---
kind: "range"
citation: "26 C.F.R. §§ 1.338-1–1.338-11"
title: "26"
from: "1.338-1"
to: "1.338-11"
count: 11
url: "https://uscodex.org/cfr/26/1.338-1..1.338-11"
---

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

- (a) **In general—**
  - (1) **Deemed transaction.** Elections are available under [section 338](/cfr/26/338.md) when a purchasing corporation acquires the stock of another corporation (the target) in a qualified stock purchase. One type of election, under [section 338(g)](/cfr/26/338.md?p=g), is available to the purchasing corporation. Another type of election, under [section 338(h)(10)](/cfr/26/338.md?p=h-10), is, in more limited circumstances, available jointly to the purchasing corporation and the sellers of the stock. (Rules concerning eligibility for these elections are contained in §§ [1.338-2](/cfr/26/1.338-2.md), [1.338-3](/cfr/26/1.338-3.md), and [1.338(h)(10)-1](/cfr/26/1.338..1.md).) However, if, as a result of the deemed purchase of old target's assets pursuant to a [section 336(e)](/cfr/26/336.md?p=e) election, there would be both a qualified stock purchase and a qualified stock disposition (as defined in [§ 1.336-1(b)(6)](/cfr/26/1.336-1.md?p=b-6)) of the stock of a subsidiary of target, neither a [section 338(g)](/cfr/26/338.md?p=g) election nor a [section 338(h)(10)](/cfr/26/338.md?p=h-10) election may be made with respect to the qualified stock purchase of the subsidiary. Instead, a [section 336(e)](/cfr/26/336.md?p=e) election may be made with respect to such purchase. See [§ 1.336-1(b)(6)(ii)](/cfr/26/1.336-1.md?p=b-6-ii). Although target is a single corporation under corporate law, if a [section 338](/cfr/26/338.md) election is made, then two separate corporations, old target and new target, generally are considered to exist for purposes of subtitle A of the Internal Revenue Code. Old target is treated as transferring all of its assets to an unrelated person in exchange for consideration that includes the discharge of its liabilities (see [§ 1.1001-2(a)](/cfr/26/1.1001-2.md?p=a)), and new target is treated as acquiring all of its assets from an unrelated person in exchange for consideration that includes the assumption of those liabilities. (Such transaction is, without regard to its characterization for Federal income tax purposes, referred to as the deemed asset sale and the income tax consequences thereof as the deemed sale tax consequences.) If a [section 338(h)(10)](/cfr/26/338.md?p=h-10) election is made, old target is deemed to liquidate following the deemed asset sale.
  - (2) **Application of other rules of law.** Other rules of law apply to determine the tax consequences to the parties as if they had actually engaged in the transactions deemed to occur under [section 338](/cfr/26/338.md) and the regulations thereunder except to the extent otherwise provided in those regulations. See also [§ 1.338-6(c)(2)](/cfr/26/1.338-6.md?p=c-2). Other rules of law may characterize the transaction as something other than or in addition to a sale and purchase of assets; however, the transaction between old and new target must be a taxable transaction. For example, if the target is an insurance company for which a [section 338](/cfr/26/338.md) election is made, the deemed asset sale results in an assumption reinsurance transaction for the insurance contracts deemed transferred from old target to new target. See, generally, [§ 1.817-4(d)](/cfr/26/1.817-4.md?p=d), and for special rules regarding the acquisition of insurance company targets, [§ 1.338-11](/cfr/26/1.338-11.md). See also [§ 1.367(a)-8(k)(13)](/cfr/26/1.367..8.md) for a rule applicable to gain recognition agreements (filed under §§ [1.367(a)-3(b)(1)(ii)](/cfr/26/1.367..3.md) and [1.367(a)-8](/cfr/26/1.367..8.md)) and deemed asset sales as a result of an election under [section 338(g)](/cfr/26/338.md?p=g).
  - (3) **Overview.** Definitions and special nomenclature and rules for making the [section 338](/cfr/26/338.md) election are provided in [§ 1.338-2](/cfr/26/1.338-2.md). Qualification for the [section 338](/cfr/26/338.md) election is addressed in [§ 1.338-3](/cfr/26/1.338-3.md). The amount for which old target is treated as selling all of its assets (the aggregate deemed sale price, or ADSP) is addressed in [§ 1.338-4](/cfr/26/1.338-4.md). The amount for which new target is deemed to have purchased all its assets (the adjusted grossed-up basis, or AGUB) is addressed in [§ 1.338-5](/cfr/26/1.338-5.md). [Section 1.338-6](/cfr/26/1.338-6.md) addresses allocation both of ADSP among the assets old target is deemed to have sold and of AGUB among the assets new target is deemed to have purchased. [Section 1.338-7](/cfr/26/1.338-7.md) addresses allocation of ADSP or AGUB when those amounts subsequently change. Asset and stock consistency are addressed in [§ 1.338-8](/cfr/26/1.338-8.md). International aspects of [section 338](/cfr/26/338.md) are covered in [§ 1.338-9](/cfr/26/1.338-9.md). Rules for the filing of returns are provided in [§ 1.338-10](/cfr/26/1.338-10.md). [Section 1.338-11](/cfr/26/1.338-11.md) provides special rules for insurance company targets. Eligibility for and treatment of [section 338(h)(10)](/cfr/26/338.md?p=h-10) elections is addressed in [§ 1.338(h)(10)-1](/cfr/26/1.338..1.md).
- (b) **Treatment of target under other provisions of the Internal Revenue Code—**
  - (1) **General rule for subtitle A.** Except as provided in this section, new target is treated as a new corporation that is unrelated to old target for purposes of subtitle A of the Internal Revenue Code. Thus—
    - (i) New target is not considered related to old target for purposes of [section 168](/cfr/26/168.md) and may make new elections under [section 168](/cfr/26/168.md) without taking into account the elections made by old target; and
    - (ii) New target may adopt, without obtaining prior approval from the Commissioner, any taxable year that meets the requirements of [section 441](/cfr/26/441.md) and any method of accounting that meets the requirements of [section 446](/cfr/26/446.md). Notwithstanding [§ 1.441-1T(b)(2)](/cfr/26/1.441-1T.md?p=b-2), a new target may adopt a taxable year on or before the last day for making the election under [section 338](/cfr/26/338.md) by filing its first return for the desired taxable year on or before that date.
