(d), 338, and
1502.
Section 1.338-7 also issued under 26 U.S.C. 337(d), 338, and
1502.
Section 1.338-8 also issued under 26 U.S.C. 337(d), 338, and
1502.
Section 1.338-9 also issued under 26 U.S.C. 337(d), 338, and
1502.
Section 1.338-10 also issued under 26 U.S.C. 337(d), 338, and
1502.* * *
Section 1.1060-1 also issued under 26 U.S.C. 1060.* * *

Par. 2. Sections 1.338-0 through 1.338-3 are revised to read as
follows:

Sec. 1.338-0 Outline of topics.

This section lists the captions contained in the regulations under
section 338 as follows:

Sec. 1.338-1 General principles; status of old target and new
target.
(a) In general.
(1) Deemed transaction.
(2) Application of other rules of law.
(3) Overview.
(b) Treatment of target under other provisions of the Internal
Revenue Code.
(1) General rule for subtitle A.
(2) Exceptions for subtitle A.
(3) General rule for other provisions of the Internal Revenue
Code.
(c) Anti-abuse rule.
(1) In general.
(2) Examples.
Sec. 1.338-2 Nomenclature and definitions; mechanics of the section
338 election.
(a) Scope.
(b) Nomenclature.
(c) Definitions.
(1) Acquisition date.
(2) Acquisition date assets.
(3) Affiliated group.
(4) Common parent.
(5) Consistency period.
(6) Deemed asset sale.
(7) Deemed sale gain.
(8) Deemed sale return.
(9) Domestic corporation.
(10) Old target's final return.
(11) Purchasing corporation.
(12) Qualified stock purchase.
(13) Related persons.
(14) Section 338 election.
(15) Section 338(h)(10) election.
(16) Selling group.
(17) Target; old target; new target.
(18) Target affiliate.
(19) 12-month acquisition period.
(d) Time and manner of making election.
(e) Special rules for foreign corporations or DISCs.
(1) Elections by certain foreign purchasing corporations.
(i) General rule.

[[Page 43476]]

