This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

49965 

Vol. 73, No. 165 

Monday, August 25, 2008 

NUCLEAR REGULATORY 

COMMISSION 

10 CFR Part 50 

[Docket No. PRM–50–90; NRC–2008–0279] 

Natural Resources Defense Council; 

Receipt of Petition for Rulemaking; 

Reopening of Public Comment Period 

AGENCY: Nuclear Regulatory 

Commission. 

ACTION: Petition for rulemaking; 

reopening of public comment period. 

SUMMARY: On May 27, 2008 (73 FR 

30321), the Nuclear Regulatory 

Commission (NRC) published for public 

comment a notice of receipt of a petition 

for rulemaking, dated March 24, 2008, 

which was filed with the Commission 

by Thomas B. Cochran and Matthew G. 

McKinzie on behalf of the Natural 

Resources Defense Council. The petition 

was docketed by the NRC on April 3, 

2008, and has been assigned Docket No. 

PRM–50–90. On August 4 and August 6, 

2008, several external stakeholder 

groups requested a 45 day extension of 

the public comment period owing to the 

details provided in the initial petition, 

short initial comment period, 

importance of the rulemaking, and the 

need for directly impacted stakeholders 

to provide substantive comments to the 

rulemaking process. The NRC is 

reopening the comment period on the 

petition for an additional 45 days from 

the original August 11, 2008 deadline. 

The comment period closes on 

September 25, 2008. 

DATES: The comment period has been 

reopened and now expires on 

September 25, 2008. Comments received 

after this date will be considered if it is 

practical to do so, but the Commission 

is able to assure consideration only for 

comments received on or before this 

date. 

ADDRESSES: You may submit comments 

on this petition by any one of the 

following methods. Please include 

PRM–50–90 in the subject line of your 

comments. Comments on petitions 

submitted in writing or in electronic 

form will be made available for public 

inspection. Personal information, such 

as your name, address, telephone 

number, e-mail address, etc., will not be 

removed from your submission. 

Federal eRulemaking Portal: Go to 

http://www.regulations.gov and search 

for documents filed under Docket ID 

[NRC–2008–0279]. Address questions 

about NRC dockets to Carol Gallagher, 

301–415–5905; e-mail 

Carol.Gallagher@nrc.gov. 

Mail comments to: Secretary, U.S. 

Nuclear Regulatory Commission, 

Washington, DC 20555–0001, ATTN: 

Rulemakings and Adjudications Staff. 

E-mail comments to: 

rulemaking.comments@nrc.gov. If you 

do not receive a reply e-mail confirming 

that we have received your comments, 

contact us directly at 301–415–1677. 

Hand deliver comments to: 11555 

Rockville Pike, Rockville, Maryland 

20852, between 7:30 a.m. and 4:15 p.m. 

Federal workdays, telephone number 

301–415–1677. 

Fax comments to: Secretary, U.S. 

Nuclear Regulatory Commission at 301– 

415–1101. Publicly available documents 

related to this petition may be viewed 

electronically on the public computers 

located at the NRC’s Public Document 

Room (PDR), Room O1 F21, One White 

Flint North, 11555 Rockville Pike, 

Rockville, Maryland. The PDR 

reproduction contractor will copy 

documents for a fee. Selected 

documents, including comments, may 

be viewed and downloaded 

electronically via the Federal 

eRulemaking Portal http:// 

www.regulations.gov. 

Publicly available documents created 

or received at the NRC after November 

1, 1999, are available electronically at 

the NRC’s Electronic Reading Room at 

http://www.nrc.gov/reading-rm/ 

adams.html. From this site, the public 

can gain entry into the NRC’s 

Agencywide Documents Access and 

Management System (ADAMS), which 

provides text and image files of NRC’s 

public documents. If you do not have 

access to ADAMS or if there are 

problems in accessing the documents 

located in ADAMS, contact the PDR 

Reference staff at 1–800–397–4209, 

301–415–4737 or by e-mail to 

pdr.resource@nrc.gov. 

A paper copy of the petition may be 

obtained by contacting Betty Golden, 

Office of Administration, U.S. Nuclear 

Regulatory Commission, Washington, 

DC 20555–0001, telephone 301–415– 

6863, toll-free 1–800–368–5642, or by 

e-mail to Betty.Golden@nrc.gov. 

FOR FURTHER INFORMATION CONTACT: 

Michael T. Lesar, Chief, Rulemaking, 

Directives and Editing Branch, Division 

of Administrative Services, Office of 

Administration, U.S. Nuclear Regulatory 

Commission, Washington, DC 20555– 

0001, telephone 301–415–7163 or tollfree 1–800–368–5642. 

For the U.S. Nuclear Regulatory 

Commission. 

Dated at Rockville, Maryland, this 19th day 

of August 2008. 

Annette L. Vietti-Cook, 

Secretary of the Commission. 

[FR Doc. E8–19609 Filed 8–22–08; 8:45 am] 

BILLING CODE 7590–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–143544–04] 

RIN 1545–BD84 

Regulations Enabling Elections for 

Certain Transactions Under Section 

336(e) 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations under section 

336(e) of the Internal Revenue Code. 

These proposed regulations, when 

finalized, would permit taxpayers to 

make an election to treat certain sales, 

exchanges, and distributions of another 

corporation’s stock as taxable sales of 

that corporation’s assets. These 

proposed regulations will affect 

corporations and their shareholders. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by November 24, 2008. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–143544–04), room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–143544– 


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49966 Federal Register / Vol. 73, No. 165 / Monday, August 25, 2008 / Proposed Rules 

04), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC, or sent 

electronically, via the Federal 

eRulemaking Portal at http:// 

www.regulations.gov (IRS REG–143544–

04). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulation, 

Mark J. Weiss, (202) 622–7750; 

concerning submissions of comments 

and the hearing, Richard Hurst, (202) 

622–7180 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information 

contained in this notice of proposed 

rulemaking has 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 

collection of information should be sent 

to the Office of Management and 

Budget, Attn: Desk Officer for the 

Department of Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503. Comments on 

the collection of information should be 

received by October 24, 2008. 

The collection of information in this 

proposed regulation is in proposed 

§§ 1.336–2(h) and 1.336–4(c)(4)). This 

information is required by the IRS to 

allow certain parties to make a section 

336(e) election and for certain 

shareholders to make a gain recognition 

election. The likely recordkeepers are 

business or other for-profit institutions. 

The estimated burden is as follows: 

Estimated total annual reporting and/ 

or recordkeeping burden: 500 hours. 

Estimated average annual burden per 

respondent: 2 hours. 

Estimated number of respondents: 

250. 

Estimated annual frequency of 

responses: Once. 

Comments concerning the accuracy of 

this burden estimate and suggestions for 

reducing this burden should be directed 

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, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224. Any such comments should be 

submitted not later than October 24, 

2008. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless the collection of information 

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 and Explanation of 

Provisions 

Section 336(e) of the Internal Revenue 

Code (Code) authorizes the issuance of 

regulations under which a corporation 

(seller) that owns stock in another 

corporation (target) meeting the 

requirements of section 1504(a)(2) and 

sells, exchanges, or distributes all of 

such stock may make an election to treat 

the sale, exchange, or distribution of the 

target stock as a sale of all of target’s 

underlying assets. Section 336(e) was 

enacted as part of the legislation 

repealing the General Utilities rule and, 

like an election under section 

338(h)(10), is meant to provide 

taxpayers relief from a potential 

multiple taxation at the corporate level 

of the same economic gain which can 

result when a transfer of appreciated 

corporate stock is taxed to a corporation 

without providing a corresponding stepup in the basis of the assets of the 

corporation. See H.R. Conf. Rep. No. 

841, 99th Cong., 2d Sess., Vol. II, 198, 

204 (1986), 1986–3 C.B., Vol. 4, 198–

207. 

A. Scope of the Proposed Regulations 

Pursuant to section 336(e), regulations 

may authorize a section 336(e) election 

in a broad set of circumstances. The IRS 

and Treasury Department have limited 

the scope of these proposed regulations, 

however, in order to provide guidance 

to a large number of taxpayers in the 

most efficient manner possible. These 

proposed regulations, when finalized, 

will provide the requirements and 

mechanics for, and consequences of, 

treating a stock sale, exchange, or 

distribution that would not otherwise be 

eligible for a section 338 election as a 

deemed asset sale. 

The IRS and Treasury Department do 

not presently intend to authorize the 

making of section 336(e) elections under 

all the circumstances described within 

the statutory grant of authority. 

However, the IRS and Treasury 

Department are interested in comments 

regarding transactions beyond the scope 

of these proposed regulations for which 

such elections should be allowed and 

under what terms and conditions. For 

example, these proposed regulations do 

not apply to transactions between 

related persons. For this purpose, 

persons are related if stock in a 

corporation owned by one of the 

persons would be attributed to the other 

person under section 318(a), other than 

section 318(a)(4). See proposed § 1.336–

1(b)(11). The IRS and Treasury 

Department continue to study the 

possibility of making a section 336(e) 

election available for such transactions. 

Accordingly, comments are requested 

regarding dispositions to related 

persons, including special rules needed 

to prevent the use of net operating 

losses to offset liquidation gains, 

manipulation of earnings and profits, 

and changes of accounting methods. See 

H.R. Conf. Rep. No. 841, 99th Cong., 2d 

Sess., Vol. II at 204 (1986). 

Additionally, these proposed 

regulations do not apply to transactions 

in which either the seller or the target 

is a foreign corporation. The IRS and 

Treasury Department request comments 

regarding how the rules of the proposed 

regulations should be modified to take 

into account the policies of 

international tax provisions if the 

proposed regulations were extended to 

apply to foreign sellers and/or foreign 

targets. For example, comments are 

requested regarding: (1) How the 

principles of section 338(h)(16) should 

apply; (2) how the foreign tax allocation 

rule of § 1.338–9(d) should apply; (3) 

the characterization of the gain 

recognized on the deemed asset 

disposition for purposes of section 

954(c)(1)(B); (4) whether special 

earnings and profits rules are necessary 

(see, for example, the rules described in 

Prop. Treas. Reg. § 1.367(b)–8); and (5) 

how the withholding tax provisions of 

section 1445 should apply to the 

deemed asset disposition (if relevant). 

The IRS and Treasury Department 

continue to study issues related to 

elections made under section 338(g) in 

the international area. Comments are 

requested on issues in this area, 

including the interaction of section 

338(h)(16) with sections 902 and 960. 

Absent the issuance of further 

guidance, it is intended that these 

regulations would provide the exclusive 

means of making elections under 

section 336(e). See proposed § 1.336–

2(a). 

B. General Principles 

1. General Adoption of Section 

338(h)(10) Principles 

The legislative history to section 

336(e) provides that principles similar 

to those of section 338(h)(10) should 

apply in the case of a section 336(e) 

election. See H.R. Conf. Rep. No. 841, 

99th Cong., 2d Sess., Vol. II, at 204 


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(1986). These proposed regulations 

implement such principles. 

Accordingly, except to the extent 

inconsistent with the purposes of 

section 336(e) or as otherwise described, 

the results of a section 336(e) election 

coincide with those of a section 

338(h)(10) election. Whenever possible, 

these proposed regulations rely upon 

and use the structure and principles 

established under section 338(h)(10) 

and the underlying regulations. For 

example, these regulations refer to 

principles under the section 338 

regulations regarding the allocation of 

consideration, application of the asset 

and stock consistency rules, treatment 

of minority shareholders, and the 

availability of the section 453 

installment method. In other instances, 

definitions and concepts from section 

338 and the underlying regulations have 

been modified to reflect principles 

applicable to section 336(e). For 

example, these proposed regulations 

generally use the term ‘‘disposition’’

rather than ‘‘acquisition or purchase’’

and the term ‘‘sale, exchange, or 

distribution’’ instead of ‘‘sale.’’ Thus, a 

qualified stock disposition is defined as 

any transaction or series of transactions 

in which stock meeting the 

requirements of section 1504(a)(2) of a 

domestic corporation is either sold, 

exchanged, or distributed, or any 

combination thereof, by another 

domestic corporation in a disposition, 

within the meaning of proposed 

§ 1.336–1(b)(4), during the 12-month 

disposition period. See proposed 

§ 1.336–1(b)(5). 

These proposed regulations also 

provide that a transaction that satisfies 

the definition of both a qualified stock 

disposition and a qualified stock 

purchase (as defined in section 

338(d)(3)) generally will be treated only 

as a qualified stock purchase and thus 

does not qualify for an election under 

these regulations. See proposed § 1.336–

1(b)(5)(ii)). 

2. Requirements for a Section 336(e) 

Election 

Section 336(e) requires that a seller 

own stock in another corporation 

meeting the requirements of section 

1504(a)(2) and sell, exchange, or 

distribute all of such stock to qualify for 

a section 336(e) election. For purposes 

of these proposed regulations, a seller is 

a domestic corporation that makes a 

qualified stock disposition and includes 

a transferor and a distributor of target 

stock. See proposed § 1.336–1(b)(1). 

Generally, all members of a seller’s 

consolidated group are treated as a 

single seller. See proposed § 1.336–

2(g)(2). Thus, similar to a section 

338(h)(10) election, a section 336(e) 

election is available to a seller that 

directly owns stock of target meeting the 

requirements of section 1504(a)(2) and 

to sellers which are members of a 

consolidated group for the taxable year 

that includes the disposition date that in 

the aggregate own stock of target 

meeting the requirements of section 

1504(a)(2). Because section 336(e) 

requires a corporate seller, the election 

is not available with respect to the stock 

of an S corporation. See proposed 

§ 1.336–1(b)(5). Cf. § 1.338(h)(10)–

1(c)(1). 

These proposed regulations interpret 

section 336(e) as requiring only that an 

amount of stock meeting the 

requirements of section 1504(a)(2) be 

disposed of and not that every share of 

stock owned by the seller be disposed 

of. Accordingly, the seller, or a member 

of seller’s consolidated group, may 

retain a portion of its target stock. See 

proposed §§ 1.336–2(b)(1)(v) and 1.336–

2(b)(2)(iv). Furthermore, these proposed 

regulations permit amounts of target 

stock sold, exchanged, and distributed 

to be aggregated for purposes of 

determining whether there has been a 

qualified stock disposition. For 

example, a domestic corporation’s sale 

of 50 percent of target’s stock to an 

unrelated person and a distribution to 

its unrelated shareholders of the 

remaining 50 percent within a 12-month 

period would constitute a qualified 

stock disposition. See proposed § 1.336–

1(b)(5). 

In contrast to section 338, which 

requires a corporate purchaser, these 

proposed regulations define a purchaser 

as any person or persons who receive 

stock of target in a qualified stock 

disposition. Accordingly, a section 

336(e) election is available for sales, 

exchanges, or distributions (or a 

combination thereof) of target stock to 

both corporate and non-corporate 

purchasers, provided that the target 

stock is not sold, exchanged, or 

distributed to a related person. See 

proposed §§ 1.336–1(b)(2) and 1.336–

1(b)(4)(i)(C). 

Any stock sold, exchanged, or 

distributed to a related party is not 

considered to be disposed of for 

purposes of determining whether there 

has been a qualified stock disposition. 