  - (2) **Exceptions for subtitle A.** New target and old target are treated as the same corporation for purposes of—
    - (i) The rules applicable to employee benefit plans (including those plans described in sections [79](/cfr/26/79.md), [104](/cfr/26/104.md), [105](/cfr/26/105.md), [106](/cfr/26/106.md), [125](/cfr/26/125.md), [127](/cfr/26/127.md), [129](/cfr/26/129.md), [132](/cfr/26/132.md), [137](/cfr/26/137.md), and [220](/cfr/26/220.md)), qualified pension, profit-sharing, stock bonus and annuity plans (sections [401(a)](/cfr/26/401.md?p=a) and [403(a)](/cfr/26/403.md?p=a)), simplified employee pensions ([section 408(k)](/cfr/26/408.md?p=k)), tax qualified stock option plans (sections [422](/cfr/26/422.md) and [423](/cfr/26/423.md)), welfare benefit funds (sections [419](/cfr/26/419.md), [419A](/cfr/26/419A.md), [512(a)(3)](/cfr/26/512.md?p=a-3), and [4976](/cfr/26/4976.md)), voluntary employees' beneficiary associations ([section 501(c)(9)](/cfr/26/501.md?p=c-9) and the regulations thereunder), and tax on excess tax-exempt organization executive compensation ([section 4960](/cfr/26/4960.md)) and the regulations in [part 53](/cfr/26/part53.md) under [section 4960](/cfr/26/4960.md);
    - (ii) [Sections 1311 through 1314](/cfr/26/1311..1314.md) (relating to the mitigation of the effect of limitations), if a [section 338(h)(10)](/cfr/26/338.md?p=h-10) election is not made for target;
    - (iii) [Section 108(e)(5)](/cfr/26/108.md?p=e-5) (relating to the reduction of purchase money debt);
    - (iv) [Section 45A](/cfr/26/45A.md) (relating to the Indian Employment Credit), [section 51](/cfr/26/51.md) (relating to the Work Opportunity Credit), [section 51A](/cfr/26/51A.md) (relating to the Welfare to Work Credit), and [section 1396](/cfr/26/1396.md) (relating to the Empowerment Zone Act);
    - (v) Sections [401(h)](/cfr/26/401.md?p=h) and [420](/cfr/26/420.md) (relating to medical benefits for retirees);
    - (vi) [Section 414](/cfr/26/414.md) (relating to definitions and special rules); and
    - (vii) [Section 846(e)](/cfr/26/846.md?p=e) (relating to an election to use an insurance company's historical loss payment pattern).
    - (viii) **Any other provision designated in the Internal Revenue Bulletin by the Internal Revenue Service.** See [§ 601.601(d)(2)(ii)](/cfr/26/601.601.md?p=d-2-ii) of this chapter. See, for example, [§ 1.1001-3(e)(4)(i)(F)](/cfr/26/1.1001-3.md?p=e-4-i-F) providing that an election under [section 338](/cfr/26/338.md) does not result in the substitution of a new obligor on target's debt. See also, for example, [§ 1.1502-77(c)(8)](/cfr/26/1.1502-77.md?p=c-8), providing that an election under [section 338](/cfr/26/338.md) does not result in a deemed termination of target's existence for purposes of the rules applicable to the agent for a consolidated group.
  - (3) **General rule for other provisions of the Internal Revenue Code.** Except as provided in the regulations under [section 338](/cfr/26/338.md) or in the Internal Revenue Bulletin by the Internal Revenue Service (see [§ 601.601(d)(2)(ii)](/cfr/26/601.601.md?p=d-2-ii) of this chapter), new target is treated as a continuation of old target for purposes other than subtitle A of the Internal Revenue Code. For example—
    - (i) New target is liable for old target's Federal income tax liabilities, including the tax liability for the deemed sale tax consequences and those tax liabilities of the other members of any consolidated group that included old target that are attributable to taxable years in which those corporations and old target joined in the same consolidated return (see [§ 1.1502-6(a)](/cfr/26/1.1502-6.md?p=a));
    - (ii) Wages earned by the employees of old target are considered wages earned by such employees from new target for purposes of sections [3101](/cfr/26/3101.md) and [3111](/cfr/26/3111.md) (Federal Insurance Contributions Act) and [section 3301](/cfr/26/3301.md) (Federal Unemployment Tax Act); and
    - (iii) Old target and new target must use the same employer identification number.
- (c) **Anti-abuse rule—**
  - (1) **In general.** The rules of this [paragraph (c)](#c) apply for purposes of applying the regulations under sections [336(e)](/cfr/26/336.md?p=e), [338](/cfr/26/338.md), and [1060](/cfr/26/1060.md). The Commissioner is authorized to treat any property (including cash) transferred by old target in connection with the transactions resulting in the application of the residual method (and not held by target at the close of the acquisition date) as, nonetheless, property of target at the close of the acquisition date if the property so transferred is, within 24 months after the deemed asset sale, owned by new target, or is owned, directly or indirectly, by a member of the affiliated group of which new target is a member and continues after the acquisition date to be held or used primarily in connection with one or more of the activities of new target. In addition, the Commissioner is authorized to treat any property (including cash) transferred to old target in connection with the transactions resulting in the application of the residual method (and held by target at the close of the acquisition date) as, nonetheless, not being property of target at the close of the acquisition date if the property so transferred is, within 24 months after the deemed asset sale, not owned by new target but owned, directly or indirectly, by a member of the affiliated group of which new target is a member, or owned by new target but held or used primarily in connection with an activity conducted, directly or indirectly, by another member of the affiliated group of which new target is a member in combination with other property retained by or acquired, directly or indirectly, from the transferor of the property (or a member of the same affiliated group) to old target. For purposes of this [paragraph (c)(1)](#c-1), an interest in an entity is considered held or used in connection with an activity if property of the entity is so held or used. The authority of the Commissioner under this [paragraph (c)(1)](#c-1) includes the making of any appropriate correlative adjustments (avoiding, to the extent possible, the duplication or omission of any item of income, gain, loss, deduction, or basis).