(ii) Qualifying foreign purchasing corporation.
(iii) Qualifying foreign target.
(iv) Triggering event.
(v) Subject to United States tax.
(2) Acquisition period.
(3) Statement of section 338 may be filed by United States
shareholders in certain cases.
(4) Notice requirement for U.S. persons holding stock in foreign
market.
(i) General rule.
(ii) Limitation.
(iii) Form of notice.
(iv) Timing of notice.
(v) Consequence of failure to comply.
(vi) Good faith effort to comply.
Sec. 1.338-3 Qualification for the section 338 election.
(a) Scope.
(b) Rules relating to qualified stock purchases.
(1) Purchasing corporation requirement.
(2) Purchase.
(i) Definition.
(ii) Purchase of target.
(iii) Purchase of target affiliate.
(3) Acquisitions of stock from related corporations.
(i) In general.
(ii) Time for testing relationship.
(iii) Cases where section 338(h)(3)(C) applies--acquisitions
treated as purchases.
(iv) Examples.
(4) Acquisition date for tiered targets.
(i) Stock sold in deemed asset sale.
(ii) Examples.
(5) Effect of redemptions.
(i) General rule.
(ii) Redemptions from persons unrelated to the purchasing
corporation.
(iii) Redemptions from the purchasing corporation or related
persons during 12-month acquisition period.
(A) General rule.
(B) Exception for certain redemptions from related corporations.
(iv) Examples.
(c) Effect of post-acquisition events on eligibility for section
338 election.
(1) Post-acquisition elimination of target.
(2) Post-acquisition elimination of the purchasing corporation.
(3) Consequences of post-acquisition elimination of target.
(i) Scope.
(ii) Continuity of interest.
(iii) Control requirement.
(iv) Example.
Sec. 1.338-4 Aggregate deemed sale price; various aspects of
taxation of the deemed asset sale.
(a) Scope.
(b) Determination of ADSP.
(1) General rule.
(2) Time and amount of ADSP.
(i) Original determination.
(ii) Redetermination of ADSP.
(iii) Example.
(c) Grossed-up amount realized on the sale to the purchasing
corporation of the purchasing corporation's recently purchased
target stock.
(1) Determination of amount.
(2) Example.
(d) Liabilities of old target.
(1) In general.
(2) Time and amount of liabilities.
(3) Interaction with deemed sale gain.
(e) Calculation of deemed sale gain.
(f) Other rules apply in determining ADSP.
(g) Examples.
(h) Deemed sale of target affiliate stock.
(1) Scope.
(2) In general.
(3) Deemed sale of foreign target affiliate by a domestic
target.
(4) Deemed sale producing effectively connected income.
(5) Deemed sale of insurance company target affiliate electing
under section 953(d).
(6) Deemed sale of DISC target affiliate.
(7) Anti-stuffing rule.
(8) Examples.
Sec. 1.338-5 Adjusted grossed-up basis.
(a) Scope.
(b) Determination of AGUB.
(1) General rule.
(2) Time and amount of AGUB.
(i) Original determination.
(ii) Redetermination of AGUB.
(iii) Examples.
(c) Grossed-up basis of recently purchased stock.
(d) Basis of nonrecently purchased stock; gain recognition
election.
(1) No gain recognition election.
(2) Procedure for making gain recognition election.
(3) Effect of gain recognition election.
(i) In general.
(ii) Basis amount.
(iii) Losses not recognized.
(iv) Stock subject to election.
(e) Liabilities of new target.
(1) In general.
(2) Time and amount of liabilities.
(3) Interaction with deemed sale gain.
(f) Adjustments by the Internal Revenue Service.
(g) Examples.
Sec. 1.338-6 Allocation of ADSP and AGUB among target assets.
(a) Scope.
(1) In general.
(2) Fair market value.
(i) In general.
(ii) Transaction costs.
(iii) Internal Revenue Service authority.
(b) General rule for allocating ADSP and AGUB.
(1) Reduction in the amount of consideration for Class I assets.
(2) Other assets.
(i) In general.
(ii) Class II assets.
(iii) Class III assets.
(iv) Class IV assets.
(v) Class V assets.
(vi) Class VI assets.
(vii) Class VII assets.
(3) Other items designated by the Internal Revenue Service.
(c) Certain limitations and other rules for allocation to an
asset.
(1) Allocation not to exceed fair market value.
(2) Allocation subject to other rules.
(3) Special rule for allocating AGUB when purchasing corporation
has nonrecently purchased stock.
(i) Scope.
(ii) Determination of hypothetical purchase price.
(iii) Allocation of AGUB.
(4) Liabilities taken into account in determining amount
realized on subsequent disposition.
(d) Examples.
Sec. 1.338-7 Allocation of redetermined ADSP and AGUB among target
assets.
(a) Scope.
(b) Allocation of redetermined ADSP and AGUB.
(c) Special rules for ADSP.
(1) Increases or decreases in deemed sale gain taxable
notwithstanding old target ceases to exist.
(2) Procedure for transactions in which section 338(h)(10) is
not elected.
(i) Deemed sale gain included in new target's return.
(ii) Carryovers and carrybacks.
(A) Loss carryovers to new target taxable years.
(B) Loss carrybacks to taxable years of old target.
(C) Credit carryovers and carrybacks.
(3) Procedure for transactions in which section 338(h)(10) is
elected.
(d) Special rules for AGUB.
(1) Effect of disposition or depreciation of acquisition date
assets.
(2) Section 38 property.
(e) Examples.
Sec. 1.338-8 Asset and stock consistency.
(a) Introduction.
(1) Overview.
(2) General application.
(3) Extension of the general rules.
(4) Application where certain dividends are paid.
(5) Application to foreign target affiliates.
(6) Stock consistency.
(b) Consistency for direct acquisitions.
(1) General rule.
(2) Section 338(h)(10) elections.
(c) Gain from disposition reflected in basis of target stock.
(1) General rule.
(2) Gain not reflected if section 338 election made for target.
(3) Gain reflected by reason of distributions.
(4) Controlled foreign corporations.
(5) Gain recognized outside the consolidated group.
(d) Basis of acquired assets.
(1) Carryover basis rule.
(2) Exceptions to carryover basis rule for certain assets.
(3) Exception to carryover basis rule for de minimis assets.
(4) Mitigation rule.
(i) General rule.
(ii) Time for transfer.
(e) Examples.
(1) In general.
(2) Direct acquisitions.
(f) Extension of consistency to indirect acquisitions.
(1) Introduction.
(2) General rule.
(3) Basis of acquired assets.
(4) Examples.
(g) Extension of consistency if dividends qualifying for 100 percent
dividends received deduction are paid.