See proposed §§ 1.336–1(b)(4)(i)(C) and 

1.336–1(b)(5)(i). Relatedness generally is 

determined immediately after the sale, 

exchange, or distribution of target stock 

occurs (see proposed §§ 1.336–

1(b)(4)(iii), 1.336–1(b)(11), and 1.338–

3(b)(3)). 

C. Sales or Exchanges of Target Stock 

In general, if a seller sells or 

exchanges target stock in a qualified 

stock disposition, the treatment of old 

target, seller, and purchaser are similar 

to the treatment of old target (old T), S, 

and P under section 338(h)(10). See 

§ 1.338(h)(10)–1. If an election is made 

under section 336(e), the seller 

disregards the actual sale or exchange of 

target stock. Instead, target (old target) is 

treated as selling all of its assets to an 

unrelated corporation in a single 

transaction at the close of the 

disposition date (the deemed asset 

disposition). Old target recognizes the 

deemed disposition tax consequences 

from the deemed asset disposition 

before the close of the disposition date 

while it is a subsidiary of seller. After 

the deemed asset disposition, old target 

is then treated as liquidating into seller 

which in most cases will be treated as 

a distribution in complete liquidation to 

which section 332 and section 336 or 

337 applies. Additionally, consistent 

with a section 338 election, the deemed 

purchase of the assets of old target by 

new target constitutes a deemed 

purchase of any subsidiary stock owned 

by target. Accordingly, a section 336(e) 

election is available for the deemed 

purchase of the stock of a target 

subsidiary if it constitutes a qualified 

stock disposition. A section 336(e) 

election generally does not change the 

tax consequences of the acquisition to a 

purchaser of target stock. 

D. Distributions of Target Stock Not 

Described in Section 355(d)(2) or (e)(2) 

A section 336(e) election can be made 

for a distribution of target stock, and the 

legislative history to section 336(e) 

provides that ‘‘[t]he conferees do not 

intend this election to affect the manner 

in which a corporation’s distribution to 

its shareholders will be characterized 

for purposes of determining the 

shareholder level income tax 

consequences.’’ H.R. Conf. Rep. No. 841, 

99th Cong., 2d Sess., Vol. II, at 204 

(1986). Accordingly, additional rules are 

required to address distributions and to 

ensure that the income tax 

consequences to a distributee are 

generally the same as if a section 336(e) 

election was not made. 

Specifically, these proposed 

regulations provide that if seller (the 

distributor) distributes old target stock 

in the qualified stock disposition, seller 

is deemed to purchase from new target 

on the disposition date, immediately 

after the deemed liquidation of old 

target, the amount of stock distributed 

in the qualified stock disposition and to 

have distributed such new target stock 


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to its shareholders. Seller recognizes no 

gain or loss on the distribution. See 

proposed § 1.336–2(b)(1)(iv). The 

distributee’s tax consequences generally 

shall be the same as if it received the 

target stock pursuant to the underlying 

distribution. However, the Federal 

income tax consequences of the deemed 

asset disposition and liquidation of 

target may affect the distributee’s 

income tax consequences. For example, 

if seller distributes the stock of target to 

its shareholders in a qualified stock 

disposition for which a section 336(e) 

election is made, any increase in seller’s 

earnings and profits as a result of old 

target’s deemed asset disposition and 

liquidation into seller may alter the 

amount of the distribution to the 

shareholders constituting a dividend 

under section 301(c)(1) from the amount 

that would have resulted if seller 

recognized gain on the stock 

distribution. See proposed § 1.336–2(c). 

If a seller actually distributed stock of 

a subsidiary or assets under section 301, 

it generally would be prevented from 

recognizing any loss. See section 311(a). 

The IRS and Treasury Department 

believe that it would be inconsistent 

with the general treatment of 

distributions to allow losses to be 

recognized on the section 336(e) 

deemed asset disposition to the extent 

the qualified stock disposition was the 

result of a stock distribution. Therefore, 

under these proposed regulations, only 

a portion of the losses realized on the 

deemed asset disposition may be 

recognized. The portion of any realized 

loss that may be recognized is based on 

a fraction equal to the value of the target 

stock sold or exchanged in the qualified 

stock disposition on or before the 

disposition date over the total value of 

target stock disposed of in the qualified 

stock disposition on or before the 

disposition date. In the case of a section 

336(e) election for a subsidiary of target, 

for purposes of determining the amount 

of loss that may be recognized by the 

subsidiary on the deemed asset 

disposition, only the percentage of the 

stock of the target subsidiary deemed 

sold by target equal to the percentage of 

the stock of target sold or exchanged is 

considered to have been sold or 

exchanged. See proposed §§ 1.336–

2(b)(1)(i)(B)(2) and (3). Thus, losses 

realized in the deemed asset disposition 

are not recognized to the extent the 

qualified stock disposition is 

attributable to the distribution of target 

stock. 

E. Section 355 Distributions 

1. Availability of Section 336(e) Election 

for Certain Section 355 Distributions 

The legislative history to section 

336(e) indicates that the election is 

intended to be available for taxable 

transactions. Specifically, the 

Conference Report provides that, 

‘‘principles similar to those of section 

338(h)(10) may be applied to taxable 

sales or distributions of controlled 

corporation stock.’’ H.R. Conf. Rep. No. 

841, 99th Cong., 2d Sess., Vol. II, at 204 

(1986). The legislative history to section 

355(e) provides that although there is no 

adjustment to the basis of stock or assets 

as a result of the recognition of gain 

under section 355(e), ‘‘[t]here is no 

intention to limit the otherwise 

applicable Treasury regulatory authority 

under section 336(e) of the Code.’’ H.R. 

Conf. Rep. 220, 105th Cong., 1st Sess., 

531–532, footnote 13 (1997), 1997–4 

C.B. Vol. 4, 531, 532. Accordingly, these 

proposed regulations would allow a 

corporation that would otherwise 

recognize the full amount of the gain 

realized with respect to a qualified stock 

disposition resulting, in whole or in 

part, from a disposition described in 

section 355(d)(2) or (e)(2) to make a 

section 336(e) election. Without a 

section 336(e) election, such provisions 

may create a triple layer of taxation, one 

at the controlled corporation level, one 

at the distributing corporation level and, 

ultimately, one at the shareholder level. 

Allowing a section 336(e) election in 

these circumstances limits taxation to 

two layers, one at the controlled 

corporation level and one at the 

shareholder level when the controlled 

corporation stock is disposed of, and 

thus is consistent with General Utilities 

repeal. 

2. Special Rules for Distributions 

Described in Section 355(d)(2) or 

355(e)(2) 

Generally, a section 336(e) election, 

like a section 338(h)(10) election, results 

in a deemed sale of old target’s assets 

followed by a liquidation of old target 

into seller, which if made in a 

transaction to which section 381 

applied, results in old target’s attributes 

being transferred to the seller. 

Accordingly, consistent with a taxable 

asset acquisition, after the transaction 

new target generally has no tax 

attributes or earnings and profits, and 

holds its assets with a cost basis. In 

contrast, a section 355 distribution is 

generally tax-free to the distributing 

corporation’s shareholders, even if the 

transaction is described in section 

355(d)(2) or 355(e)(2). Further, following 

a section 355 distribution, the 

controlled corporation generally retains 

tax attributes and earnings and profits. 

The IRS and Treasury Department 

believe that, except as necessary to carry 

out the purposes of section 336(e), the 

section 355 consequences generally 

should continue to apply in such a 

transaction. For example, if the 

controlled corporation were treated as a 

new corporation, with no earnings and 

profits, the controlled corporation may 

be able to distribute its assets to its 

shareholders without recognizing any 

dividend consequences under section 

301(c)(1). Therefore, to preserve the 

consequences of section 355 

distributions, the proposed regulations 

provide special rules. 

If a section 336(e) election is made for 

a distribution of the controlled 

corporation stock in a transaction 

described in section 355(d)(2) or 

355(e)(2), the controlled corporation is 

treated as if it sold its assets to an 

unrelated person in the deemed asset 

disposition and then it reacquired those 

assets (sale-to-self treatment). Following 

the deemed asset disposition, the 

controlled corporation (old target) is not 

deemed to liquidate into the distributing 

corporation (seller). See proposed 

§ 1.336–2(b)(2)(i)(A). Instead, the 

controlled corporation (old target) is 

treated as acquiring all of its assets from 

an unrelated person in a single, separate 

transaction at the close of the 

disposition date, and then the 

distributing corporation is treated as 

distributing the stock of the controlled 

corporation (old target) to its 

shareholders. See proposed § 1.336–

2(b)(2)(ii) and (iii). Because no 

liquidation of old target into seller is 

deemed to occur, the controlled 

corporation (old target) will generally 

retain the tax attributes it would have 

had if the section 336(e) election had 

not been made. The proposed 

regulations further provide that the 

controlled corporation (old target) will 

take the effects of the deemed asset 

disposition into account and increase or 

decrease its earnings and profits 

immediately before allocating earnings 

and profits pursuant to § 1.312–10. See 

proposed § 1.336–2(b)(2)(vi). Finally, 

the deemed sale and reacquisition of 

target’s assets (and, in the case of a 

parent-subsidiary chain of corporations 

making section 336(e) elections, a target 

subsidiary’s assets) pursuant to the 

deemed asset disposition will not cause 

the transaction to fail to satisfy the 

requirements of section 355. See 

proposed § 1.336–2(b)(2)(v). 

Similar to a qualified stock 

disposition resulting from a distribution 

not involving a transaction described in 

section 355(d)(2) or (e)(2), old target’s 


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Federal Register / Vol. 73, No. 165 / Monday, August 25, 2008 / Proposed Rules 49969 

losses in the deemed asset disposition 

will be recognized, but only in relation 

to the amount of stock sold or 

exchanged in the qualified stock 

disposition on or before the disposition 

date. See §§ 1.336–2(b)(2)(i)(B)(2) and 

(3). 

Notwithstanding the fact that the 

sale-to-self treatment applies to a 

distribution of stock described in 

section 355(d)(2) or (e)(2), if old target 

has any subsidiaries for which a section 

336(e) election is made, the general 

deemed asset disposition methodology 

shall apply. Accordingly, old target 

subsidiary is treated as though it sold all 

its assets to an unrelated person, new 

target subsidiary is deemed to purchase 

all its assets from an unrelated person, 

and old target subsidiary is deemed to 

liquidate into old target. If the sale-toself treatment was applied, target 

subsidiary’s attributes would remain 

with target subsidiary. The IRS and 

Treasury Department do not believe that 

taxpayers should have the option of 

whether the attributes become those of 

target, by doing an actual sale of target 

subsidiary’s assets followed by a 

liquidation of target subsidiary, or 

remain with target subsidiary, by 

making a section 336(e) election for 

target subsidiary. Accordingly, the 

regulations apply the general deemed 

asset disposition methodology for 

section 336(e) elections for target 

subsidiaries in a distribution of target 

stock described in section 355(d)(2) or 

(e)(2). 

3. Intragroup Sales, Exchanges, or 

Distributions Prior to External Sales, 

Exchanges, or Distributions 

Generally, if the stock of a target is 

transferred within an affiliated group 

and then is further transferred outside 

the affiliated group, a section 336(e) 

election is not available for the 

intragroup transfer because a qualified 

stock disposition may not be made 

between related sellers and purchasers. 

Thus, stock level gain may be 

recognized on the intragroup transfer. 

While a section 336(e) election may be 

available for the external transfer, this 

election would result in the affiliated 

group recognizing gain both on target’s 

assets and the target stock, contrary to 

the intent of these proposed regulations. 

Comments are requested on how to 

address this concern. Further, because 

section 355(f) provides that section 355 

does not apply to an intragroup 

distribution prior to an external 

distribution described in section 

355(e)(2), these comments should 

address the concerns that section 355(f) 

is intended to address for distributions 

described therein. 

F. Aggregate Deemed Asset Disposition 

Price (ADADP) and Adjusted Grossed 

Up Basis (AGUB) 

These proposed regulations create a 

new term, aggregate deemed asset 

disposition price (ADADP). These 

proposed regulations retain the term 

adjusted grossed up basis (AGUB) as 

used in section 338. See § 1.338–5. In 

general, these proposed regulations treat 

ADADP and AGUB similarly to the way 

aggregate deemed sale price (ADSP) and 

AGUB are treated under the section 338 

regulations. See proposed §§ 1.336–3 

and 1.336–4. Old target recognizes all of 

the gain realized on the deemed transfer 

of its assets in exchange for the ADADP 

and allocates the ADADP among the 

assets held as of the disposition date (in 

the same manner as ADSP is allocated 

under §§ 1.338–6 and 1.338–7). See 

proposed §§ 1.336–2(b)(1)(i) and 1.336–

2(b)(2)(i). ADADP is calculated by 

adding the grossed-up amount realized 

on the sale, exchange, or distribution of 

recently disposed target stock and the 

liabilities of old target. See proposed 

§ 1.336–3(b)(1). These proposed 

regulations account for the fact that 

there is no actual amount realized in a 

distribution of stock by treating the 

grossed-up amount realized on the sale, 

exchange, or distribution as including in 

the amount realized the fair market 

value of recently disposed target stock 

distributed in the qualified stock 

disposition. See proposed § 1.336–

3(c)(1)(i)(B). 

These proposed regulations also 

create a new term, nonrecently disposed 

stock. The term nonrecently disposed 

stock has a similar meaning to the term 

nonrecently purchased stock in section 

338(b)(6)(B). In a transaction for which 

a section 338 election is made, there is 

only one purchasing corporation (or an 

affiliated group treated as a purchasing 

corporation). Accordingly, in most 

cases, it should be relatively easy to 

determine the purchaser’s basis in 

nonrecently purchased stock in order to 

determine AGUB. However, in a section 

336(e) election, there can be multiple 

purchasers or multiple distributees, 

many of whom may have acquired small 

amounts of target stock prior to the 12- 

month disposition period. While a more 

precise determination of AGUB would 

require the determination of the basis of 

all such stockholdings, the IRS and 

Treasury Department recognize that it 

would often be impractical to require a 

seller to determine and track all the 

purchasers (and distributees) possessing 

small amounts of nonrecently 

purchased stock. Generally, purchasers 

holding at least 10 percent of the total 

voting power or value of the stock of 

target should be readily identifiable 

through mandatory SEC filings and 

other sources. Thus, in order to balance 

a desire for precision with a practical 

application, nonrecently disposed stock 

is defined as stock in a target 

corporation which is held on the 

disposition date by a purchaser or a 

person related to a purchaser who owns, 

on the disposition date, with the 

application of section 318(a), other than 

section 318(a)(4), at least 10 percent of 

the total voting power or value of the 

stock of target, and which is not recently 

disposed stock. See proposed § 1.336–

1(b)(17). 

In general, proposed § 1.336–4 uses 

the same principles as paragraphs (b) 

through (g) of § 1.338–5 to determine the 

amount of AGUB for target and the 

consequences of a gain recognition 

election. Proposed § 1.336–4(b) contains 

modifications to the principles of 

§ 1.338–5 to reflect the principles of 

section 336(e). 