  - (2) **Examples.** The following examples illustrate this [paragraph (c)](#c):
- (d) **Next day rule for post-closing transactions.** If a target corporation for which an election under [section 338](/cfr/26/338.md) is made engages in a transaction outside the ordinary course of business on the acquisition date after the event resulting in the qualified stock purchase of the target or a higher tier corporation, the target and all persons related thereto (either before or after the qualified stock purchase) under [section 267(b)](/cfr/26/267.md?p=b) or [section 707](/cfr/26/707.md) 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 purchase by new target.
- (e) **Effective/applicability date.** Paragraphs [(a)(1)](#a-1) and [(c)(1)](#c-1) of this section are applicable to any qualified stock disposition for which the disposition date (as defined in [§ 1.336-1(b)(8)](/cfr/26/1.336-1.md?p=b-8)) is on or after May 15, 2013.

# §1.338-2. Nomenclature and definitions; mechanics of the section 338 election.

- (a) **Scope.** This section prescribes rules relating to elections under [section 338](/cfr/26/338.md).
- (b) **Nomenclature.** For purposes of the regulations under [section 338](/cfr/26/338.md) (except as otherwise provided):
  - (1) **T is a domestic target corporation that has only one class of stock outstanding.** Old T refers to T for periods ending on or before the close of T's acquisition date; new T refers to T for subsequent periods.
  - (2) **P is the purchasing corporation.**
  - (3) **The P group is an affiliated group of which P is a member.**
  - (4) P1, P2, etc., are domestic corporations that are members of the P group.
  - (5) T1, T2, etc., are domestic corporations that are target affiliates of T. These corporations (T1, T2, etc.) have only one class of stock outstanding and may also be targets.
  - (6) **S is a domestic corporation (unrelated to P and B) that owns T prior to the purchase of T by P.** (S is referred to in cases in which it is appropriate to consider the effects of having all of the outstanding stock of T owned by a domestic corporation.)
  - (7) A, a U.S. citizen or resident, is an individual (unrelated to P and B) who owns T prior to the purchase of T by P. (A is referred to in cases in which it is appropriate to consider the effects of having all of the outstanding stock of T owned by an individual who is a U.S. citizen or resident. Ownership of T by A and ownership of T by S are mutually exclusive circumstances.)
  - (8) B, a U.S. citizen or resident, is an individual (unrelated to T, S, and A) who owns the stock of P.
  - (9) F, used as a prefix with the other terms in this [paragraph (b)](#b), connotes foreign, rather than domestic, status. For example, FT is a foreign corporation (as defined in [section 7701(a)(5)](/cfr/26/7701.md?p=a-5)) and FA is an individual other than a U.S. citizen or resident.
  - (10) CFC, used as a prefix with the other terms in this [paragraph (b)](#b) referring to a corporation, connotes a controlled foreign corporation (as defined in [section 957](/cfr/26/957.md), taking into account [section 953(c)](/cfr/26/953.md?p=c)). A corporation identified with the prefix F may be a controlled foreign corporation. (The prefix CFC is used when the corporation's status as a controlled foreign corporation is significant.)
- (c) **Definitions.** For purposes of the regulations under [section 338](/cfr/26/338.md) (except as otherwise provided):
  - (1) **Acquisition date.** The term acquisition date has the same meaning as in [section 338(h)(2)](/cfr/26/338.md?p=h-2).
  - (2) **Acquisition date assets. Acquisition date assets—** are the assets of the target held at the beginning of the day after the acquisition date (but see [§ 1.338-1(d)](/cfr/26/1.338-1.md?p=d) (regarding certain transactions on the acquisition date)).
  - (3) **Affiliated group.** The term affiliated group has the same meaning as in [section 338(h)(5)](/cfr/26/338.md?p=h-5). Corporations are affiliated on any day they are members of the same affiliated group.
  - (4) **Common parent.** The term common parent has the same meaning as in [section 1504](/cfr/26/1504.md).
  - (5) **Consistency period.** The consistency period is the period described in [section 338(h)(4)(A)](/cfr/26/338.md?p=h-4-A) unless extended pursuant to [§ 1.338-8(j)(1)](/cfr/26/1.338-8.md?p=j-1).
  - (6) **Deemed asset sale.** The deemed asset sale is the transaction described in [§ 1.338-1(a)(1)](/cfr/26/1.338-1.md?p=a-1) that is deemed to occur for purposes of subtitle A of the Internal Revenue Code if a [section 338](/cfr/26/338.md) election is made.
  - (7) **Deemed sale tax consequences. Deemed sale tax consequences—** refers to, in the aggregate, the Federal income tax consequences (generally, the income, gain, deduction, and loss) of the deemed asset sale. Deemed sale tax consequences also refers to the Federal income tax consequences of the transfer of a particular asset in the deemed asset sale.
  - (8) **Deemed sale return.** The deemed sale return is the return on which target's deemed sale tax consequences are reported that does not include any other items of target. Target files a deemed sale return when a [section 338](/cfr/26/338.md) election (but not a [section 338(h)(10)](/cfr/26/338.md?p=h-10) election) is filed for target and target is a member of a selling group (defined in [paragraph (c)(16)](#c-16) of this section) that files a consolidated return for the period that includes the acquisition date. See [§ 1.338-10](/cfr/26/1.338-10.md). If target is an S corporation for the period that ends on the day before the acquisition date and a [section 338](/cfr/26/338.md) election (but not a [section 338(h)(10)](/cfr/26/338.md?p=h-10) election) is filed for target, see [§ 1.338-10(a)(3)](/cfr/26/1.338-10.md?p=a-3).
