New Section 336(e) Regulations Call for Thoughtful Wording in Purchase Agreements

Oct. 31, 2013

The new IRC Section 336(e) regulations present challenges for drafters of stock purchase agreements. Buyers and sellers need to make sure the language in the agreements will result in the agreed-upon tax treatment for both parties.

In June 2013, the IRS issued final regulations under IRC Section 336(e). The regulations expand the availability of deemed asset sale treatment in a manner similar to Section 338(h)(10).

One significant difference between Sections 336(e) and 338(h)(10) is the manner in which the election for each is made. Under Section 338(h)(10), the buyer and seller jointly make the election. Under Section 336(e), the election is made by the seller and the target corporation – the buyer has no role.

As a result, every stock purchase agreement involving a transaction that could qualify under Section 336(e) should contain specific language that either obligates the seller to make the election or precludes the seller from making the election, depending on what the buyer and seller agreed upon beforehand. Doing so will help the parties achieve the desired tax consequences of the transaction.

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