New target is treated as acquiring all 

of its assets from an unrelated person in 

a single transaction at the close of the 

disposition date, but before the deemed 

liquidation (or, in the case of a 

transaction described in section 

355(d)(2) or (e)(2), before the 

distribution) in exchange for an amount 

equal to the AGUB as determined under 

proposed § 1.336–4. New target allocates 

the consideration deemed paid in the 

same manner as new target would as 

described in §§ 1.338–6 and 1.338–7 in 

order to determine the basis in each of 

the transferred assets. See proposed 

§§ 1.336–2(b)(1)(ii) and 1.336–2(b)(2)(ii). 

In the case of a disposition described in 

section 355(d)(2) or (e)(2), any reference 

to new target is treated as referring to 

old target in its capacity as the 

purchaser of assets pursuant to the 

section 336(e) election. See proposed 

§ 1.336–4(b)(4). 

Consistent with the principles of a 

section 338(h)(10) election, any stock 

retained by a seller or a member of 

seller’s consolidated group after the 12- 

month disposition period is treated as 

acquired by the seller on the day after 

the disposition date at its fair market 

value. For this purpose, the fair market 

value of all the target stock equals the 

grossed-up amount realized on the sale, 

exchange, or distribution of recently 

disposed stock. See proposed §§ 1.336–

2(b)(1)(v) and 1.336–2(b)(2)(iv). A 

minority shareholder (that is, a 

shareholder that is neither the seller that 

disposes of 80 percent of the voting 

power and value of target stock nor a 

member of seller’s consolidated group) 

is generally not affected by a section 

336(e) election. Accordingly, such a 

minority shareholder that disposes of its 


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target stock will recognize gain or loss 

on the stock without regard to the 

section 336(e) election, and a minority 

shareholder that retains its target stock 

retains its basis and holding period in 

its target stock. See proposed § 1.336–

2(d). 

Under proposed § 1.336–4(c), a holder 

of nonrecently disposed stock may make 

a gain recognition election, similar to 

the gain recognition election under 

section 338, which treats the 

nonrecently disposed stock as being 

sold as of the disposition date. The gain 

recognition election is mandatory if a 

purchaser owns (after the application of 

the rules of section 318(a), other than 

section 318(a)(4)) 80 percent or more of 

the voting power or value of target 

stock. See proposed §§ 1.336–1(b)(15) 

and 1.336–4(c)(2). Cf. §§ 1.338(h)(10)–

1(d)(1) and 1.338–5(d). Once made, a 

gain recognition election is irrevocable. 

See proposed § 1.336–4(c)(1). The IRS 

and Treasury Department request 

comments on whether the rules 

regarding gain recognition elections in 

these proposed regulations are 

appropriate, and whether the gain 

recognition election rules in regulations 

promulgated under section 338 should 

continue to apply. Also, see the 

‘‘Correction to section 1.338–5’’ section 

of this preamble addressing a correction 

to the definition of the term basis 

amount, the amount used in 

determining the purchasing 

corporation’s gain on the deemed sale of 

stock pursuant to the gain recognition 

election and in determining AGUB. 

G. Making the Section 336(e) Election 

These proposed regulations provide 

that a section 336(e) election is made by 

seller attaching a statement to its timely 

filed Federal income tax return for the 

taxable year that includes the 

disposition date. See proposed § 1.336–

2(h). If the seller is a member of a 

consolidated group, the statement is 

filed with the group’s consolidated 

return. 

The IRS and Treasury Department 

believe that it is appropriate to allow the 

seller (or the common parent of the 

seller’s consolidated group) to 

unilaterally make the section 336(e) 

election. The IRS and Treasury 

Department believe that in a 

distribution of target stock, it would be 

impractical to require each distributee, 

who generally will hold relatively small 

percentages of the target stock, to join in 

the election. Further, the distributees’

interests should generally be protected 

because of the distributing corporation’s 

fiduciary responsibilities to its 

shareholders. In the case of a sale or 

exchange, the purchasers should be able 

to protect their interests in any purchase 

contract. Comments are requested 

regarding whether it is appropriate to 

allow such unilateral section 336(e) 

elections in all cases. 

The information required on a section 

336(e) election statement is similar to 

that required on Form 8023, Elections 

Under Section 338 for Corporations 

Making Qualified Stock Purchases. In 

the case of a gain recognition election, 

the section 336(e) election statement 

must include information pertaining to 

the gain recognition election. 

When finalized, these proposed 

regulations will permit taxpayers to 

make a protective section 336(e) 

election if they are unsure of whether a 

transaction constitutes a qualified stock 

disposition. If such an election is made, 

it will not have any effect if the 

transaction does not constitute a 

qualified stock disposition but will 

otherwise be binding and irrevocable. 

See proposed § 1.336–2(j). 

H. Correction to § 1.338–5 

Section 338(b)(3)(A) authorizes 

regulations under which the purchasing 

corporation may elect to step up its 

basis in nonrecently purchased stock 

(gain recognition election) to a ‘‘basis 

amount.’’ Under section 338(b)(3)(B), 

the basis amount is equal to the grossedup basis of the purchasing corporation’s 

recently purchased stock multiplied by 

a fraction, the numerator of which is the 

percentage of target stock attributable to 

the purchasing corporation’s 

nonrecently purchased stock and the 

denominator of which is 100 percent 

minus the numerator amount. 

Section 1.338–5(d) provides for the 

above described gain recognition 

election. Section 1.338–5(d)(3)(ii) 

provides that the basis amount is equal 

to the amount in § 1.338–5(c)(1) (the 

purchasing corporation’s basis in 

recently purchased target stock 

determined without regard to 

acquisition costs) multiplied by a 

fraction, the numerator of which is the 

percentage of target stock (by value, 

determined on the acquisition date) 

attributable to the purchasing 

corporation’s nonrecently purchased 

target stock and the denominator of 

which is 100 percent minus the 

numerator amount. Section 1.338–

5(d)(3)(ii) goes on to state, ‘‘[t]hus, if 

target has a single class of outstanding 

stock, the purchasing corporation’s basis 

in each share of nonrecently purchased 

target stock after the gain recognition 

election is equal to the average price per 

share of the purchasing corporation’s 

recently purchased target stock.’’

However, unless the purchasing 

corporation purchases all of the 

outstanding stock of target (other than 

the purchasing corporation’s 

nonrecently purchased stock) within the 

12-month acquisition period on or 

before the acquisition date, the formula 

in the regulations will not result in the 

purchasing corporation’s basis in each 

share of nonrecently purchased stock 

equaling the average price of the 

recently purchased stock. Only if the 

basis in the recently purchased stock is 

grossed-up (as provided by the Code) 

will such result be achieved. In fact, 

§ 1.338–5(g), Example 1, paragraph (v), 

in demonstrating the effect of a gain 

recognition election, uses the grossedup basis in the recently purchased 

stock, not the non-grossed-up basis, 

consistent with both the Code and the 

intent of the regulation. Accordingly, 

§ 1.338–5(d)(3)(ii) is corrected to use the 

grossed-up basis of recently purchased 

stock in determining the basis amount, 

rather than the non-grossed-up basis. 

I. Proposed Effective/Applicability Date 

These proposed regulations are 

proposed to apply to any qualified stock 

disposition for which the disposition 

date is on or after the date these 

regulations are published as final 

regulations 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. 

Further, it is hereby certified that these 

proposed regulations will not have a 

significant economic impact on a 

substantial number of small entities. 

This certification is based on the fact 

that these regulations do not have a 

substantial economic impact because 

they merely provide for an election in 

the context of certain sales, exchanges, 

and distributions of stock of 

corporations. Moreover, they are 

expected to apply predominantly to 

transactions involving larger businesses 

because the election is only applicable 

for certain dispositions of stock of an 

affiliated subsidiary. Accordingly, a 

Regulatory Flexibility Analysis under 

the Regulatory Flexibility Act (5 U.S.C. 

chapter 6) is not required. Pursuant to 

section 7805(f) of the Code, this notice 

of proposed rulemaking has been 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on its 

impact on small business. 

Comments and Requests for Public 

Hearing 

Before these proposed regulations are 

adopted as final regulations, 


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consideration will be given to any 

written comments (a signed original and 

eight copies) or electronic comments 

that are submitted timely to the IRS. In 

addition to the specific requests for 

comments made elsewhere in this 

preamble, the IRS and Treasury 

Department request comments on the 

clarity of the proposed rules and how 

they can be made easier to understand. 

All comments will be available for 

public inspection and copying. A public 

hearing may be scheduled if requested 

in writing by any person who timely 

submits written comments. If a public 

hearing is scheduled, notice of the date, 

time, and place of the hearing will be 

published in the Federal Register. 

Drafting Information 

The principal author of these 

regulations is Mark J. Weiss of the Office 

of Associate Chief Counsel (Corporate). 

Other personnel from the IRS and 

Treasury Department participated in 

their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

Paragraph 1. The authority citation 

for part 1 is amended by adding entries 

in numerical order to read in part as 

follows: 

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

Section 1.336–1 is also issued under 26 

U.S.C. 336. * * * 

Section 1.336–2 is also issued under 26 

U.S.C. 336. * * * 

Section 1.336–3 is also issued under 26 

U.S.C. 336. * * * 

Section 1.336–4 is also issued under 26 

U.S.C. 336. * * * 

Section 1.336–5 is also issued under 26 

U.S.C. 336. * * * 

Par. 2. Sections 1.336–0 through 

1.336–5 are added to read as follows: 

§ 1.336–0 Table of Contents. 

This section lists captions contained in 

§§ 1.336–1, 1.336–2, 1.336–3, 1.336–4, and 

1.336–5. 

§ 1.336–1 General principles, nomenclature, 

and definitions for a section 336(e) 

election. 

(a) Overview. 

(b) Definitions. 

(1) Seller. 

(2) Purchaser. 

(3) Target; target corporation; old target; 

new target. 

(4) Disposed of; disposition. 

(i) In general. 

(ii) Exception for disposition of stock in 

certain section 355 transactions. 

(iii) Transactions with related persons. 

(iv) No consideration paid. 

(v) Disposed of stock reacquired by certain 

persons. 

(5) Qualified stock disposition. 

(i) In general. 

(ii) Overlap with qualified stock purchase. 

(A) In general. 

(B) Exception. 

(6) 12-month disposition period. 

(7) Disposition date. 

(8) Disposition date assets. 

(9) Domestic corporation. 

(10) Section 336(e) election. 

(11) Related persons. 

(12) Liquidation. 

(13) Deemed asset disposition. 

(14) Deemed disposition tax consequences. 

(15) 80-percent purchaser. 

(16) Recently disposed stock. 

(17) Nonrecently disposed stock. 

(c) Nomenclature. 

§ 1.336–2 Availability, mechanics, and 

consequences of section 336(e) election. 

(a) Availability of election. 

(b) Deemed transaction. 

(1) Dispositions not described in section 

355(d)(2) or (e)(2). 

(i) Old target—deemed asset disposition. 

(A) In general. 

(B) Gains and losses. 

(1) Gains. 

(2) Losses. 

(3) Examples. 

(C) Tiered targets. 

(ii) New target—deemed purchase. 

(iii) Old target and seller—deemed 

liquidation. 

(A) In general. 

(B) Tiered targets. 

(iv) Seller—distribution of target stock. 

(v) Seller—retention of target stock. 

(2) Dispositions described in section 

355(d)(2) or (e)(2). 

(i) Old target—deemed asset disposition. 

(A) In general. 

(B) Gains and losses. 

(1) Gains. 

(2) Losses. 

(3) Example. 

(C) Tiered targets. 

(ii) Old target—deemed purchase. 

(A) In general. 

(B) Tiered targets. 

(iii) Seller—distribution of target stock. 

(A) In general. 

(B) Tiered targets. 

(iv) Seller—retention of target stock. 

(v) Qualification under section 355. 

(vi) Earnings and profits. 

(c) Purchaser. 

(d) Minority shareholders. 

(1) In general. 

(2) Sale, exchange, or distribution of target 

stock by a minority shareholder. 

(3) Retention of target stock by a minority 

shareholder. 

(e) Treatment consistent with an actual 

asset disposition. 

(f) Treatment of target under other 

provisions of the Internal Revenue Code. 

(g) Special rules. 

(1) Target as two corporations. 

(2) Treatment of members of a consolidated 

group. 

(3) Miscellaneous international provisions. 

(i) Source and foreign tax credit. 

(ii) Allocation of foreign taxes. 

(h) Making the section 336(e) election. 

(i) [Reserved]. 

(j) Protective section 336(e) election. 

(k) Examples. 

§ 1.336–3 Aggregate deemed asset 

disposition price; various aspects of 

taxation of the deemed asset disposition. 

(a) Scope. 

(b) Determination of ADADP. 

(1) General rule. 

(2) Time and amount of ADADP. 

(i) Original determination. 

(ii) Redetermination of ADADP. 

(c) Grossed-up amount realized on the sale, 

exchange, or distribution of recently 

disposed stock of target. 

(1) Determination of amount. 

(2) Example. 

(d) Liabilities of old target. 

(1) In general. 

(2) Time and amount of liabilities. 

(e) Deemed disposition tax consequences. 

(f) Other rules apply in determining 

ADADP. 

§ 1.336–4 Adjusted grossed-up basis. 

(a) Scope. 

(b) Modifications to the principles in 

§ 1.338–5. 

(1) Purchasing corporation; purchaser. 

(2) Acquisition date; disposition date. 

(3) Section 338 election; section 338(h)(10) 

election; section 336(e) election. 

(4) New target; old target. 

(5) Recently purchased stock; recently 

disposed stock. 

(6) Nonrecently purchased stock; 

nonrecently disposed stock. 

(c) Gain recognition election. 

(1) In general. 

(2) 80-percent purchaser. 

(3) Non-80-percent purchaser. 

(4) Gain recognition election statement. 

(d) Examples. 

§ 1.336–5 Effective/applicability Date. 

§ 1.336–1 General principles, 

nomenclature, and definitions for a section 

336(e) election. 

(a) Overview. Section 336(e) 

authorizes the promulgation of 

regulations under which, in certain 

circumstances, a sale, exchange, or 

distribution of the stock of a subsidiary 

may be treated as an asset sale. This 

section and §§ 1.336–2 through 1.336–5 

provide the rules for and consequences 

of making such election. This section 

provides the definitions and 

nomenclature. Generally, except to the 

extent inconsistent with section 336(e), 

the results of a section 336(e) election 

should coincide with those of a section 

338(h)(10) election. Accordingly, to the 

extent not otherwise addressed in these 

regulations nor inconsistent with 

section 336(e), the principles of section 

338 and the regulations under section 

338 apply for purposes of these 

regulations. For example, § 1.338–8 

(concerning asset and stock consistency) 


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and § 1.338(h)(10)–1(d)(8) (concerning 

the availability of the section 453 

installment method) may apply with 

respect to a section 336(e) election. 

(b) Definitions. For purposes of 

§§ 1.336–1 through 1.336–5 (except as 

otherwise provided): 

(1) Seller. The term seller means any 

domestic corporation that makes a 

qualified stock disposition of stock of 

another corporation. A seller includes 

both a transferor and a distributor of 

target stock. Generally, all members of a 

consolidated group that dispose of target 

stock are treated as a single seller. See 

§ 1.336–2(g)(2). 