  - (9) **Domestic corporation.** A domestic corporation is a corporation—
    - (i) That is domestic within the meaning of [section 7701(a)(4)](/cfr/26/7701.md?p=a-4) or that is treated as domestic for purposes of subtitle A of the Internal Revenue Code (e.g., to which an election under section [953(d)](/cfr/26/953.md?p=d) or [1504(d)](/cfr/26/1504.md?p=d) applies); and
    - (ii) That is not a DISC, a corporation described in [section 1248(e)](/cfr/26/1248.md?p=e), or a corporation to which an election under [section 936](/cfr/26/936.md) applies.
  - (10) **Old target's final return. Old target's final return—** is the income tax return of old target for the taxable year ending at the close of the acquisition date that includes the deemed sale tax consequences. However, if a deemed sale return is filed for old target, the deemed sale return is considered old target's final return.
  - (11) **Purchasing corporation.** The term purchasing corporation has the same meaning as in [section 338(d)(1)](/cfr/26/338.md?p=d-1). The purchasing corporation may also be referred to as purchaser. Unless otherwise provided, any reference to the purchasing corporation is a reference to all members of the affiliated group of which the purchasing corporation is a member. See sections [338(h)(5)](/cfr/26/338.md?p=h-5) and [(8)](/cfr/26/338.md?p=h-8). Also, unless otherwise provided, any reference to the purchasing corporation is, with respect to a deemed purchase of stock under [section 338(a)(2)](/cfr/26/338.md?p=a-2), a reference to new target with respect to its own deemed purchase of stock in another target.
  - (12) **Qualified stock purchase.** The term qualified stock purchase has the same meaning as in [section 338(d)(3)](/cfr/26/338.md?p=d-3).
  - (13) **Related persons.** Two persons are related if stock in a corporation owned by one of the persons would be attributed under [section 318(a)](/cfr/26/318.md?p=a) (other than [section 318(a)(4)](/cfr/26/318.md?p=a-4)) to the other.
  - (14) **Section 338 election.** A [section 338](/cfr/26/338.md) election is an election to apply [section 338(a)](/cfr/26/338.md?p=a) to target. A [section 338](/cfr/26/338.md) election is made by filing a statement of [section 338](/cfr/26/338.md) election pursuant to [paragraph (d)](#d) of this section. The form on which this statement is filed is referred to in the regulations under [section 338](/cfr/26/338.md) as the Form 8023, “Elections Under [Section 338](/cfr/26/338.md) For Corporations Making Qualified Stock Purchases.”
  - (15) **Section 338(h)(10) election.** A [section 338(h)(10)](/cfr/26/338.md?p=h-10) election is an election to apply [section 338(h)(10)](/cfr/26/338.md?p=h-10) to target. A [section 338(h)(10)](/cfr/26/338.md?p=h-10) election is made by making a joint election for target under [§ 1.338(h)(10)-1](/cfr/26/1.338..1.md) on Form 8023.
  - (16) **Selling group.** The selling group is the affiliated group (as defined in [section 1504](/cfr/26/1504.md)) eligible to file a consolidated return that includes target for the taxable period in which the acquisition date occurs. However, a selling group is not an affiliated group of which target is the common parent on the acquisition date.
  - (17) **Target; old target; new target. Target—** is the target corporation as defined in [section 338(d)(2)](/cfr/26/338.md?p=d-2). Old target refers to target for periods ending on or before the close of target's acquisition date. New target refers to target for subsequent periods.
  - (18) **Target affiliate.** The term target affiliate has the same meaning as in [section 338(h)(6)](/cfr/26/338.md?p=h-6) (applied without [section 338(h)(6)(B)(i)](/cfr/26/338.md?p=h-6-B-i)). Thus, a corporation described in [section 338(h)(6)(B)(i)](/cfr/26/338.md?p=h-6-B-i) is considered a target affiliate for all purposes of [section 338](/cfr/26/338.md). If a target affiliate is acquired in a qualified stock purchase, it is also a target.
  - (19) **12-month acquisition period.** The 12-month acquisition period is the period described in [section 338(h)(1)](/cfr/26/338.md?p=h-1), unless extended pursuant to [§ 1.338-8(j)(2)](/cfr/26/1.338-8.md?p=j-2).
- (d) **Time and manner of making election.** The purchasing corporation makes a [section 338](/cfr/26/338.md) election for target by filing a statement of [section 338](/cfr/26/338.md) election on Form 8023 in accordance with the instructions to the form. The [section 338](/cfr/26/338.md) election must be made not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs. A [section 338](/cfr/26/338.md) election is irrevocable. See [§ 1.338(h)(10)-1(c)(2)](/cfr/26/1.338..1.md) for [section 338(h)(10)](/cfr/26/338.md?p=h-10) elections.
- (e) **Special rules for foreign corporations or DISCs—**
  - (1) **Elections by certain foreign purchasing corporations—**
    - (i) **General rule.** A qualifying foreign purchasing corporation is not required to file a statement of [section 338](/cfr/26/338.md) election for a qualifying foreign target before the earlier of 3 years after the acquisition date and the 180th day after the close of the purchasing corporation's taxable year within which a triggering event occurs.
    - (ii) **Qualifying foreign purchasing corporation.** A purchasing corporation is a qualifying foreign purchasing corporation only if, during the acquisition period of a qualifying foreign target, all the corporations in the purchasing corporation's affiliated group are foreign corporations that are not subject to United States tax.
    - (iii) **Qualifying foreign target.** A target is a qualifying foreign target only if target and its target affiliates are foreign corporations that, during target's acquisition period, are not subject to United States tax (and will not become subject to United States tax during such period because of a [section 338](/cfr/26/338.md) election). A target affiliate is taken into account for purposes of the preceding sentence only if, during target's 12-month acquisition period, it is or becomes a member of the affiliated group that includes the purchasing corporation.