[[Page 43477]]

(1) General rule for direct acquisitions from target.
(2) Other direct acquisitions having same effect.
(3) Indirect acquisitions.
(4) Examples.
(h) Consistency for target affiliates that are controlled foreign
corporations.
(1) In general.
(2) Income or gain resulting from asset dispositions.
(i) General rule.
(ii) Basis of controlled foreign corporation stock.
(iii) Operating rule.
(iv) Increase in asset or stock basis.
(3) Stock issued by target affiliate that is a controlled foreign
corporation.
(4) Certain distributions.
(i) General rule.
(ii) Basis of controlled foreign corporation stock.
(iii) Increase in asset or stock basis.
(5) Examples.
(i) [Reserved]
(j) Anti-avoidance rules.
(1) Extension of consistency rules.
(2) Qualified stock purchase and 12-month acquisition period.
(3) Acquisitions by conduits.
(i) Asset ownership.
(A) General rule.
(B) Application of carryover basis rule.
(ii) Stock acquisitions.
(A) Purchase by conduit.
(B) Purchase of conduit by corporation.
(C) Purchase of conduit by conduit.
(4) Conduit.
(5) Existence of arrangement.
(6) Predecessor and successor.
(i) Persons.
(ii) Assets.
(7) Examples.
Sec. 1.338-9 International Aspects of Section 338.
(a) Scope.
(b) Application of section 338 to foreign targets.
(1) In general.
(2) Ownership of FT stock on the acquisition date.
(3) Carryover FT stock.
(i) Definition.
(ii) Carryover of earnings and profits.
(iii) Cap on carryover of earnings and profits.
(iv) Post-acquisition date distribution of old FT earnings and
profits.
(v) Old FT earnings and profits unaffected by post-acquisition date
deficits.
(vi) Character of FT stock as carryover FT stock eliminated upon
disposition.
(4) Passive foreign investment company stock.
(c) Dividend treatment under section 1248(e).
(d) Allocation of foreign taxes.
(e) Operation of section 338(h)(16). [Reserved]
(f) Examples.
Sec. 1.338-10 Filing of Returns.
(a) Returns including tax liability from deemed asset sale.
(1) In general.
(2) Old target's final taxable year otherwise included in
consolidated return of selling group.
(i) General rule.
(ii) Separate taxable year.
(iii) Carryover and carryback of tax attributes.
(iv) Old target is a component member of purchasing corporation's
controlled group.
(3) Old target is an S corporation.
(4) Combined deemed sale return.
(i) General rule.
(ii) Gain and loss offsets.
(iii) Procedure for filing a combined return.
(iv) Consequences of filing a combined return.
(5) Deemed sale excluded from purchasing corporation's consolidated
return.
(6) Due date for old target's final return.
(i) General rule.
(ii) Application of Sec. 1.1502 76(c).
(A) In general.
(B) Deemed extension.
(C) Erroneous filing of deemed sale return.
(D) Erroneous filing of return for regular tax year.
(E) Last date for payment of tax.
(7) Examples.
(b) Waiver.
(1) Certain additions to tax.
(2) Notification.
(3) Elections or other actions required to be specified on a timely
filed return.
(i) In general.
(ii) New target in purchasing corporation's consolidated return.
(4) Examples.
Sec. 1.338(h)(10)-1 Deemed Asset Sale and Liquidation.
(a) Scope.
(b) Definitions.
(1) Consolidated target.
(2) Selling consolidated group.
(3) Selling affiliate; affiliated target.
(4) S corporation target.
(5) S corporation shareholders.
(6) Liquidation.
(c) Section 338(h)(10) election.
(1) In general.
(2) Simultaneous joint election requirement.
(3) Irrevocability.
(4) Effect of invalid election.
(d) Certain consequences of section 338(h)(10) election.
(1) P.
(2) New T.
(3) Old T--deemed sale.
(i) In general.
(ii) Tiered targets.
(4) Old T and selling consolidated group, selling affiliate, or S
corporation shareholders--deemed liquidation; tax characterization.
(i) In general.
(ii) Tiered targets.
(5) Selling consolidated group, selling affiliate, or S corporation
shareholders.
(i) In general.
(ii) Basis and holding period of T stock not acquired.
(iii) T stock sale.
(6) Nonselling minority shareholders other than nonselling S
corporation shareholders.
(i) In general.
(ii) T stock sale.
(iii) T stock not acquired.
(7) Consolidated return of selling consolidated group.
(8) Availability of the section 453 installment method.
(i) In deemed asset sale.
(ii) In deemed liquidation.
(9) Treatment consistent with an actual asset sale.
(e) Examples.
(f) Inapplicability of provisions.
(g) Required information.
Sec. 1.338(i)-1 Effective dates.