(2) Purchaser. The term purchaser 

means one or more persons that receive 

the stock of another corporation in a 

qualified stock disposition. A purchaser 

includes both a transferee and a 

distributee of target stock. 

(3) Target; target corporation; old 

target; new target. The term target or 

target corporation means any domestic 

corporation the stock of which is sold, 

exchanged, or distributed by another 

domestic corporation in a qualified 

stock disposition. In the case of a 

transaction not described in section 

355(d)(2) or (e)(2), ‘‘old target’’ refers to 

target for periods ending on or before 

the close of target’s disposition date and 

‘‘new target’’ refers to target for 

subsequent periods. In the case of a 

transaction described in section 

355(d)(2) or (e)(2), ‘‘old target’’ refers to 

target for periods ending on or before 

the disposition date as well as for 

subsequent periods. 

(4) Disposed of; disposition—(i) In 

general. The term disposed of refers to 

a transfer of stock in a disposition. The 

term disposition means any sale, 

exchange, or distribution of stock, but 

only if—

(A) The basis of the stock in the hands 

of the purchaser is not determined in 

whole or in part by reference to the 

adjusted basis of such stock in the 

hands of the person from whom 

acquired or under section 1014(a) 

(relating to property acquired from a 

decedent), 

(B) Except as provided in paragraph 

(b)(4)(ii) of this section, the stock is not 

sold, exchanged, or distributed in a 

transaction to which section 351, 354, 

355, or 356 applies and is not sold, 

exchanged, or distributed in any 

transaction described in regulations in 

which the transferor does not recognize 

the entire amount of the gain or loss 

realized in the transaction, and 

(C) The stock is not sold, exchanged, 

or distributed to a related person. 

(ii) Exception for disposition of stock 

in certain section 355 transactions. 

Notwithstanding paragraph (b)(4)(i)(B) 

of this section, a distribution of stock to 

a person who is not a related person in 

a transaction in which the full amount 

of stock gain would be recognized 

pursuant to section 355(d)(2) or (e)(2) 

shall be considered a disposition. 

(iii) Transactions with related 

persons. In determining whether stock 

is sold, exchanged, or distributed to a 

related person, the principles of section 

338(h)(3)(C) and § 1.338–3(b)(3) shall 

apply. 

(iv) No consideration paid. Stock in a 

target may be considered disposed of if, 

under general principles of tax law, the 

seller is considered to sell, exchange, or 

distribute stock of the target 

notwithstanding that no amount may be 

paid for (or allocated to) the stock. 

(v) Disposed of stock reacquired by 

certain persons. Stock disposed of to 

another person under this section which 

is reacquired by the seller or a member 

of the seller’s consolidated group within 

the 12-month disposition period shall 

not be considered as disposed of. 

(5) Qualified stock disposition—(i) In 

general. The term qualified stock 

disposition means any transaction or 

series of transactions in which stock 

meeting the requirements of section 

1504(a)(2) of a domestic corporation is 

either sold, exchanged, or distributed, or 

any combination thereof, by another 

domestic corporation in a disposition, 

within the meaning of paragraph (b)(4) 

of this section, during the 12-month 

disposition period. 

(ii) Overlap with qualified stock 

purchase—(A) In general. Except as 

provided in paragraph (b)(5)(ii)(B) of 

this section, a transaction satisfying the 

definition of a qualified stock 

disposition under paragraph (b)(5)(i) of 

this section which also qualifies as a 

qualified stock purchase (as defined in 

section 338(d)(3)) will not be treated as 

a qualified stock disposition. 

(B) Exception. If, as a result of the 

deemed sale of old target’s assets 

pursuant to a section 336(e) election, 

there would be, but for paragraph 

(b)(5)(ii)(A) of this section, a qualified 

stock disposition of the stock of a 

subsidiary of target, then paragraph 

(b)(5)(ii)(A) shall not apply. 

(6) 12-month disposition period. The 

term 12-month disposition period 

means the 12-month period beginning 

with the date of the first sale, exchange, 

or distribution of stock included in a 

qualified stock disposition. 

(7) Disposition date. The term 

disposition date means, with respect to 

any corporation, the first day on which 

there is a qualified stock disposition 

with respect to the stock of such 

corporation. 

(8) Disposition date assets. 

Disposition date assets are the assets of 

the target held at the beginning of the 

day after the disposition date (but see 

§ 1.338–1(d) (regarding certain 

transactions on the disposition date)). 

(9) Domestic corporation. The term 

domestic corporation has the same 

meaning as in § 1.338–2(c)(9). 

(10) Section 336(e) election. A section 

336(e) election is an election to apply 

section 336(e) to target. A section 336(e) 

election is made by making an election 

for target under § 1.336–2(h). 

(11) Related persons. Two persons are 

related if stock of a corporation owned 

by one of the persons would be 

attributed under section 318(a), other 

than section 318(a)(4), to the other. 

(12) Liquidation. Any reference to a 

liquidation is treated as a reference to 

the transfer described in § 1.336–

2(b)(1)(iii) notwithstanding its ultimate 

characterization for Federal income tax 

purposes. 

(13) Deemed asset disposition. The 

deemed sale of old target’s assets is, 

without regard to its characterization for 

Federal income tax purposes, referred to 

as the deemed asset disposition. 

(14) Deemed disposition tax 

consequences. Deemed disposition tax 

consequences refers to, in the aggregate, 

the Federal income tax consequences 

(generally, the income, gain, deduction, 

and loss) of the deemed asset 

disposition. Deemed disposition tax 

consequences also refers to the Federal 

income tax consequences of the transfer 

of a particular asset in the deemed asset 

disposition. 

(15) 80-percent purchaser. An 80- 

percent purchaser is any purchaser that, 

after application of the attribution rules 

of section 318(a), other than section 

318(a)(4), owns 80 percent or more of 

the voting power or value of the target 

corporation stock. 

(16) Recently disposed stock. The 

term recently disposed stock means any 

stock in the target corporation which is 

not held by a seller or a member of the 

seller’s consolidated group immediately 

after the close of the disposition date 

and which was sold, exchanged, or 

distributed by a seller during the 12- 

month disposition period. If, within the 

12-month disposition period, stock is 

sold, exchanged, or distributed, then 

reacquired by a seller, and then sold, 

exchanged, or distributed again, only 

the last sale, exchange, or distribution of 

the reacquired stock in the 12-month 

disposition period may be recently 

disposed stock. 

(17) Nonrecently disposed stock. The 

term nonrecently disposed stock means 

stock in the target corporation which is 

held on the disposition date by a 


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purchaser or a person related (as 

described in § 1.336–1(b)(11)) to the 

purchaser who owns, on the disposition 

date, with the application of section 

318(a), other than section 318(a)(4), at 

least 10 percent of the total voting 

power or value of the stock of target and 

which is not recently disposed stock. 

(c) Nomenclature. For purposes of 

§§ 1.336–1 through 1.336–5, except as 

otherwise provided, Parent, Seller, 

Target, Target Subsidiary, and Sub are 

domestic corporations and A, B, C, and 

D are individuals, none of whom are 

related to Parent, Seller, Target, Target 

Subsidiary, Sub, or each other. 

§ 1.336–2 Availability, mechanics, and 

consequences of section 336(e) election. 

(a) Availability of election. A section 

336(e) election is available if a seller 

makes a disposition of stock of another 

corporation (target) in a qualified stock 

disposition (as defined in § 1.336–

1(b)(5)). A section 336(e) election is 

irrevocable. A section 336(e) election is 

not available for transactions described 

in section 336(e) that do not constitute 

qualified stock dispositions, as defined 

in § 1.336–1(b)(5). 

(b) Deemed transaction—(1) 

Dispositions not described in section 

355(d)(2) or (e)(2)—(i) Old targetdeemed asset disposition—(A) In 

general. This paragraph (b)(1) provides 

the Federal income tax consequences of 

a section 336(e) election made with 

respect to a qualified stock disposition 

not described, in whole or in part, in 

section 355(d)(2) or (e)(2). For the 

Federal income tax consequences of a 

section 336(e) election made with 

respect to a qualified stock disposition 

described, in whole or in part, in section 

355(d)(2) or (e)(2), see paragraph (b)(2) 

of this section. In general, if a section 

336(e) election is made, the seller is 

treated as not having sold, exchanged, 

or distributed the stock disposed of in 

the qualified stock disposition. Instead, 

old target is treated as selling its assets 

to an unrelated person in a single 

transaction at the close of the 

disposition date (but before the deemed 

liquidation described in paragraph 

(b)(1)(iii) of this section) in exchange for 

the aggregate deemed asset disposition 

price (ADADP) as determined under 

§ 1.336–3. ADADP is allocated among 

the disposition date assets in the same 

manner as ADSP is allocated under 

§§ 1.338–6 and 1.338–7 in order to 

determine the amount realized from 

each of the sold assets. Old target 

realizes the deemed disposition tax 

consequences from the deemed asset 

disposition before the close of the 

disposition date while old target is 

owned by seller. 

(B) Gains and losses—(1) Gains. 

Except as provided in § 1.338(h)(10)–

1(d)(8) (regarding the installment 

method), old target shall recognize all of 

the gain realized on the deemed asset 

disposition. 

(2) Losses. Old target shall recognize 

loss, if any, on the deemed sale of each 

of its assets with respect to the amount 

of stock sold or exchanged in the 

qualified stock disposition on or before 

the disposition date. Old target shall not 

recognize loss on the deemed sale of 

each of its assets with respect to the 

amount of stock distributed in the 

qualified stock disposition on or before 

the disposition date. The amount of loss 

recognized by old target with respect to 

an asset is the amount of loss realized 

on the deemed sale of the asset 

multiplied by a fraction (loss 

recognition fraction). The numerator of 

the loss recognition fraction is the value 

of the target stock, determined on the 

disposition date, sold or exchanged in 

the qualified stock disposition on or 

before the disposition date. The 

denominator of the loss recognition 

fraction is the total value of the target 

stock, determined on the disposition 

date, disposed of in the qualified stock 

disposition on or before the disposition 

date. For purposes of determining the 

amount of loss recognized by a 

subsidiary of old target for which a 

section 336(e) election is made, only the 

fraction of the old target subsidiary 

stock deemed sold in the deemed asset 

disposition of old target’s assets that is 

equal to the loss recognition fraction is 

considered to have been sold or 

exchanged. In addition, to the extent old 

target or a subsidiary of old target 

otherwise recognizes losses from the 

deemed asset disposition, such losses 

may be disallowed under other 

provisions of the Internal Revenue Code 

or general principles of tax law, in the 

same manner as if such assets were 

actually sold to an unrelated person. 

(3) Examples. The following examples 

illustrate this paragraph (b)(1)(i)(B). 

Example 1. (i) Facts. Seller owns 98 of the 

100 outstanding shares of Target common 

stock, the only class of Target stock 

outstanding. On March 1 of Year 1, Seller 

sells 30 shares of Target stock to A for cash. 

On April 1 of Year 1, Seller sells 10 shares 

of Target stock to R, a related individual. On 

July 1 of Year 1, Seller distributes 50 shares 

of target stock to its unrelated shareholders. 

On December 1 of Year 1, Seller sells 5 shares 

of Target stock to B. Seller retains its 

remaining 3 shares of Target stock. The value 

of the Target stock on July 1 equals $100 per 

share. A section 336(e) election is made. 

(ii) Consequences. Because at least 80 

percent of the Target stock ((30 + 50 + 5)/100) 

was disposed of by Seller within the 12- 

month disposition period, a qualified stock 

disposition has occurred. July 1 of Year 1, the 

first date on which there was a qualified 

stock disposition with respect to the Target 

stock, is the disposition date. Old Target 

recognizes all of its gain on the deemed asset 

disposition. However, only 30 shares of 

Target stock were sold or exchanged in the 

qualified stock disposition on or before the 

disposition date. Therefore, only a portion of 

the loss, if any, on the deemed sale of each 

of Target’s assets is recognized for Federal 

income tax purposes. The portion of the loss 

recognized is equal to a fraction, the 

numerator of which is $3,000, the value, 

determined on July 1, the disposition date, of 

the 30 shares sold by Seller in the qualified 

stock disposition on or before the disposition 

date, and the denominator of which is 

$8,000, the value of the Target stock on July 

1, the disposition date, that was disposed of 

in the qualified stock disposition on or before 

the disposition date. Accordingly, only 37.5 

percent ($3,000/$8,000) of Old Target’s loss 

(if any) with respect to each asset sold in the 

deemed asset disposition is recognized. 

Example 2. (i) Facts. The facts are the same 

as in Example 1 with the following 

additional facts: Target also owns 80 shares 

of Target Subsidiary common stock, the only 

class of Target Subsidiary common stock 

outstanding, and Seller owns the remaining 

20 shares of Target Subsidiary stock. Seller, 

Target, and Target Subsidiary file a 

consolidated Federal income tax return. Also 

on July 1 of Year 1, Seller distributes 15 

shares of Target Subsidiary stock to its 

unrelated shareholders and sells 5 shares of 

Target Subsidiary stock to C for cash. The 

Target Subsidiary stock is worth $10 a share 

on July 1. A section 336(e) election is also 

made with respect to the Target Subsidiary 

stock. 

(ii) Consequences. The consequences with 

respect to the Target stock are the same as 

described in Example 1 except that no gain 

or loss is recognized by Target on the deemed 

sale of its Target Subsidiary stock. With 

respect to Target Subsidiary, because at least 

80 percent of the Target Subsidiary stock ((80 

+ 15 +5)/100) was disposed of (or deemed 

disposed of) by members of Seller’s 

consolidated group within the 12-month 

disposition period, a qualified stock 

disposition of Target Subsidiary has 

occurred. Old Target Subsidiary recognizes 

all of its gain on the deemed asset 

disposition. Notwithstanding that all 80 of 

Target’s shares in Target Subsidiary were 

deemed sold in the deemed asset disposition 

of Target, only 37.5 percent of such shares 

were deemed sold as a result of a sale or 

exchange of Target stock. Accordingly, in 

determining the amount of loss on each of 

Target Subsidiary’s assets that is recognized 

in the deemed sale of its assets, only 37.5 

percent of the 80 shares of Target Subsidiary 

deemed sold by Target, 30 shares, are 

considered to have been sold or exchanged 

by Target. Therefore, the amount of loss 

recognized by Target Subsidiary is equal to 

a fraction, the numerator of which is the sum 

of $300, the value, determined on July 1, the 

disposition date, of the 30 shares of Target 

Subsidiary deemed sold by Target in the 


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qualified stock disposition, and $50, the 

value, determined on July 1, the disposition 

date, of the 5 shares of Target Subsidiary 

stock sold by Seller on or before the 

disposition date, and the denominator of 

which is $1,000, the value of the Target 

Subsidiary stock on July 1, the disposition 

date, that was disposed of in the qualified 

stock disposition of Target Subsidiary on or 

before the disposition date. Accordingly, 

only 35 percent (($300 + $50)/($1,000)) of 

Old Target Subsidiary’s loss (if any) with 

respect to each asset sold in the deemed asset 

disposition is recognized. 