    - (iv) **Triggering event.** A triggering event occurs in the taxable year of the qualifying foreign purchasing corporation in which either that corporation or any corporation in its affiliated group becomes subject to United States tax.
    - (v) **Subject to United States tax.** For purposes of this [paragraph (e)(1)](#e-1), a foreign corporation is considered subject to United States tax—
      - (A) For the taxable year for which that corporation is required under [§ 1.6012-2(g)](/cfr/26/1.6012-2.md?p=g) (other than [§ 1.6012-2(g)(2)(i)(B)(2)](/cfr/26/1.6012-2.md?p=g-2-i-B-2)) to file a United States income tax return; or
      - (B) For the period during which that corporation is a controlled foreign corporation, a passive foreign investment company for which an election under [section 1295](/cfr/26/1295.md) is in effect, a foreign investment company, or a foreign corporation the stock ownership of which is described in [section 552(a)(2)](/cfr/26/552.md?p=a-2).
  - (2) **Acquisition period.** For purposes of this [paragraph (e)](#e), the term acquisition period means the period beginning on the first day of the 12-month acquisition period and ending on the acquisition date.
  - (3) **Statement of section 338 election may be filed by United States shareholders in certain cases.** The United States shareholders (as defined in [section 951(b)](/cfr/26/951.md?p=b)) of a foreign purchasing corporation that is a controlled foreign corporation (as defined in [section 957](/cfr/26/957.md) (taking into account [section 953(c)](/cfr/26/953.md?p=c))) may file a statement of [section 338](/cfr/26/338.md) election on behalf of the purchasing corporation if the purchasing corporation is not required under [§ 1.6012-2(g)](/cfr/26/1.6012-2.md?p=g) (other than [§ 1.6012-2(g)(2)(i)(B)(2)](/cfr/26/1.6012-2.md?p=g-2-i-B-2)) to file a United States income tax return for its taxable year that includes the acquisition date. Form 8023 must be filed as described in the form and its instructions and also must be attached to the Form 5471, “Information Returns of U.S. Persons With Respect to Certain Foreign Corporations,” filed with respect to the purchasing corporation by each United States shareholder for the purchasing corporation's taxable year that includes the acquisition date (or, if [paragraph (e)(1)(i)](#e-1-i) of this section applies to the election, for the purchasing corporation's taxable year within which it becomes a controlled foreign corporation). The provisions of [§ 1.964-1(c)](/cfr/26/1.964-1.md?p=c) (including [§ 1.964-1(c)(7)](/cfr/26/1.964-1.md?p=c-7)) do not apply to an election made by the United States shareholders.
  - (4) **Notice requirement for U.S. persons holding stock in foreign target—**
    - (i) **General rule.** If a target subject to a [section 338](/cfr/26/338.md) election was a controlled foreign corporation, a passive foreign investment company, or a foreign personal holding company at any time during the portion of its taxable year that ends on its acquisition date, the purchasing corporation must deliver written notice of the election (and a copy of Form 8023, its attachments and instructions) to—
      - (A) Each U.S. person (other than a member of the affiliated group of which the purchasing corporation is a member (the purchasing group member)) that, on the acquisition date of the foreign target, holds stock in the foreign target; and
      - (B) Each U.S. person (other than a purchasing group member) that sells stock in the foreign target to a purchasing group member during the foreign target's 12-month acquisition period.
    - (ii) **Limitation.** The notice requirement of this [paragraph (e)(4)](#e-4) applies only where the [section 338](/cfr/26/338.md) election for the foreign target affects income, gain, loss, deduction, or credit of the U.S. person described in [paragraph (e)(4)(i)](#e-4-i) of this section under section [551](/cfr/26/551.md), [951](/cfr/26/951.md), [1248](/cfr/26/1248.md), or [1293](/cfr/26/1293.md).
    - (iii) **Form of notice.** The notice to U.S. persons must be identified prominently as a notice of [section 338](/cfr/26/338.md) election and must—
      - (A) Contain the name, address, and employer identification number (if any) of, and the country (and, if relevant, the lesser political subdivision) under the laws of which are organized the purchasing corporation and the relevant target (i.e., the target the stock of which the particular U.S. person held or sold under the circumstances described in [paragraph (e)(4)(i)](#e-4-i) of this section);
      - (B) Identify those corporations as the purchasing corporation and the foreign target, respectively; and
      - (C) **Contain the following declaration (or a substantially similar declaration)—**
    - (iv) **Timing of notice.** The notice required by this [paragraph (e)(4)](#e-4) must be delivered to the U.S. person on or before the later of the 120th day after the acquisition date of the particular target or the day on which Form 8023 is filed. The notice is considered delivered on the date it is mailed to the proper address (or an address similar enough to complete delivery), unless the date it is mailed cannot be reasonably determined. The date of mailing will be determined under the rules of [section 7502](/cfr/26/7502.md). For example, the date of mailing is the date of U.S. postmark or the applicable date recorded or marked by a designated delivery service.
    - (v) **Consequence of failure to comply.** A statement of [section 338](/cfr/26/338.md) election is not valid if timely notice is not given to one or more U.S. persons described in this [paragraph (e)(4)](#e-4). If the form of notice fails to comply with all requirements of this [paragraph (e)(4)](#e-4), the [section 338](/cfr/26/338.md) election is valid, but the waiver rule of [§ 1.338-10(b)(1)](/cfr/26/1.338-10.md?p=b-1) does not apply.
    - (vi) **Good faith effort to comply.** The purchasing corporation will be considered to have complied with this [paragraph (e)(4)](#e-4), even though it failed to provide notice or provide timely notice to each person described in this [paragraph (e)(4)](#e-4), if the Commissioner determines that the purchasing corporation made a good faith effort to identify and provide timely notice to those U.S. persons.

# §1.338-3. Qualification for the section 338 election.

- (a) **Scope.** This section provides rules on whether certain acquisitions of stock are qualified stock purchases and on other miscellaneous issues under [section 338](/cfr/26/338.md).
