[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.338(h)(10)-1T]

[Page 153-154]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.338(h)(10)-1T  Deemed asset sale and liquidation (temporary).

    (a)-(c)(1) [Reserved]. For further guidance, see Sec. 1.338(h)(10)-
1(a) through (c)(1).
    (c)(2) Availability of section 338(h)(10) election in certain multi-
step transactions. Notwithstanding anything to the contrary in Sec. 
1.338-3(c)(1)(i), a section 338(h)(10) election may be made for T where 
P's acquisition of T stock, viewed independently, constitutes a 
qualified stock purchase and, after the stock acquisition, T merges or 
liquidates into P (or another member of the affiliated group that 
includes P), whether or not, under relevant provisions of law, including 
the step transaction doctrine, the acquisition of the T stock and the 
merger or liquidation of T qualify as a reorganization described in 
section 368(a). If a section 338(h)(10) election is made in a case where 
the acquisition of T stock followed by a merger or liquidation of T into 
P qualifies as a reorganization described in section 368(a), for all 
Federal tax purposes, P's acquisition of T stock is treated as a 
qualified stock purchase and is not treated as part of a reorganization 
described in section 368(a).
    (c)(3)-(e) (Example 10) [Reserved]. For further guidance, see Sec. 
1.338(h)(10)-1(c)(3) through (e) (Example 10).

    (e) Example 11. Stock acquisition followed by upstream merger--
without section 338(h)(10) election. (i) P owns all the stock of Y, a 
newly formed subsidiary. S owns all the stock of T. Each of P, S, T and 
Y is a domestic corporation. P acquires all of the T stock in a 
statutory merger of Y into T, with T surviving. In the merger, S 
receives consideration consisting of 50% P voting stock and 50% cash. 
Viewed independently of any other step, P's acquisition of T stock 
constitutes a qualified stock purchase. As part of the plan that 
includes P's acquisition of the T stock, T subsequently merges into P. 
Viewed independently of any other step, T's merger into P qualifies as a 
liquidation described in section 332. Absent the application of 
paragraph (c)(2) of this section, the step transaction doctrine would 
apply to treat P's acquisition of the T stock and T's merger into P as 
an acquisition by P of T's assets in a reorganization described in 
section 368(a). P and S do not make a section 338(h)(10) election with 
respect to P's purchase of the T stock.
    (ii) Because P and S do not make an election under section 
338(h)(10) for T, P's acquisition of the T stock and T's merger into P 
is treated as part of a reorganization described in section 368(a).
    Example 12. Stock acquisition followed by upstream merger--with 
section 338(h)(10) election. (i) The facts are the same as in Example 11 
except that P and S make a joint election under section 338(h)(10) for 
T.
    (ii) Pursuant to paragraph (c)(2) of this section, as a result of 
the election under section 338(h)(10), for all Federal tax purposes, P's 
acquisition of the T stock is treated as a qualified stock purchase and 
P's acquisition of the T stock is not treated as part of a 
reorganization described in section 368(a).
    Example 13. Stock acquisition followed by brother-sister merger--
with section 338(h)(10) election. (i) The facts are the same as in 
Example 12, except that, following P's acquisition of the T stock, T 
merges into X, a domestic corporation that is a wholly owned subsidiary 
of P. Viewed independently of any other step, T's merger into X 
qualifies as a reorganization described in section 368(a). Absent the 
application of paragraph (c)(2) of this section, the step transaction 
doctrine would apply to treat P's acquisition of the T stock and T's 
merger into X as an acquisition by X of T's assets in a reorganization 
described in section 368(a).
    (ii) Pursuant to paragraph (c)(2) of this section, as a result of 
the election under section 338(h)(10), for all Federal tax purposes, P's 
acquisition of T stock is treated as a qualified stock purchase and P's 
acquisition of T stock is not treated as part of a reorganization 
described in section 368(a).
    Example 14. Stock acquisition that does not qualify as a qualified 
stock purchase followed by upstream merger. (i) The facts are the same 
as in Example 11, except that, in the statutory merger of Y into T, S 
receives only P voting stock.
    (ii) Pursuant to section 1.338-3(c)(1)(i) and paragraph (c)(2) of 
this section, no election under section 338(h)(10) can be made with 
respect to P's acquisition of the T stock because, pursuant to relevant 
provisions of law, including the step transaction doctrine, that 
acquisition followed by T's merger into P is treated as a reorganization 
under section 368(a)(1)(A), and that acquisition, viewed independently 
of T's merger into P, does not constitute a qualified stock purchase 
under section 338(d)(3). Accordingly, P's acquisition of the T stock and 
T's merger into P is treated as a reorganization under section 368(a).

    (f)-(g) [Reserved]. For further guidance, see Sec. 1.338(h)(10)-
1(f) through (g).

[[Page 154]]

    (h) Effective date. This section is applicable to stock acquisitions 
occurring on or after July 9, 2003.

[T.D. 9071, 68 FR 40768, July 9, 2003]