(C) Tiered targets. In the case of 

parent-subsidiary chains of corporations 

making section 336(e) elections, the 

deemed asset disposition of a higher-tier 

subsidiary is considered to precede the 

deemed asset disposition of a lower-tier 

subsidiary. 

(ii) New target—deemed purchase. 

New target is treated as acquiring all of 

its assets from an unrelated person in a 

single transaction at the close of the 

disposition date (but before the deemed 

liquidation) in exchange for an amount 

equal to the adjusted grossed up basis 

(AGUB) as determined under § 1.336–4. 

New target shall allocate the 

consideration deemed paid in the 

transaction in the same manner as new 

target would under §§ 1.338–6 and 

1.338–7 in order to determine the basis 

in each of the purchased assets. 

Notwithstanding paragraph (b)(1)(iii) of 

this section (deemed liquidation of old 

target), new target remains liable for the 

tax liabilities of old target (including the 

tax liability for the deemed disposition 

tax consequences). For example, new 

target remains liable for the tax 

liabilities of the members of any 

consolidated group that are attributable 

to taxable years in which those 

corporations and old target joined in the 

same consolidated return. See § 1.1502–

6(a). 

(iii) Old target and seller—deemed 

liquidation—(A) In general. Old target 

and seller are treated as if, before the 

close of the disposition date, after the 

deemed asset disposition described in 

paragraph (b)(1)(i)(A) of this section, 

and while owned by seller, old target 

transferred all of its assets to seller and 

ceased to exist. The transfer from old 

target to seller is characterized for 

Federal income tax purposes in the 

same manner as if the parties had 

actually engaged in the transactions 

deemed to occur because of this section 

and taking into account other 

transactions that actually occurred or 

are deemed to occur. For example, the 

transfer may be treated as a distribution 

in pursuance of a plan of reorganization, 

a distribution in complete cancellation 

or redemption of all its stock, one of a 

series of distributions in complete 

cancellation or redemption of all its 

stock in accordance with a plan of 

liquidation, or part of a circular flow of 

cash. In most cases, the transfer will be 

treated as a distribution in complete 

liquidation to which section 332 and 

section 336 or 337 applies. 

(B) Tiered targets. In the case of 

parent-subsidiary chains of corporations 

making section 336(e) elections, the 

deemed liquidation of a lower-tier 

subsidiary corporation is considered to 

precede the deemed liquidation of a 

higher-tier subsidiary. 

(iv) Seller—distribution of target 

stock. In the case of a distribution of 

target stock in the qualified stock 

disposition, seller (the distributor) is 

deemed to purchase from new target on 

the disposition date, immediately after 

the deemed liquidation of old target, the 

amount of stock distributed in the 

qualified stock disposition and to have 

distributed such new target stock to its 

shareholders. Seller recognizes no gain 

or loss on the distribution of stock. 

(v) Seller—retention of target stock. If 

a seller retains any target stock after the 

12-month disposition period, the seller 

is treated as purchasing the stock so 

retained from new target (new target 

stock) on the day after the disposition 

date for its fair market value. The 

holding period for the retained stock 

starts on the day after the disposition 

date. For purposes of this paragraph 

(b)(1)(v), the fair market value of all of 

the target stock equals the grossed-up 

amount realized on the sale, exchange, 

or distribution of recently disposed 

stock of target (see § 1.336–3(c)). 

(2) Dispositions described in section 

355(d)(2) or (e)(2)—(i) Old target—

deemed asset disposition—(A) In 

general. This paragraph (b)(2) provides 

the Federal income tax consequences of 

a section 336(e) election made with 

respect to a qualified stock disposition 

resulting, in whole or in part, from a 

disposition described in section 

355(d)(2) or (e)(2). Old target is treated 

as selling its assets to an unrelated 

person in a single transaction at the 

close of the disposition date in exchange 

for the ADADP as determined under 

§ 1.336–3. ADADP is allocated among 

the disposition date assets in the same 

manner as ADSP is allocated under 

§§ 1.338–6 and 1.338–7 in order to 

determine the amount realized from 

each of the sold assets. Old target 

realizes the deemed disposition tax 

consequences from the deemed asset 

disposition before the close of the 

disposition date while old target is 

owned by seller. Unlike a section 

338(h)(10) election or a section 336(e) 

election made with respect to a 

qualified stock disposition not 

described, in whole or in part, in section 

355(d)(2) or (e)(2), old target is not 

deemed to liquidate. 

(B) Gains and losses—(1) Gains. 

Except as provided in § 1.338(h)(10)–

1(d)(8) (regarding the installment 

method), old target shall recognize all of 

the gain realized on the deemed asset 

disposition. 

(2) Losses. Old target shall recognize 

loss, if any, on the deemed sale of each 

of its assets with respect to the amount 

of stock sold or exchanged in the 

qualified stock disposition on or before 

the disposition date. Old target shall not 

recognize loss on the deemed sale of 

each of its assets with respect to the 

amount of stock distributed in the 

qualified stock disposition on or before 

the disposition date. The amount of loss 

recognized by old target with respect to 

an asset is the amount of loss realized 

on the deemed sale of the asset 

multiplied by a fraction (loss 

recognition fraction). The numerator of 

the loss recognition fraction is the value 

of the target stock, determined on the 

disposition date, sold or exchanged in 

the qualified stock disposition on or 

before the disposition date. The 

denominator of the loss recognition 

fraction is the total value of the target 

stock, determined on the disposition 

date, disposed of in the qualified stock 

disposition on or before the disposition 

date. In addition, to the extent old target 

otherwise recognizes losses from the 

deemed asset disposition, such losses 

may be disallowed under other 

provisions of the Internal Revenue Code 

or general principles of tax law, in the 

same manner as if such assets were 

actually sold to an unrelated person. 

(3) Example. The following example 

illustrates this paragraph (b)(2)(i)(B). 

Example. (i) Facts. Seller owns 95 of the 

100 outstanding shares of Target common 

stock, the only class of Target stock 

outstanding. On January 1 of Year 1, Seller 

sells 4 shares of Target stock to A for cash. 

On February 1 of Year 1, Seller sells 5 shares 

of Target stock to R, a related individual. On 

May 1 of Year 1, Seller distributes 6 shares 

of Target stock to its unrelated shareholders 

in a distribution not described in section 

355(d)(2) or (e)(2). In an unrelated 

transaction, on July 1 of Year 1, Seller 

distributes its remaining 80 shares of Target 

stock to its unrelated shareholders in a 

distribution described in section 355(d)(2) or 

(e)(2). The value of the Target stock on July 

1 equals $100 per share. A section 336(e) 

election is made. 

(ii) Consequences. Because at least 80 

percent of the Target stock ((4 + 6 + 80)/100) 

was disposed of by Seller within the 12- 

month disposition period, a qualified stock 

disposition has occurred. July 1 of Year 1, the 

first date on which there was a qualified 

stock disposition with respect to the Target 

stock, is the disposition date. Old Target 


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recognizes all of its gain on the deemed asset 

disposition. However, only 4 shares of Target 

stock were sold or exchanged in the qualified 

stock disposition on or before the disposition 

date. Therefore, only a portion of the loss, if 

any, on the deemed sale of each of Target’s 

assets is recognized for Federal income tax 

purposes. The portion of the loss recognized 

is equal to a fraction, the numerator of which 

is $400, the value, determined on July 1, the 

disposition date, of the 4 shares sold by 

Seller in the qualified stock disposition on or 

before the disposition date, and the 

denominator of which is $9,000 ($400 + $600 

+ $8,000), the total value of the Target stock 

determined as of July 1, that was disposed of 

in the qualified stock disposition on or before 

the disposition date. Accordingly, only $400/ 

$9,000 of Old Target’s loss (if any) with 

respect to each asset sold in the deemed asset 

disposition is recognized. 

(C) Tiered targets. In the case of 

parent-subsidiary chains of corporations 

making section 336(e) elections, the 

deemed asset disposition of a higher-tier 

subsidiary is considered to precede the 

deemed asset disposition of a lower-tier 

subsidiary. 

(ii) Old target—deemed purchase—

(A) In general. Immediately after the 

deemed asset disposition described in 

paragraph (b)(2)(i)(A) of this section, old 

target is treated as acquiring all of its 

assets from an unrelated person in a 

single, separate transaction at the close 

of the disposition date (but before the 

distribution described in paragraph 

(b)(2)(iii)(A) of this section) in exchange 

for an amount equal to the AGUB as 

determined under § 1.336–4. Old target 

shall allocate the consideration deemed 

paid in the transaction in the same 

manner as new target would under 

§§ 1.338–6 and 1.338–7 in order to 

determine the basis in each of the 

purchased assets. 

(B) Tiered targets. In the case of 

parent-subsidiary chains of corporations 

making section 336(e) elections with 

respect to a qualified stock disposition 

described, in whole or in part, in section 

355(d)(2) or (e)(2), old target’s deemed 

purchase of all its assets is considered 

to precede the deemed asset disposition 

of a lower-tier subsidiary. 

(iii) Seller—distribution of target 

stock—(A) In general. Immediately after 

old target’s deemed purchase of its 

assets described in paragraph (b)(2)(ii) 

of this section, seller is treated as 

distributing the stock of old target 

actually distributed to its shareholders 

in the qualified stock disposition. No 

gain or loss is recognized by seller on 

the distribution. Additionally, if stock of 

target is sold or exchanged as part of a 

qualified stock disposition described, in 

whole or in part, in section 355(d)(2) or 

(e)(2), no gain or loss is recognized by 

seller on the sale or exchange. 

(B) Tiered targets. In the case of 

parent-subsidiary chains of corporations 

making section 336(e) elections with 

respect to a qualified stock disposition 

described, in whole or in part, in section 

355(d)(2) or (e)(2), the Federal income 

tax consequences of the section 336(e) 

election for a subsidiary of target shall 

be determined under paragraph (b)(1) of 

this section. The deemed liquidation of 

a lower-tier subsidiary corporation 

pursuant to paragraph (b)(1)(iii) of this 

section is considered to precede the 

deemed liquidation of a higher-tier 

subsidiary. The deemed liquidation of 

the highest tier subsidiary of target is 

considered to precede the distribution 

of old target stock described in 

paragraph (b)(2)(iii)(A) of this section. 

(iv) Seller—retention of target stock. If 

a seller retains any target stock after the 

12-month disposition period, the seller 

is treated as having disposed of the old 

target stock so retained, on the 

disposition date, in a transaction in 

which no gain or loss is recognized, and 

then, on the day after the disposition 

date, purchasing the stock so retained 

from old target for its fair market value. 

The holding period for the retained 

stock starts on the day after the 

disposition date. For purposes of this 

paragraph (b)(2)(iv), the fair market 

value of all of the target stock equals the 

grossed-up amount realized on the sale, 

exchange, or distribution of recently 

disposed stock of target (see § 1.336–

3(c)). 

(v) Qualification under section 355. 

Old target’s deemed sale of all its assets 

to an unrelated person and old target’s 

deemed purchase of all its assets from 

an unrelated person will not cause the 

distribution of old target to fail to satisfy 

the requirements of section 355. 

Similarly, the deemed sale of all of the 

assets of a subsidiary of target to an 

unrelated person and the subsidiary’s 

deemed purchase of all its assets from 

an unrelated person will not cause the 

distribution of old target to fail to satisfy 

the requirements of section 355. For 

purposes of applying section 

355(a)(1)(D), seller is treated as having 

disposed of any stock disposed of in the 

qualified stock disposition on the date 

seller actually sold, exchanged, or 

distributed such stock. Further, seller’s 

deemed disposition of retained old 

target stock under paragraph (b)(2)(iv) of 

this section is disregarded for purposes 

of applying section 355(a)(1)(D). 

(vi) Earnings and profits. The earnings 

and profits of seller and target shall be 

determined pursuant to § 1.312–10 and, 

if applicable, § 1.1502–33(e). For this 

purpose, target will not be treated as a 

newly created controlled corporation 

and any increase or decrease in target’s 

earnings and profits pursuant to the 

deemed asset disposition will increase 

or decrease, as the case may be, target’s 

earnings and profits immediately before 

the allocation described in § 1.312–10. 

(c) Purchaser. Generally, the making 

of a section 336(e) election will not 

affect the Federal income tax 

consequences to which the purchaser 

would have been subject with respect to 

the acquisition of the target stock if a 

section 336(e) election was not made. 

Thus, notwithstanding §§ 1.336–

2(b)(1)(i)(A), 1.336–2(b)(1)(iv), and 

1.336–2(b)(2)(iii)(A), the purchaser will 

still be treated as having purchased, 

received in an exchange, or received in 

a distribution, the stock of target so 

acquired on the date actually acquired. 

However, see section 1223(1)(B) with 

respect to the holding period for stock 

acquired pursuant to a distribution 

qualifying under section 355 (or so 

much of section 356 that relates to 

section 355). The Federal income tax 

consequences of the deemed asset 

disposition and liquidation of target 

may affect the purchaser’s 

consequences. For example, if seller 

distributes the stock of target to its 

shareholders in a qualified stock 

disposition for which a section 336(e) 

election is made, any increase in seller’s 

earnings and profits as a result of old 

target’s deemed asset disposition and 

liquidation into seller may increase the 

amount of the distribution to the 

shareholders constituting a dividend 

under section 301(c)(1). 

(d) Minority shareholders—(1) In 

general. This paragraph (d) describes 

the treatment of shareholders of old 

target other than the seller (or a member 

of seller’s consolidated group), whether 

or not they sell, exchange, or distribute 

their stock of target. A shareholder to 

which this paragraph (d) applies is 

referred to as a minority shareholder. 

(2) Sale, exchange, or distribution of 

target stock by a minority shareholder. 

A minority shareholder recognizes gain 

or loss (as permitted under the general 

principles of tax law) on its sale, 

exchange, or distribution of target stock. 

(3) Retention of target stock by a 

minority shareholder. A minority 

shareholder who retains its target stock 

does not recognize gain or loss under 

this section with respect to its shares of 

target stock. The minority shareholder’s 

basis and holding period for that target 

stock are not affected by the section 

336(e) election. Notwithstanding the 

treatment to the minority shareholder, if 

a section 336(e) election is made, target 

will still be treated as disposing of all 

of its assets in the deemed asset 

disposition. 


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(e) Treatment consistent with an 

actual asset disposition. Except as 

otherwise provided, no provision in this 

section shall produce a Federal income 

tax result under subtitle A of the 

Internal Revenue Code that would not 

occur if the parties had actually engaged 

in the transactions deemed to occur 

because of this section, taking into 

account other transactions that actually 

occurred or are deemed to occur. See 

§ 1.338–1(a)(2) regarding the application 

of other rules of law. 

(f) Treatment of target under other 

provisions of the Internal Revenue Code. 

The provisions § 1.338–1(b) apply with 

respect to the treatment of new target 

after a section 336(e) election, treating 

any reference to section 338 or 

338(h)(10) as a reference to section 

336(e). 