- (b) **Rules relating to qualified stock purchases—**
  - (1) **Purchasing corporation requirement.** An individual cannot make a qualified stock purchase of target. [Section 338(d)(3)](/cfr/26/338.md?p=d-3) requires, as a condition of a qualified stock purchase, that a corporation purchase the stock of target. If an individual forms a corporation (new P) to acquire target stock, new P can make a qualified stock purchase of target if new P is considered for tax purposes to purchase the target stock. Facts that may indicate that new P does not purchase the target stock include new P's merging downstream into target, liquidating, or otherwise disposing of the target stock following the purported qualified stock purchase.
  - (2) **Purchase.** The term purchase has the same meaning as in [section 338(h)(3)](/cfr/26/338.md?p=h-3). Stock in a target (or target affiliate) may be considered purchased if, under general principles of tax law, the purchasing corporation is considered to own stock of the target (or target affiliate) meeting the requirements of [section 1504(a)(2)](/cfr/26/1504.md?p=a-2), notwithstanding that no amount may be paid for (or allocated to) the stock.
  - (3) **Acquisitions of stock from related corporations—**
    - (i) **In general.** Stock acquired by a purchasing corporation from a related corporation (R) is generally not considered acquired by purchase. See [section 338(h)(3)(A)(iii)](/cfr/26/338.md?p=h-3-A-iii).
    - (ii) **Time for testing relationship.** For purposes of [section 338(h)(3)(A)(iii)](/cfr/26/338.md?p=h-3-A-iii), a purchasing corporation is treated as related to another person if the relationship specified in [section 338(h)(3)(A)(iii)](/cfr/26/338.md?p=h-3-A-iii) exists—
      - (A) In the case of a single transaction, immediately after the purchase of target stock;
      - (B) In the case of a series of acquisitions otherwise constituting a qualified stock purchase within the meaning of [section 338(d)(3)](/cfr/26/338.md?p=d-3), immediately after the last acquisition in such series; and
      - (C) In the case of a series of transactions effected pursuant to an integrated plan to dispose of target stock, immediately after the last transaction in such series.
    - (iii) **Cases where section 338(h)(3)(C) applies—acquisitions treated as purchases.** If [section 338(h)(3)(C)](/cfr/26/338.md?p=h-3-C) applies and the purchasing corporation is treated as acquiring stock by purchase from R, solely for purposes of determining when the stock is considered acquired, target stock acquired from R is considered to have been acquired by the purchasing corporation on the day on which the purchasing corporation is first considered to own that stock under [section 318(a)](/cfr/26/318.md?p=a) (other than [section 318(a)(4)](/cfr/26/318.md?p=a-4)).
    - (iv) **Examples.** The following examples illustrate this [paragraph (b)(3)](#b-3):
  - (4) **Acquisition date for tiered targets—**
    - (i) **Stock sold in deemed asset sale.** If an election under [section 338](/cfr/26/338.md) is made for target, old target is deemed to sell target's assets and new target is deemed to acquire those assets. Under [section 338(h)(3)(B)](/cfr/26/338.md?p=h-3-B), new target's deemed purchase of stock of another corporation is a purchase for purposes of [section 338(d)(3)](/cfr/26/338.md?p=d-3) on the acquisition date of target. If new target's deemed purchase causes a qualified stock purchase of the other corporation and if a [section 338](/cfr/26/338.md) election is made for the other corporation, the acquisition date for the other corporation is the same as the acquisition date of target. However, the deemed sale and purchase of the other corporation's assets is considered to take place after the deemed sale and purchase of target's assets.
    - (ii) **Example.** The following example illustrates this [paragraph (b)(4)](#b-4):
  - (5) **Effect of redemptions—**
    - (i) **General rule.** Except as provided in this [paragraph (b)(5)](#b-5), a qualified stock purchase is made on the first day on which the percentage ownership requirements of [section 338(d)(3)](/cfr/26/338.md?p=d-3) are satisfied by reference to target stock that is both—
      - (A) Held on that day by the purchasing corporation; and
      - (B) **Purchased by the purchasing corporation during the 12-month period ending on that day.**
    - (ii) **Redemptions from persons unrelated to the purchasing corporation.** Target stock redemptions from persons unrelated to the purchasing corporation that occur during the 12-month acquisition period are taken into account as reductions in target's outstanding stock for purposes of determining whether target stock purchased by the purchasing corporation in the 12-month acquisition period satisfies the percentage ownership requirements of [section 338(d)(3)](/cfr/26/338.md?p=d-3).
    - (iii) **Redemptions from the purchasing corporation or related persons during 12-month acquisition period—**
      - (A) **General rule.** For purposes of the percentage ownership requirements of [section 338(d)(3)](/cfr/26/338.md?p=d-3), a redemption of target stock during the 12-month acquisition period from the purchasing corporation or from any person related to the purchasing corporation is not taken into account as a reduction in target's outstanding stock.
      - (B) **Exception for certain redemptions from related corporations.** A redemption of target stock during the 12-month acquisition period from a corporation related to the purchasing corporation is taken into account as a reduction in target's outstanding stock to the extent that the redeemed stock would have been considered purchased by the purchasing corporation (because of [section 338(h)(3)(C)](/cfr/26/338.md?p=h-3-C)) during the 12-month acquisition period if the redeemed stock had been acquired by the purchasing corporation from the related corporation on the day of the redemption. See [paragraph (b)(3)](#b-3) of this section.
    - (iv) **Examples.** The following examples illustrate this [paragraph (b)(5)](#b-5):
- (c) **Effect of post-acquisition events on eligibility for section 338 election—**
  - (1) **Post-acquisition elimination of target.**
    - (i) The purchasing corporation may make an election under [section 338](/cfr/26/338.md) for target even though target is liquidated on or after the acquisition date. If target liquidates on the acquisition date, the liquidation is considered to occur on the following day and immediately after new target's deemed purchase of assets. The purchasing corporation may also make an election under [section 338](/cfr/26/338.md) for target even though target is merged into another corporation, or otherwise disposed of by the purchasing corporation provided that, under the facts and circumstances, the purchasing corporation is considered for tax purposes as the purchaser of the target stock. See [§ 1.338(h)(10)-1(c)(2)](/cfr/26/1.338..1.md) for special rules concerning [section 338(h)(10)](/cfr/26/338.md?p=h-10) elections in certain multi-step transactions.