Sec. 1.338-1 General principles; status of old target and new target.

(a) In general--(1) Deemed transaction. Elections are available
under section 338 when a purchasing corporation acquires the stock of
another corporation (the target) in a qualified stock purchase. One
type of election, under section 338(g), is available to the purchasing
corporation. Another type of election, under section 338(h)(10), is, in
more limited circumstances, available jointly to the purchasing
corporation and the sellers of the stock. (Rules concerning eligibility
for these elections are contained in Secs. 1.338-2, 1.338-3, and
1.338(h)(10)-1.) Although target is a single corporation under
corporate law, if a section 338 election is made, then two separate
corporations, old target and new target, generally are considered to
exist for purposes of subtitle A of the Internal Revenue Code. Old
target is treated as transferring all of its assets to an unrelated
person in exchange for consideration that includes the assumption of,
or taking subject to, liabilities, and new target is treated as
acquiring all of its assets from an unrelated person in exchange for
consideration that includes the assumption of or taking subject to
liabilities. (Such transaction is, without regard to its
characterization for Federal income tax purposes, referred to as the
deemed asset sale and the income tax consequences thereof as the deemed
sale gain.) If a section 338(h)(10) election is made, old target is
also deemed to liquidate following the deemed asset sale.
(2) Application of other rules of law. Other rules of law apply to
determine the tax consequences to the parties as if they had actually
engaged in the transactions deemed to occur under section 338 and the
regulations hereunder except to the extent otherwise provided in the
regulations hereunder. See also Sec. 1.338-6(c)(2). Other rules of law
may characterize the transaction as something other than or in addition
to a sale and purchase of assets; however, it must be a taxable
transaction. For example, if target is an insurance company for which a
section 338 election is made, the deemed asset