(g) Special rules—(1) Target as two 

corporations. Although the target is a 

single corporation under corporate law, 

if a section 336(e) election is made, 

then, except with respect to a 

distribution described in section 

355(d)(2) or (e)(2) and as provided in 

§ 1.338–1(b)(2), two separate 

corporations, old target and new target, 

generally are considered to exist for 

purposes of subtitle A of the Internal 

Revenue Code. 

(2) Treatment of members of a 

consolidated group. For purposes of 

§§ 1.336–1 through 1.336–5, all 

members of the seller’s consolidated 

group are treated as a single seller, 

regardless of whether the member 

actually disposes of any stock. 

Accordingly, any dispositions of stock 

made by members of the same 

consolidated group shall be treated as 

made by one corporation, and any stock 

owned by members of the same 

consolidated group and not disposed of 

will be treated as stock retained by the 

seller. 

(3) Miscellaneous international 

provisions—(i) Source and foreign tax 

credit. The principles of section 

338(h)(16) apply to section 336(e) 

elections for target corporations with 

foreign operations to ensure that the 

source and foreign tax credit limitation 

are properly determined. 

(ii) Allocation of foreign taxes. If a 

section 336(e) election is made for target 

and target’s taxable year under foreign 

law (if any) does not close at the end of 

the disposition date, foreign income 

taxes attributable to the foreign taxable 

income earned by the target during such 

foreign taxable year are allocated to old 

target and new target under the 

principles of § 1.1502–76(b). 

(h) Making the section 336(e) election. 

A section 336(e) election is made by the 

seller attaching a section 336(e) election 

statement to its timely filed (including 

extensions) Federal income tax return 

for the taxable year which includes the 

disposition date entitled ‘‘THIS IS AN 

ELECTION UNDER SECTION 336(e) TO 

TREAT THE DISPOSITION OF THE 

STOCK OF [insert name and employer 

identification number of target] AS A 

DEEMED SALE OF SUCH 

CORPORATION’S ASSETS.’’ If the 

seller is a member of a consolidated 

group, the statement is filed with the 

Federal income tax return of the 

consolidated group. The seller must 

provide a copy of the statement to the 

target. The relevant information for each 

consolidated group member that 

disposes of target stock and each 

member that retains target stock must be 

set forth individually, not in the 

aggregate. In the case of a section 336(e) 

election for lower-tier targets, an 

additional statement must be filed for 

each lower-tier target. However, in 

preparing the statement, the seller of the 

directly disposed of target shall be 

treated as the seller of the lower-tier 

target. The section 336(e) election 

statement must include: 

(1) The name, address, employer 

identification number (EIN), tax year, 

and state of incorporation of the target 

corporation; 

(2) The name, address, EIN, tax year, 

and state of incorporation of the 

seller(s); 

(3) The name, address, EIN (or Social 

Security number), tax year, and state of 

incorporation (if any) of any 80-percent 

purchaser; 

(4) The disposition date; 

(5) The percentage of target stock that 

was disposed of by each seller in the 

qualified stock disposition; 

(6) The percentage of target stock that 

was disposed of on the disposition date 

by each seller in the qualified stock 

disposition; 

(7) The percentage of target stock that 

was sold or exchanged by each seller in 

the qualified stock disposition on or 

before the disposition date; 

(8) The percentage of target stock that 

was distributed by each seller in the 

qualified stock disposition on or before 

the disposition date; 

(9) The percentage of target stock that 

was retained by each seller immediately 

after the 12-month disposition period; 

and 

(10) Whether any purchaser made a 

gain recognition election pursuant to 

§ 1.336–4(c). A copy of the gain 

recognition election statement must be 

attached to the section 336(e) election 

statement. 

(i) [Reserved] 

(j) Protective section 336(e) election. 

Taxpayers may make a protective 

election under section 336(e) in 

connection with a transaction. Such an 

election will have no effect if the 

transaction does not constitute a 

qualified stock disposition, as defined 

in § 1.336–1(b)(5), but will otherwise be 

binding and irrevocable. 

(k) Examples. The following examples 

illustrate the provisions of this section. 

Example 1. Sale of 100 percent of target 

stock. (i) Facts. Parent owns all 100 shares of 

Target’s only class of stock. The stock has a 

basis of $80 per share. Target’s only assets are 

two parcels of land. Parcel 1 has a basis of 

$5,000 and Parcel 2 has a basis of $4,000. 

Target has no liabilities. On July 1 of Year 1, 

Parent sells all 100 shares of Target stock to 

A for $100 per share. Parent incurs no selling 

costs and A incurs no acquisition costs. On 

July 1, the value of Parcel 1 is $7,000 and the 

value of Parcel 2 is $3,000. Parent makes a 

section 336(e) election. 

(ii) Consequences. The sale of Target stock 

constitutes a qualified stock disposition. July 

1 of Year 1 is the disposition date. 

Accordingly, pursuant to the section 336(e) 

election, for Federal income tax purposes, 

rather than treating Parent as selling the stock 

of Target to A, the following events are 

deemed to occur. Target is treated as if, on 

July 1, it sold all of its assets to an unrelated 

person in exchange for the ADADP, $10,000, 

which is allocated $7,000 to Parcel 1 and 

$3,000 to Parcel 2 (see § 1.336–3 for the 

determination and allocation of ADADP). 

Target recognizes gain of $2,000 on Parcel 1 

and loss of $1,000 on Parcel 2. New Target 

is then treated as acquiring all its assets from 

an unrelated person in a single transaction in 

exchange for the AGUB, $10,000 (see 

§ 1.336–4 for the determination of AGUB). 

Old Target is treated as liquidating into 

Parent immediately thereafter, distributing 

the $10,000 deemed received in exchange for 

its assets in a transaction qualifying under 

section 332. Parent recognizes no gain or loss 

on the liquidation. A’s basis in New Target 

stock equals $100 per share, the amount paid 

for the stock. 

Example 2. Sale of 80 percent of target 

stock. (i) Facts. The facts are the same as in 

Example 1 except that Parent only sells 80 

shares of its Target stock to A and retains the 

other 20 shares. 

(ii) Consequences. The results are the same 

as in Example 1 except that Parent also is 

treated as purchasing from New Target on 

July 2, the day after the disposition date, the 

20 shares of Target stock (New Target stock) 

not actually sold to A, for their fair market 

value as determined under § 1.336–2(b)(1)(v), 

$2,000 ($100 per share). 

Example 3. Distribution of 100 percent of 

target stock. (i) Facts. The facts are the same 

as in Example 1 except that instead of Parent 

selling 100 shares of Target stock to A, Parent 

distributes 100 shares to its shareholders, all 

of whom are unrelated to Parent, in a 

transaction that does not qualify under 

section 355. 

(ii) Consequences. The results are the same 

as in Example 1 except that Target does not 

recognize the $1,000 of loss realized with 

respect to Parcel 2 (see § 1.336–


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2(b)(1)(i)(B)(2)) and on July 1, immediately 

after the deemed liquidation of Target, Parent 

is deemed to purchase from New Target 100 

shares of New Target stock and distribute 

those New Target shares to its shareholders. 

Parent recognizes no gain or loss on the 

deemed distribution of the shares under 

§ 1.336–2(b)(1)(iv). The shareholders receive 

the New Target stock as a distribution 

pursuant to section 301 and their basis in the 

New Target stock received is its fair market 

value pursuant to section 301(d). 

Example 4. Distribution of 80 percent of 

target stock. (i) Facts. The facts are the same 

as in Example 3 except that Parent 

distributes only 80 shares of Target stock to 

its shareholders and retains the other 20 

shares. 

(ii) Consequences. The results are the same 

as in Example 3 except that Parent is treated 

as purchasing on July 1 only 80 shares of 

New Target stock and as distributing only 80 

shares of New Target stock to its shareholders 

and then as purchasing (and retaining), on 

July 2, the day after the disposition date, 20 

shares of New Target stock at their fair 

market value as determined under § 1.336–

2(b)(1)(v), $2,000 ($100 per share). 

Example 5. Part sale, part distribution. (i) 

Facts. Parent owns all 100 shares of Target’s 

only class of stock. The stock has a basis of 

$80 per share. Target has two assets, both of 

which are buildings used in its business. 

Building 1 has a basis of $6,000 and Building 

2 has a basis of $5,100. Target has no 

liabilities. On January 1 of Year 1, Parent 

sells 50 shares of Target to A for $88 per 

share. Parent incurred no selling costs with 

respect to the sale of Target stock and A 

incurred no acquisition costs with respect to 

the purchase. On July 1 of Year 1, when the 

value of the Target stock is $120 per share, 

Parent distributes 30 shares of Target to its 

unrelated shareholders. Parent retains the 

remaining 20 shares. On July 1, the value of 

Building 1 is $7,800 and the value of 

Building 2 is $4,200. A section 336(e) 

election is made. 

(ii) Consequences. Because the sale of the 

50 shares and the distribution of the 30 

shares occurred within a 12-month 

disposition period, the 80 shares of Target 

stock sold and distributed were disposed of 

in a qualified stock disposition. July 1 of Year 

1 is the disposition date. On July 1, Target 

is treated as if it sold its assets to an 

unrelated person in exchange for the ADADP, 

$10,000, which is allocated $6,500 to 

Building 1 and $3,500 to Building 2 (see 

§ 1.336–3 for the determination and 

allocation of ADADP). Target realizes and 

recognizes gain of $500 on the deemed sale 

of Building 1 ($6,500–$6,000). Target realizes 

loss of $1,600 on the deemed sale of Building 

2 ($3,500–$5,100). However, pursuant to 

§ 1.336–2(b)(1)(i)(B)(2), because only a 

portion of the stock disposed of in the 

qualified stock disposition was sold or 

exchanged, only a portion of the loss on 

Building 2 is recognized. The amount of loss 

recognized on Building 2 is the $1,600 loss 

realized multiplied by a fraction, the 

numerator of which is $6,000, the value on 

July 1, of the 50 shares that were sold in the 

qualified stock disposition on or before the 

disposition date and the denominator of 

which is $9,600, the value on July 1, of all 

of the Target shares disposed of in the 

qualified stock disposition on or before the 

disposition date. Thus, only $1,000 ($1,600 × 

($6,000/$9,600)) of the loss on the deemed 

sale of Building 2 is recognized by Old 

Target. New Target is then treated as 

acquiring all its assets from an unrelated 

person in a single transaction in exchange for 

the AGUB, $10,000 (see § 1.336–4 for the 

determination of AGUB). Old Target is 

treated as liquidating into Parent 

immediately after the deemed asset 

disposition, distributing the $10,000 deemed 

received in exchange for its assets in a 

transaction qualifying under section 332. 

Parent recognizes no gain or loss on the 

liquidation. Parent is then deemed to 

purchase 30 shares of New Target stock from 

New Target on July 1, and distribute those 30 

New Target shares to its shareholders. Parent 

recognizes no gain or loss on the deemed 

distribution of the 30 shares under § 1.336–

2(b)(1)(iv). Parent is then deemed to purchase 

(and retain), on July 2, the day after the 

disposition date, 20 shares of New Target 

stock at their fair market value as determined 

under § 1.336–2(b)(1)(v), $2,000 ($100 per 

share). A is treated as having purchased the 

50 shares of New Target stock on January 1 

of Year 1 at a cost of $88 per share, the same 

as if no section 336(e) election had been 

made. Parent’s shareholders are treated as 

receiving the New Target stock on July 1 of 

Year 1 as a distribution pursuant to section 

301 and their basis in the New Target stock 

received is its fair market value pursuant to 

section 301(d), the same as if no section 

336(e) election had been made. 

Example 6. Sale of Target stock by 

consolidated group members. (i) Facts. 

Parent owns all the stock of Sub and 50 of 

the 100 outstanding shares of Target stock. 

Sub owns the remaining 50 shares of Target 

stock. Parent and Sub each hold their Target 

stock with a basis of $80 per share. Target’s 

assets have an aggregate basis of $9,000. 

Target has no liabilities. Parent, Sub, and 

Target file a consolidated Federal income tax 

return. On February 1 of Year 1, Parent sells 

30 shares of its Target stock to A for $2,400. 

On March 1 of Year 1, Sub sells all 50 shares 

of its Target stock to B for $5,600. Neither 

Parent nor Sub incurred any selling costs. 

Neither A nor B incurred any acquisition 

costs. A section 336(e) election is made. 

Assume that if the sale of the Target stock 

constitutes a qualified stock disposition, the 

value allocated to each of Target’s assets 

under § 1.336–3 will exceed the asset’s basis. 

(ii) Consequences. Because Parent and Sub 

are members of the same consolidated group, 

their sale of Target stock is treated as made 

by one seller (see paragraph (g)(2) of this 

section), and the sales of Target stock 

constitute a qualified stock disposition. 

March 1 of Year 1 is the disposition date. For 

Federal income tax purposes, Parent and Sub 

are not treated as selling the stock of Target 

to A and B, respectively. Instead, the 

following events are deemed to occur. Target 

is treated as if, on March 1, it sold all its 

assets to unrelated person in exchange for the 

ADADP, $10,000 (see § 1.336–3 for 

determination of ADADP), recognizing gain 

of $1,000. New Target is then treated as 

acquiring all its assets from an unrelated 

person in a single transaction in exchange for 

the AGUB, $10,000 (see § 1.336–4 for the 

determination of AGUB). Old Target is 

treated as liquidating into Parent and Sub 

immediately thereafter, distributing the 

$10,000 deemed received in exchange for its 

assets in a transaction qualifying under 

section 332 (see § 1.1502–34). Neither Parent 

nor Sub recognize gain or loss on the 

liquidation. Parent is then treated as 

purchasing from New Target on March 2, the 

day after the disposition date, the 20 shares 

of Target stock (New Target stock) not 

actually sold, for its fair market value as 

determined under § 1.336–2(b)(1)(v), $2,000 

($100 per share). A is treated as having 

purchased 30 shares of New Target stock on 

February 1 of Year 1 at a cost of $2,400 ($80 

per share), the same as if no section 336(e) 

election had been made. B is treated as 

having purchased 50 shares of New Target 

stock on March 1 of Year 1 at a cost of $5,600 

($112 per share), the same as if no section 

336(e) election had been made. 

Example 7. Sale of target stock by nonconsolidated group members. (i) Facts. The 

facts are the same as in Example 6 except that 

Parent, Sub, and Target do not join in the 

filing of a consolidated Federal income tax 

return. A section 336(e) election is made. 

(ii) Consequences. Because Parent and Sub 

do not join in a consolidated Federal income 

tax return and no single seller sells, 

exchanges, or distributes Target stock 

meeting the requirements of section 

1504(a)(2), the transaction does not constitute 

a qualified stock disposition. The section 

336(e) election made with respect to the 

disposition of Target stock has no effect. 

Example 8. Distribution of 80 percent of 

Target stock in complete redemption of a 

greater-than-50-percent shareholder. (i) 

Facts. A and B own 51 and 49 shares, 

respectively, of Seller’s only class of stock. 

Seller owns all 100 shares of Target’s only 

class of stock. Seller distributes 80 shares of 

Target stock to A in complete redemption of 

A’s 51 shares of Seller in a transaction that 

does not qualify under section 355. A section 

336(e) election is made. 