    - (ii) **The following examples illustrate this paragraph (c)(1)—**
  - (2) **Post-acquisition elimination of the purchasing corporation.** An election under [section 338](/cfr/26/338.md) may be made for target after the acquisition of assets of the purchasing corporation by another corporation in a transaction described in [section 381(a)](/cfr/26/381.md?p=a), provided that the purchasing corporation is considered for tax purposes as the purchaser of the target stock. The acquiring corporation in the [section 381(a)](/cfr/26/381.md?p=a) transaction may make an election under [section 338](/cfr/26/338.md) for target.
- (d) **Consequences of post-acquisition elimination of target where section 338 election not made—**
  - (1) **Scope.** The rules of this [paragraph (d)](#d) apply to the transfer of target assets to the purchasing corporation (or another member of the same affiliated group as the purchasing corporation) (the transferee) following a qualified stock purchase of target stock, if the purchasing corporation does not make a [section 338](/cfr/26/338.md) election for target. Notwithstanding the rules of this [paragraph (d)](#d), [section 354(a)](/cfr/26/354.md?p=a) (and so much of [section 356](/cfr/26/356.md) as relates to [section 354](/cfr/26/354.md)) cannot apply to any person other than the purchasing corporation or another member of the same affiliated group as the purchasing corporation unless the transfer of target assets is pursuant to a reorganization as determined without regard to this [paragraph (d)](#d).
  - (2) **Continuity of interest.** By virtue of [section 338](/cfr/26/338.md), in determining whether the continuity of interest requirement of [§ 1.368-1(b)](/cfr/26/1.368-1.md?p=b) is satisfied on the transfer of assets from target to the transferee, the purchasing corporation's target stock acquired in the qualified stock purchase represents an interest on the part of a person who was an owner of the target's business enterprise prior to the transfer that can be continued in a reorganization.
  - (3) **Control requirement.** By virtue of [section 338](/cfr/26/338.md), the acquisition of target stock in the qualified stock purchase will not prevent the purchasing corporation from qualifying as a shareholder of the target transferor for the purpose of determining whether, immediately after the transfer of target assets, a shareholder of the transferor is in control of the corporation to which the assets are transferred within the meaning of [section 368(a)(1)(D)](/cfr/26/368.md?p=a-1-D).
  - (4) **Solely for voting stock requirement.** By virtue of [section 338](/cfr/26/338.md), the acquisition of target stock in the qualified stock purchase for consideration other than voting stock will not prevent the subsequent transfer of target assets from satisfying the solely for voting stock requirement for purposes of determining if the transfer of target assets qualifies as a reorganization under [section 368(a)(1)(C)](/cfr/26/368.md?p=a-1-C).
  - (5) **Example.** The following example illustrates this [paragraph (d)](#d):

# §1.338-4. Aggregate deemed sale price; various aspects of taxation of the deemed asset sale.

- (a) **Scope.** This section provides rules under [section 338(a)(1)](/cfr/26/338.md?p=a-1) to determine the aggregate deemed sale price (ADSP) for target. ADSP is the amount for which old target is deemed to have sold all of its assets in the deemed asset sale. ADSP is allocated among target's assets in accordance with [§ 1.338-6](/cfr/26/1.338-6.md) 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 ADSP, the redetermined ADSP is allocated among target's assets in accordance with [§ 1.338-7](/cfr/26/1.338-7.md). This § 1.338-4 also provides rules regarding the recognition of gain or loss on the deemed sale of target affiliate stock. Notwithstanding [section 338(h)(6)(B)(ii)](/cfr/26/338.md?p=h-6-B-ii), stock held by a target affiliate in a foreign corporation or in a corporation that is a DISC or that is described in [section 1248(e)](/cfr/26/1248.md?p=e) is not excluded from the operation of [section 338](/cfr/26/338.md).
- (b) **Determination of ADSP—**
  - (1) **General rule.** ADSP is the sum of—
    - (i) The grossed-up amount realized on the sale to the purchasing corporation of the purchasing corporation's recently purchased target stock (as defined in [section 338(b)(6)(A)](/cfr/26/338.md?p=b-6-A)); and
    - (ii) **The liabilities of old target.**
  - (2) **Time and amount of ADSP—**
    - (i) **Original determination.** ADSP is initially determined at the beginning of the day after the acquisition date of target. General principles of tax law apply in determining the timing and amount of the elements of ADSP.
    - (ii) **Redetermination of ADSP.** ADSP 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 ADSP. For example, ADSP is redetermined because of an increase or decrease in the amount realized for recently purchased stock or because liabilities not originally taken into account in determining ADSP are subsequently taken into account. Increases or decreases with respect to the elements of ADSP result in the reallocation of ADSP among target's assets under [§ 1.338-7](/cfr/26/1.338-7.md).
    - (iii) **Example.** The following example illustrates this [paragraph (b)(2)](#b-2):
- (c) **Grossed-up amount realized on the sale to the purchasing corporation of the purchasing corporation's recently purchased target stock—**
  - (1) **Determination of amount.** The grossed-up amount realized on the sale to the purchasing corporation of the purchasing corporation's recently purchased target stock is an amount equal to—
    - (i) The amount realized on the sale to the purchasing corporation of the purchasing corporation's recently purchased target stock determined as if the selling shareholder(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)](#c-1-iii) of this section;
    - (ii) Divided by the percentage of target stock (by value, determined on the acquisition date) attributable to that recently purchased target stock;
    - (iii) Less the selling costs incurred by the selling shareholders in connection with the sale to the purchasing corporation of the purchasing corporation's recently purchased target stock that reduce their amount realized on the sale of the stock (e.g., brokerage commissions and any similar costs to sell the stock).