[[Page 43478]]

sale would be characterized and taxed as an assumption-reinsurance
transaction under applicable Federal income tax law. See Sec. 1.817-
4(d).
(3) Overview. Definitions and special nomenclature and rules for
making the section 338 election are provided in Sec. 1.338-2.
Qualification for the section 338 election is addressed in Sec. 1.338-
3. The amount for which old target is treated as selling all of its
assets (the aggregate deemed sale price, or ADSP) is addressed in
Sec. 1.338-4. The amount for which new target is deemed to have
purchased all its assets (the adjusted grossed-up basis, or AGUB) is
addressed in Sec. 1.338-5. Section 1.338-6 addresses allocation both of
ADSP among the assets old target is deemed to have sold and of AGUB
among the assets new target is deemed to have purchased. Section 1.338-
7 addresses allocation of ADSP or AGUB when those amounts change after
the close of new target's first taxable year. Asset and stock
consistency are addressed in Sec. 1.338-8. International aspects of
section 338 are covered in Sec. 1.338-9. Rules for the filing of
returns are provided in Sec. 1.338-10. Eligibility for and treatment of
section 338(h)(10) elections is addressed in Sec. 1.338(h)(10)-1.
(b) Treatment of target under other provisions of the Internal
Revenue Code--(1) General rule for subtitle A. Except as provided in
this section, new target is treated as a new corporation that is
unrelated to old target for purposes of subtitle A of the Internal
Revenue Code. Thus--
(i) New target is not considered related to old target for purposes
of section 168 and may make new elections under section 168 without
taking into account the elections made by old target; and
(ii) New target may adopt, without obtaining prior approval from
the Commissioner, any taxable year that meets the requirements of
section 441 and any method of accounting that meets the requirements of
section 446. Notwithstanding Sec. 1.441-1T(b)(2), a new target may
adopt a taxable year on or before the last day for making the election
under section 338 by filing its first return for the desired taxable
year on or before that date.
(2) Exceptions for subtitle A. New target and old target are
treated as the same corporation for purposes of--
(i) The rules applicable to employee benefit plans (including those
plans described in sections 79, 104, 105, 106, 125, 127, 129, 132, 137,
and 220), qualified pension, profit-sharing, stock bonus and annuity
plans (sections 401(a) and 403(a)), simplified employee pensions
(section 408(k)), tax qualified stock option plans (sections 422 and
423), welfare benefit funds (sections 419, 419A, 512(a)(3), and 4976),
voluntary employee benefit associations (section 501(c)(9) and the
regulations thereunder);
(ii) Sections 1311 through 1314 (relating to the mitigation of the
effect of limitations) if a section 338(h)(10) election is not made for
target;
(iii) Section 108(e)(5) (relating to the reduction of purchase
money debt);
(iv) Section 45A (relating to the Indian Employment Credit),
section 51 (relating to the Work Opportunity Credit), section 51A
(relating to the Welfare to Work Credit), and section 1396 (relating to
the Empowerment Zone Act);
(v) Sections 401(h) and 420 (relating to medical benefits for
retirees);
(vi) Section 414 (relating to definitions and special rules); and
(vii) Any other provision designated in the Internal Revenue
Bulletin by the Internal Revenue Service. See Sec. 601.601(d)(2)(ii) of
this chapter (relating to the Internal Revenue Bulletin). See
Sec. 1.1001-3(e)(4)(F) providing that an election under section 338
does not result in the substitution of a new obligor on target's debt.
(3) General rule for other provisions of the Internal Revenue Code.
Except as provided in the regulations under section 338 or in the
Internal Revenue Bulletin by the Internal Revenue Service (see
Sec. 601.601(d)(2)(ii) of this chapter), new target is treated as a
continuation of old target for purposes other than subtitle A of the
Internal Revenue Code. For example--
(i) New target is liable for old target's Federal income tax
liabilities, including the tax liability for the deemed sale gain and
those tax liabilities of the other members of any consolidated group
that included old target that are attributable to taxable years in
which those corporations and old target joined in the same consolidated
return (see Sec. 1.1502-6(a));
(ii) Wages earned by the employees of old target are considered
wages earned by such employees from new target for purposes of sections
3101 and 3111 (Federal Insurance Contributions Act) and section 3301
(Federal Unemployment Tax Act); and
(iii) Old target and new target must use the same employer
identification number.
(c) Anti-abuse rule--(1) In general. For purposes of applying the
resid

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A99-19930. Public record. Not legal advice.