(ii) Consequences. Prior to the redemption, 

Seller and A would be related persons 

because, under section 318(a)(2)(C), any stock 

of a corporation that is owned by Seller 

would be attributed to A because A owns 50 

percent or more of the value of the stock of 

Seller. However, for purposes of §§ 1.336–1 

through 1.336–5, the determination of 

whether Seller and A are related is made 

immediately after the redemption of A’s 

stock. See §§ 1.336–1(b)(4)(iii) and 1.338–

3(b)(3)(ii)(A). After the redemption, A no 

longer owns any stock of Seller. Accordingly, 

A and Seller are not related persons, as 

defined in § 1.336–1(b)(11), and the 

distribution of Target stock constitutes a 

qualified stock disposition. For Federal 

income tax purposes, rather than Seller 

distributing the stock of Target to A, the 

following is deemed to occur. Target is 

treated as if it sold its assets to an unrelated 

person. New Target is then treated as 

acquiring all its assets from an unrelated 

person in a single transaction. Immediately 

thereafter, Old Target is liquidated into Seller 


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in a transaction qualifying under section 332. 

Seller recognizes no gain or loss on the 

liquidation. Seller is then treated as 

purchasing 80 shares of New Target stock 

from New Target and then distributing the 

stock of New Target to A in exchange for A’s 

51 shares of Seller stock. Seller recognizes no 

gain or loss on the distribution of New Target 

stock pursuant to § 1.336–2(b)(1)(iv). Seller is 

then treated as purchasing from New Target, 

on the day after the disposition date, the 20 

shares of Target stock (New Target stock) not 

actually distributed, for its fair market value 

as determined under § 1.336–2(b)(1)(v). The 

Federal income tax consequences to A are the 

same as if no section 336(e) election had been 

made. 

Example 9. Pro-rata distribution of 80 

percent of target stock. (i) Facts. A and B own 

60 and 40 shares, respectively, of Seller’s 

only class of stock. Seller owns all 100 shares 

of Target’s only class of stock. Seller 

distributes 48 shares of Target stock to A and 

32 shares of Target stock to B in a transaction 

that does not qualify under section 355. A 

section 336(e) election is made. 

(ii) Consequences. Any stock of a 

corporation that is owned by Seller would be 

attributed to A under section 318(a)(2)(C) 

because, after the distribution, A owns 50 

percent or more of the value of the stock of 

Seller. Therefore, after the distribution, A 

and Seller are related persons, as defined in 

§ 1.336–1(b)(11), and the distribution of 

Target stock to A is not a disposition. 

Because only 32 percent of the Target stock 

was sold, exchanged, or distributed to 

nonrelated persons, there has not been a 

qualified stock disposition. Accordingly, the 

section 336(e) election made with respect to 

the distribution of the Target stock has no 

effect. 

Example 10. Distribution of target stock 

described in section 355(e)(2). (i) Facts. Seller 

owns all 100 shares of Target’s only class of 

stock. Target owns all 100 shares of Target 

Subsidiary’s only class of stock. Seller 

distributes all 100 shares of Target stock to 

its shareholders, all of whom are unrelated to 

Seller, in a distribution that qualifies under 

section 355 (see paragraph (iv) of this 

Example 10). As part of the plan involving 

the distribution of the Target stock, the 

shareholders of Seller sell all of the stock of 

Seller, and section 355(e)(2) applies to the 

distribution. Section 336(e) elections are 

made with respect to Target and Target 

Subsidiary. 

(ii) Consequences—Old Target deemed 

asset sale. Because the Target stock was 

distributed to persons who are unrelated to 

Seller, and the distribution is described in 

section 355(e)(2), the distribution constitutes 

a qualified stock disposition. See proposed 

§§ 1.336–1(b)(4) and 1.336–1(b)(5). Target’s 

deemed disposition of the stock of Target 

Subsidiary as a result of the section 336(e) 

election also constitutes a qualified stock 

disposition. See § 1.336–1(b)(5)(ii). For 

Federal income tax purposes, rather than 

Seller distributing the stock of Target to 

unrelated shareholders, the following is 

deemed to occur. Old Target is treated as if 

it sold all of its assets to an unrelated person 

for the ADADP, determined under § 1.336–3. 

Old Target recognizes gain, but not loss, on 

the deemed sale of each of its assets, other 

than the stock of Target Subsidiary. See 

§ 1.336–2(b)(2)(i)(B)(2). Old Target is then 

treated as acquiring all of its assets from an 

unrelated person in a single transaction in 

exchange for an amount equal to the AGUB, 

as determined under § 1.336–4. 

(iii) Consequences—Old Target Subsidiary 

deemed asset sale and liquidation. After Old 

Target’s deemed purchase of all of its assets, 

Old Target Subsidiary is then treated as if it 

sold all of its assets to an unrelated person 

for the ADADP, determined under § 1.336–3. 

Old Target Subsidiary recognizes gain, but 

not loss, on the deemed sale of each of its 

assets. See § 1.336–2(b)(1)(i)(B)(2). New 

Target Subsidiary is then treated as acquiring 

all of its assets from an unrelated person in 

a single transaction in exchange for an 

amount equal to the AGUB, as determined 

under § 1.336–4. Old Target Subsidiary is 

then deemed to liquidate into Old Target 

immediately thereafter, distributing the 

amount deemed received in exchange for its 

assets, in a transaction qualifying under 

section 332. Old Target recognizes no gain or 

loss on the liquidation of Old Target 

Subsidiary. 

(iv) Consequences—Seller distribution of 

Old Target. After the deemed liquidation of 

Old Target Subsidiary, Seller is then treated 

as distributing the stock of Old Target to the 

unrelated shareholders. Pursuant to 

paragraph (b)(2)(v) of this section, neither 

Old Target’s and Old Target Subsidiary’s 

deemed sales of all their assets to unrelated 

persons nor Old Target’s and New Target 

Subsidiary’s deemed purchases of all their 

assets from unrelated persons will cause the 

distribution of Old Target to fail to satisfy the 

requirements of section 355. The distributee 

shareholders have the same Federal income 

tax consequences with respect to the receipt 

of the Target stock as if a section 336(e) 

election had not been made. 

§ 1.336–3 Aggregate deemed asset 

disposition price; various aspects of 

taxation of the deemed asset disposition. 

(a) Scope. This section provides rules 

under section 336(e) to determine the 

aggregate deemed asset disposition price 

(ADADP) for target. ADADP is the 

amount for which old target is deemed 

to have sold all of its assets in the 

deemed asset disposition. ADADP is 

allocated among target’s assets in the 

same manner as ADSP is allocated 

under § 1.338–6 to determine the 

amount for which each asset is deemed 

to have been sold. When a subsequent 

increase or decrease is required under 

general principles of tax law with 

respect to an element of ADADP, the 

redetermined ADADP is allocated 

among target’s assets in the same 

manner as redetermined ADSP is 

allocated under § 1.338–7. 

(b) Determination of ADADP—(1) 

General rule. ADADP is the sum of—

(i) The grossed-up amount realized on 

the sale, exchange, or distribution of 

recently disposed stock of target; and 

(ii) The liabilities of old target. 

(2) Time and amount of ADADP—(i) 

Original determination. ADADP is 

initially determined at the beginning of 

the day after the disposition date of 

target. General principles of tax law 

apply in determining the timing and 

amount of the elements of ADADP. 

(ii) Redetermination of ADADP. 

ADADP is redetermined at such time 

and in such amount as an increase or 

decrease would be required, under 

general principles of tax law, for the 

elements of ADADP. For example, 

ADADP is redetermined because of an 

increase or decrease in the amount 

realized on the sale or exchange of 

recently disposed stock of target or 

because liabilities not originally taken 

into account in determining ADADP are 

subsequently taken into account. 

Increases or decreases with respect to 

the elements of ADADP result in the 

reallocation of ADADP among target’s 

assets in the same manner as ADSP 

under § 1.338–7. 

(c) Grossed-up amount realized on the 

sale, exchange, or distribution of 

recently disposed stock of target—(1) 

Determination of amount. The grossedup amount realized on the sale, 

exchange, or distribution of recently 

disposed stock of target is an amount 

equal to—

(i) The sum of (A) the amount realized 

on the sale or exchange of recently 

disposed stock of target, determined as 

if the seller(s) were required to use old 

target’s accounting methods and 

characteristics and the installment 

method were not available and 

determined without regard to the selling 

costs taken into account under 

paragraph (c)(1)(iii) of this section and 

(B) the fair market value of recently 

disposed stock of target, determined on 

the date of each distribution, distributed 

in the qualified stock disposition; 

(ii) Divided by the percentage of target 

stock (by value, determined on the 

disposition date) attributable to the 

recently disposed stock; 

(iii) Less the selling costs incurred by 

the seller in connection with the sale or 

exchange of recently disposed stock that 

reduce its amount realized on the sale 

or exchange of the stock (for example, 

brokerage commissions and any similar 

costs to sell the stock). 

(2) Example. The following example 

illustrates this paragraph (c): 

Example. Target has two classes of stock 

outstanding, voting common stock and 

preferred stock described in section 

1504(a)(4). Seller owns all 100 shares of each 

class of stock. On March 1 of Year 1, Seller 

sells 10 shares of Target voting common 

stock to A for $75. On April 1 of Year 2, 

Seller distributes 15 shares of voting common 

stock with a fair market value of $120 to B. 


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On May 1 of Year 2, Seller distributes 10 

shares of voting common stock with a fair 

market value of $110 to C. On July 1 of Year 

2, Seller sells 55 shares of Target voting 

common stock to D for $550. On July 1 of 

Year 2, the fair market value of all the Target 

voting common stock is $1,000 ($10 per 

share) and the fair market value of the 

preferred stock is $600. Seller incurs $20 of 

selling costs with respect to the sale to A and 

$60 of selling costs with respect to the sale 

to D. The grossed-up amount realized on the 

sale, exchange, or distribution of recently 

disposed stock of Target corporation is 

calculated as follows: The sum of the amount 

realized on the sale or exchange of recently 

disposed stock sold or exchanged (without 

regard to selling costs) and the fair market 

value of the recently disposed stock 

distributed is $780 ($120 + $110 + $550) (the 

10 shares sold to A on March 1 of Year 1 is 

not recently disposed stock because it was 

not disposed of during the 12-month 

disposition period). The percentage of Target 

stock by value on the disposition date 

attributable to recently disposed stock equals 

50% ($800/($1,000 + $600). The grossed-up 

amount realized equals $1,500 (($780/.50) ¥ 

$60 selling costs). 

(d) Liabilities of old target—(1) In 

general. In general, the liabilities of old 

target are measured as of the beginning 

of the day after the disposition date. 

However, if a target for which a section 

336(e) election is made engages in a 

transaction outside the ordinary course 

of business on the disposition date after 

the event resulting in the qualified stock 

disposition of the target or a higher-tier 

corporation, the target and all persons 

related thereto (either before or after the 

qualified stock disposition) under 

section 267(b) or section 707 must treat 

the transaction for all Federal income 

tax purposes as occurring at the 

beginning of the day following the 

transaction and after the deemed 

disposition by old target. In order to be 

taken into account in ADADP, a liability 

must be a liability of target that is 

properly taken into account in an 

amount realized under general 

principles of tax law that would apply 

if old target had sold its assets to an 

unrelated person for consideration that 

included the discharge of its liabilities. 

See § 1.1001–2(a). Such liabilities may 

include liabilities for the tax 

consequences resulting from the 

deemed asset disposition. 

(2) Time and amount of liabilities. 

The time for taking into account 

liabilities of old target in determining 

ADADP and the amount of the liabilities 

taken into account is determined as if 

old target had sold its assets to an 

unrelated person for consideration that 

included the discharge of the liabilities 

by the unrelated person. For example, if 

no amount of a target liability is 

properly taken into account in an 

amount realized as of the beginning of 

the day after the disposition date, the 

liability is not initially taken into 

account in determining ADADP 

(although it may be taken into account 

at some later date). 

(e) Deemed disposition tax 

consequences. Gain or loss on each asset 

in the deemed asset disposition is 

computed by reference to the ADADP 

allocated to that asset. ADADP is 

allocated in the same manner as is 

ADSP under § 1.338–6. Although 

deemed disposition tax consequences 

may increase or decrease ADADP by 

creating or reducing a tax liability, the 

amount of the tax liability itself may be 

a function of the size of the deemed 

disposition tax consequences. Thus, 

these determinations may require trial 

and error computations. 

(f) Other rules apply in determining 

ADADP. ADADP may not be applied in 

such a way as to contravene other 

applicable rules. For example, a capital 

loss cannot be applied to reduce 

ordinary income in calculating the tax 

liability on the deemed asset disposition 

for purposes of determining ADADP. 

§ 1.336–4 Adjusted grossed-up basis. 

(a) Scope. Except as provided in 

paragraphs (b) and (c) of this section or 

as the context otherwise requires, the 

principles of paragraphs (b) through (g) 

of § 1.338–5 apply in determining the 

adjusted gross-up basis (AGUB) for 

target and the consequences of a gain 

recognition election. AGUB is the 

amount for which new target is deemed 

to have purchased all of its assets in the 

deemed purchase under § 1.336–

2(b)(1)(ii), or the amount for which old 

target is deemed to have purchased all 

of its assets in the deemed purchase 

under § 1.336–2(b)(2)(ii). AGUB is 

allocated among target’s assets in 

accordance with § 1.338–6 to determine 

the price at which the assets are deemed 

to have been purchased. When a 

subsequent increase or decrease with 

respect to an element of AGUB is 

required under general principles of tax 

law, redetermined AGUB is allocated 

among target’s assets in accordance with 

§ 1.338–7. 

(b) Modifications to the principles in 

§ 1.338–5. Solely for purposes of 

applying §§ 1.336–1 through 1.336–4, 

the principles of § 1.338–5 are modified 

as follows—

(1) Purchasing corporation; 

purchaser. Any reference to the 

‘‘purchasing corporation’’ shall be 

treated as a reference to a purchaser, as 

defined in § 1.336–1(b)(2). 

(2) Acquisition date; disposition date. 

Any reference to the ‘‘acquisition date’’

shall be treated as a reference to the 

disposition date, as defined in § 1.336–

1(b)(7). 

(3) Section 338 election; section 

338(h)(10) election; section 336(e) 

election. Any reference to a ‘‘section 338 

election’’ or a ‘‘section 338(h)(10) 

election’’ shall be treated as a reference 

to a section 336(e) election, as defined 

in § 1.336–1(b)(10). 

(4) New target; old target. In the case 

of a disposition described in section 

355(d)(2) or (e)(2), any reference to 

‘‘new target’’ shall be treated as a 

reference to ‘‘old target’’ in its capacity 

as the purchaser of assets pursuant to 

the section 336(e) election. 

(5) Recently purchased stock; recently 

disposed stock. Any reference to 

recently purchased stock shall be 

treated as a reference to recently 

disposed stock, as defined in § 1.336–

1(b)(16). In the case of a distribution of 

stock, for purposes of determining the 

purchaser’s grossed-up basis of recently 

disposed stock, the purchaser’s basis in 

recently disposed stock shall be deemed 

to be such stock’s fair market value on 

the date it was acquired. 

(6) Nonrecently purchased stock; 

nonrecently disposed stock. Any 

reference to nonrecently purchased 

stock shall be treated as a reference to 

nonrecently disposed stock, as defined 

in § 1.336–1(b)(17). 

(c) Gain recognition election—(1) In 

general. Any holder of nonrecently 

disposed stock of target may make a 

gain recognition election. The gain 

recognition election is irrevocable. Each 

owner of nonrecently disposed stock 

determines its basis amount, and 

therefore, the gain recognized pursuant 

to the gain recognition election, by 

applying §§ 1.338–5(c) and 1.338–

5(d)(3)(ii) by reference to its own 

recently disposed stock and nonrecently 

disposed stock, and not by reference to 

all recently disposed stock and 

nonrecently disposed stock. 

(2) 80-percent purchaser. If a section 

336(e) election is made for target, any 

80-percent purchaser and all persons 

related to the 80-percent purchaser are 

automatically deemed to have made a 

gain recognition election for its 

nonrecently disposed target stock. 

(3) Non-80-percent purchaser. A gain 

recognition election is actually made by 

a non-80-percent purchaser by 

providing to the seller, and seller 

including with the section 336(e) 

election statement, a gain recognition 

election statement, as described in 

paragraph (c)(4) of this section. If a non80-percent purchaser makes a gain 

recognition election, all related persons 

to the non-80-percent purchaser must 

also make a gain recognition election. 

Otherwise, the gain recognition election 


ebenthall on PRODPC60 with PROPOSALS
49980 Federal Register / Vol. 73, No. 165 / Monday, August 25, 2008 / Proposed Rules 

for the non-80-percent purchaser will 

have no effect. 

(4) Gain recognition election 

statement. A gain recognition election 

statement must include the following 

declarations (or substantially similar 

declarations): 

(i) [Insert name, address, and taxpayer 

identifying number of person for whom 

gain recognition election is actually 

being made] has elected to recognize 

gain under § 1.336–4(c) with respect to 

[his, hers, or its] nonrecently disposed 

stock. 

(ii) [Insert name of person for whom 

gain recognition election is actually 

being made] agrees to report any gain 

under the gain recognition election on 

[his, hers, or its] Federal income tax 

return (including an amended return, if 

necessary) for the taxable year that 

includes the disposition date of [insert 

name and EIN of target corporation]. 

(d) Examples. The following examples 

illustrate the provisions of this section. 

Example 1. On January 1 of Year 1, Seller 

owns 85 shares of Target stock, A owns 8 

shares, B owns 4 shares, and C owns the 

remaining 3 shares. Each of A’s 8 shares, B’s 

4 shares, and C’s 3 shares have a $5 basis. 

Assume that Target has no liabilities. On July 

1 of Year 2, Seller sells 70 shares of Target 

stock to A for $10 per share. On September 

1 of Year 2, Seller sells 5 shares of Target 

stock to B and 5 shares of Target stock to C 

for $14 per share. A incurs $25 of acquisition 

costs, and B and C each incur $10 of 

acquisition costs in connection with their 

respective Year 2 purchases. These costs are 

capitalized in the basis of the Target stock. 

September 1 of Year 2 is the disposition date. 

Because A owns at least 10 percent of the 

Target stock on September 1, the disposition 

date, and A’s original 8 shares of Target stock 

owned on January 1 of Year 1 were not 

disposed of in the qualified stock disposition, 

A’s original 8 shares of Target stock are 

nonrecently disposed stock. Although B’s 

original 4 shares and C’s original 3 shares 

were not disposed of in the qualified stock 

disposition, because neither B nor C owns, 

with the application of section 318(a), other 

than section 318(a)(4), at least 10 percent of 

the total voting power or value of Target 

stock on the disposition date, their original 

shares are not nonrecently disposed stock. 

The grossed-up basis of recently disposed 

Target stock is $1011, determined as follows: 

The purchasers’ (A, B, and C) aggregate basis 

in the recently disposed target stock, 

determined without regard to acquisition 

costs, is $840 ((70 × $10) + (5 × $14) + (5 × 

$14)). This amount is multiplied by a 

fraction, the numerator of which is 100 

minus 8, the percentage of the Target stock 

which is nonrecently disposed stock, and the 

denominator of which is 80, the percentage 

of Target stock disposed of in the qualified 

stock disposition ($840 × 92/80 = $966). This 

amount is then increased by the $45 of 

acquisition costs incurred by A, B, and C to 

arrive at the $1011 grossed-up basis of 

recently disposed Target stock ($966 + $45 = 

$1011). New Target’s AGUB is $1051, the 

sum of $1011, the grossed-up basis of 

recently disposed Target stock and $40 (8 × 

$5), A’s basis in his nonrecently disposed 

Target stock. 

Example 2. The facts are the same as in 

Example 1 except that A makes a gain 

recognition election. Pursuant to the gain 

recognition election, A is treated as if it sold 

on September 1 of Year 2, the disposition 

date, its 8 shares of nonrecently disposed 

target stock for the basis amount, and A’s 

basis in nonrecently disposed target stock 

immediately after the deemed sale is the 

basis amount. A’s basis amount equals his 

basis in his recently disposed Target stock 

without regard to acquisition costs, $700 (70 

× $10), multiplied by a fraction, the 

numerator of which is 100 minus 8, the 

percentage of the Target stock, by value, 

determined on the disposition date, which is 

A’s nonrecently disposed Target stock, and 

the denominator of which is 70, the 

percentage of the Target stock, by value, 

determined on the disposition date, disposed 

of to A in the qualified stock disposition, 

which is then multiplied by a fraction, the 

numerator of which is 8, the percentage of 

target stock, by value, determined on the 

disposition date, attributable to A’s 

nonrecently disposed Target stock and the 

denominator of which is 100 minus the 

numerator amount. Accordingly, A’s basis 

amount is $80 ($700 × 92/70 × 8/92). A 

therefore recognizes gain of $40 under the 

gain recognition election ($80 basis amount 

minus A’s $40 basis in his nonrecently 

disposed stock prior to the gain recognition 

election). New Target’s AGUB is $1091, the 

sum of $1011, the grossed-up basis of all 

recently disposed Target stock and $80, A’s 

basis in his nonrecently disposed Target 

stock pursuant to the gain recognition 

election. 

§ 1.336–5 Effective/Applicability date. 

The provisions of §§ 1.336–1 through 

1.336–4 apply to any qualified stock 

disposition for which the disposition 

date is on or after the date of publication 

of the Treasury decision adopting these 

rules as final regulations in the Federal 

Register. 

Par. 3. Section 1.338–0 is amended by 

adding entries for §§ 1.338–1(e) and 

1.338–5(h) to read as follows: 

§ 1.338–0 Outline of topics. 

* * * * * 

§ 1.338–1 General principles; status of old 

target and new target. 

* * * * * 

(e) Effective/applicability date. 

* * * * * 

§ 1.338–5 Adjusted grossed-up basis. 

* * * * * 

(h) Effective/applicability date. 

Par. 4. Section 1.338–1 is amended by 

adding two new sentences after the 

parenthetical that follows the third 

sentence of paragraph (a)(1), by revising 

the first sentence in paragraph (c)(1), 

and adding a new paragraph (e) to read 

as follows: 

§ 1.338–1 General principles; status of old 

target and new target. 

(a) * * * 

(1) * * * However, if, as a result of 

the deemed purchase of old target’s 

assets pursuant to a section 336(e) 

election, there would be both a qualified 

stock purchase and a qualified stock 

disposition of the stock of a subsidiary 

of the target, neither a section 338(g) 

election nor a section 338(h)(10) 

election may be made with respect to 

the qualified stock purchase of the 

subsidiary. Instead, a section 336(e) 

election may be made with respect to 

such purchase. See § 1.336–1(b)(5)(ii). 

* * * 

* * * * * 

(c) * * * 

(1) In general. The rules of this 

paragraph (c) apply for purposes of 

applying the regulations under sections 

336(e), 338, and 1060. * * * 

* * * * * 

(e) Effective/applicability date. 

Paragraphs (a)(1) and (c)(1) of this 

section are applicable to any qualified 

stock disposition for which the 

disposition date is on or after the date 

of publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register. 

Par. 5. Section 1.338–5 is amended by 

revising the first sentence in paragraph 

(d)(3)(ii) and by adding a new paragraph 

(h) to read as follows: 

§ 1.338–5 Adjusted grossed-up basis. 

* * * * * 

(d) * * * 

(3) * * * 

(ii) Basis amount. The basis amount is 

equal to the amount determined by 

applying paragraphs (c)(1) and (2) of 

this section (the purchasing 

corporation’s grossed-up basis in 

recently purchased target stock at the 

beginning of the day after the 

acquisition date determined without 

regard to the acquisition costs taken into 

account in paragraph (c)(3) of this 

section) multiplied by a fraction the 

numerator of which is the percentage of 

target stock (by value, determined on 

the acquisition date) attributable to the 

purchasing corporation’s nonrecently 

purchased target stock and the 

denominator of which is 100 percent 

minus the numerator amount. * * * 

* * * * * 

(h) Effective/applicability date. 

Paragraph (d)(3)(ii) of this section is 

applicable to any qualified stock 

disposition for which the disposition 

date is on or after the date of publication 

of the Treasury decision adopting these 


ebenthall on PRODPC60 with PROPOSALS
Federal Register / Vol. 73, No. 165 / Monday, August 25, 2008 / Proposed Rules 49981 

rules as final regulations in the Federal 

Register. 

Linda E. Stiff, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. E8–19603 Filed 8–22–08; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 48 

[REG–155087–05] 

RIN 1545–BF17 

Alcohol Fuel and Biodiesel; Renewable 

Diesel; Alternative Fuel; Diesel-Water 

Fuel Emulsion; Taxable Fuel 

Definitions; Excise Tax Returns; 

Correction 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Correction to notice of proposed 

rulemaking. 

SUMMARY: This document contains a 

correction to a notice of proposed 

rulemaking (REG–155087–05) that was 

published in the Federal Register on 

Tuesday, July 29, 2008 (73 FR 43890) 

relating to credits and payments for 

alcohol mixtures, biodiesel mixtures, 

renewable diesel mixtures, alternative 

fuel mixtures, and alternative fuel sold 

for use or used as a fuel, as well as 

proposed regulations relating to the 

definition of gasoline and diesel fuel. 

These regulations reflect changes 

made by the American Jobs Creation Act 

of 2004, the Energy Policy Act of 2005, 

the Safe, Accountable, Flexible, 

Efficient Transportation Equity Act: A 

Legacy for Users, and the Tax Technical 

Corrections Act of 2007. These 

regulations affect producers of alcohol, 

biodiesel, and renewable diesel; 

producers of alcohol, biodiesel, 

renewable diesel, and alternative fuel 

mixtures; sellers and users of alternative 

fuel; and certain persons liable for the 

tax on removals, entries, or sales of 

gasoline or diesel fuel. 

FOR FURTHER INFORMATION CONTACT: 

Stephanie Bland, Taylor Cortright, or 

DeAnn Malone, (202) 622–3130 (not a 

toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

The correction notice that is the 

subject of this document is under 

section 4081 of the Internal Revenue 

Code. 

Need for Correction 

As published, the notice of proposed 

rulemaking (REG–155087–05) contains 

an error that may prove to be misleading 

and is in need of clarification. 

Correction of Publication 

Accordingly, the publication of the 

notice of proposed rulemaking (REG–

155087–05), which was the subject of 

FR Doc. E8–17270, is corrected as 

follows: 

§ 48.4081–1 [Corrected] 

On page 43895, column 3, § 48.4081–

1(b), line 5 of the column, the language 

‘‘pursuant to section 211 of the Clear 

Air’’ is corrected to read ‘‘pursuant to 

section 211 of the Clean Air’’. 

LaNita Van Dyke, 

Chief, Publications and Regulations Branch, 

Legal Processing Division, Associate Chief 

Counsel (Procedure and Administration). 

[FR Doc. E8–19598 Filed 8–22–08; 8:45 am] 

BILLING CODE 4830–01–P 

ENVIRONMENTAL PROTECTION 

AGENCY 

40 CFR Parts 52 and 70 

[EPA–R07–OAR–2008–0403; FRL–8707–6] 

Approval and Promulgation of 

Implementation Plans and Operating 

Permits Program; State of Iowa 

AGENCY: Environmental Protection 

Agency (EPA). 

ACTION: Proposed rule. 

SUMMARY: EPA proposes to approve the 

State Implementation Plan (SIP) and 

Operating Permits Program revision 

submitted by the state of Iowa for the 

purpose of modifying and clarifying 

requirements for certain types of grain 

elevators. Specifically, the new rule 

revises the SIP to add special 

requirements for grain elevators, and the 

associated chapters for definitions and 

emission standards will be revised 

accordingly. The Iowa Department of 

Natural Resources is requiring that 

owners or operators of grain elevators 

apply best management practices and 

comply with the fugitive dust standard, 

as well as emission controls specified in 

required construction permits. These 

strategies will protect the ambient air 

and minimize the impact of emissions 

from each of the facilities. 

DATES: Comments on this proposed 

action must be received in writing by 

September 24, 2008. 

ADDRESSES: Submit your comments, 

identified by Docket ID No. EPA–R07–

OAR–2008–0403, by mail to Heather 

Hamilton, Environmental Protection 

Agency, Air Planning and Development 

Branch, 901 North 5th Street, Kansas 

City, Kansas 66101. Comments may also 

be submitted electronically or through 

hand delivery/courier by following the 

detailed instructions in the ADDRESSES

section of the direct final rule located in 

the rules section of this Federal 

Register. 

FOR FURTHER INFORMATION CONTACT: 

Heather Hamilton at (913) 551–7039, or 

by e-mail at Hamilton.heather@epa.gov. 

SUPPLEMENTARY INFORMATION: In the 

final rules section of the Federal 

Register, EPA is approving the state’s 

SIP revision and Title V revision as a 

direct final rule without prior proposal 

because the Agency views this as a 

noncontroversial revision amendment 

and anticipates no relevant adverse 

comments to this action. A detailed 

rationale for the approval is set forth in 

the direct final rule. If no relevant 

adverse comments are received in 

response to this action, no further 

activity is contemplated in relation to 

this action. If EPA receives relevant 

adverse comments, the direct final rule 

will be withdrawn and all public 

comments received will be addressed in 

a subsequent final rule based on this 

proposed action. EPA will not institute 

a second comment period on this action. 

Any parties interested in commenting 

on this action should do so at this time. 

Please note that if EPA receives adverse 

comment on part of this rule and if that 

part can be severed from the remainder 

of the rule, EPA may adopt as final 

those parts of the rule that are not the 

subject of an adverse comment. For 

additional information, see the direct 

final rule which is located in the rules 

section of this Federal Register. 

Dated: August 15, 2008. 

John B. Askew, 

Regional Administrator, Region 7. 

[FR Doc. E8–19518 Filed 8–22–08; 8:45 am] 

BILLING CODE 6560–50–P 


ebenthall on PRODPC60 with PROPOSALS