  - (2) **Example.** The following example illustrates this [paragraph (c)](#c):
- (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 acquisition date. (But see [§ 1.338-1(d)](/cfr/26/1.338-1.md?p=d) (regarding certain transactions on the acquisition date).) In order to be taken into account in ADSP, a liability must be a liability of target that is properly taken into account in 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)](/cfr/26/1.1001-2.md?p=a). Such liabilities may include liabilities for the tax consequences resulting from the deemed sale.
  - (2) **Time and amount of liabilities.** The time for taking into account liabilities of old target in determining ADSP 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 amount realized as of the beginning of the day after the acquisition date, the liability is not initially taken into account in determining ADSP (although it may be taken into account at some later date).
- (e) **Deemed sale tax consequences.** Gain or loss on each asset in the deemed sale is computed by reference to the ADSP allocated to that asset. ADSP is allocated under the rules of [§ 1.338-6](/cfr/26/1.338-6.md). Though deemed sale tax consequences may increase or decrease ADSP by creating or reducing a tax liability, the amount of the tax liability itself may be a function of the size of the deemed sale tax consequences. Thus, these determinations may require trial and error computations.
- (f) **Other rules apply in determining ADSP.** ADSP 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 sale for purposes of determining ADSP.
- (g) **Examples.** The following examples illustrate this section. For purposes of the examples in this [paragraph (g)](#g), unless otherwise stated, T is a calendar year taxpayer that files separate returns and that has no loss, tax credit, or other carryovers to Year 1. Depreciation for Year 1 is not taken into account. T has no liabilities other than the Federal income tax liability resulting from the deemed asset sale, and the T shareholders have no selling costs. Assume that T's tax rate for any ordinary income or net capital gain resulting from the deemed sale of assets is 34 percent and that any capital loss is offset by capital gain. On July 1 of Year 1, P purchases all of the stock of T and makes a [section 338](/cfr/26/338.md) election for T. The examples are as follows:
- (h) **Deemed sale of target affiliate stock—**
  - (1) **Scope.** This [paragraph (h)](#h) prescribes rules relating to the treatment of gain or loss realized on the deemed sale of stock of a target affiliate when a [section 338](/cfr/26/338.md) election (but not a [section 338(h)(10)](/cfr/26/338.md?p=h-10) election) is made for the target affiliate. For purposes of this [paragraph (h)](#h), the definition of domestic corporation in [§ 1.338-2(c)(9)](/cfr/26/1.338-2.md?p=c-9) is applied without the exclusion therein for DISCs, corporations described in [section 1248(e)](/cfr/26/1248.md?p=e), and corporations to which an election under [section 936](/cfr/26/936.md) applies.
  - (2) **In general.** Except as otherwise provided in this [paragraph (h)](#h), if a [section 338](/cfr/26/338.md) election is made for target, target recognizes no gain or loss on the deemed sale of stock of a target affiliate having the same acquisition date and for which a [section 338](/cfr/26/338.md) election is made if—
    - (i) Target directly owns stock in the target affiliate satisfying the requirements of [section 1504(a)(2)](/cfr/26/1504.md?p=a-2);
    - (ii) Target and the target affiliate are members of a consolidated group filing a final consolidated return described in [§ 1.338-10(a)(1)](/cfr/26/1.338-10.md?p=a-1); or
    - (iii) Target and the target affiliate file a combined return under [§ 1.338-10(a)(4)](/cfr/26/1.338-10.md?p=a-4).
  - (3) **Deemed sale of foreign target affiliate by a domestic target.** A domestic target recognizes gain or loss on the deemed sale of stock of a foreign target affiliate. For the proper treatment of such gain or loss, see, e.g., sections [1246](/cfr/26/1246.md), [1248](/cfr/26/1248.md), [1291](/cfr/26/1291.md) et seq., and 338(h)(16) and [§ 1.338-9](/cfr/26/1.338-9.md).
  - (4) **Deemed sale producing effectively connected income.** A foreign target recognizes gain or loss on the deemed sale of stock of a foreign target affiliate to the extent that such gain or loss is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States.
  - (5) **Deemed sale of insurance company target affiliate electing under section 953(d).** A domestic target recognizes gain (but not loss) on the deemed sale of stock of a target affiliate that has in effect an election under [section 953(d)](/cfr/26/953.md?p=d) in an amount equal to the lesser of the gain realized or the earnings and profits described in [section 953(d)(4)(B)](/cfr/26/953.md?p=d-4-B).
  - (6) **Deemed sale of DISC target affiliate.** A foreign or domestic target recognizes gain (but not loss) on the deemed sale of stock of a target affiliate that is a DISC or a former DISC (as defined in [section 992(a)](/cfr/26/992.md?p=a)) in an amount equal to the lesser of the gain realized or the amount of accumulated DISC income determined with respect to such stock under [section 995(c)](/cfr/26/995.md?p=c). Such gain is included in gross income as a dividend as provided in sections [995(c)(2)](/cfr/26/995.md?p=c-2) and [996(g)](/cfr/26/996.md?p=g).
  - (7) **Anti-stuffing rule.** If an asset the adjusted basis of which exceeds its fair market value is contributed or transferred to a target affiliate as transferred basis property (within the meaning of [section 7701(a)(43)](/cfr/26/7701.md?p=a-43)) and a purpose of such transaction is to reduce the gain (or increase the loss) recognized on the deemed sale of such target affiliate's stock, the gain or loss recognized by target on the deemed sale of stock of the target affiliate is determined as if such asset had not been contributed or transferred.
  - (8) **Examples.** The following examples illustrate this [paragraph (h)](#h):

# §1.338-5. Adjusted grossed-up basis.

- (a) **Scope.** This section provides rules under [section 338(b)](/cfr/26/338.md?p=b) to determine the adjusted grossed-up basis (AGUB) for target. AGUB is the amount for which new target is deemed to have purchased all of its assets in the deemed purchase under [section 338(a)(2)](/cfr/26/338.md?p=a-2). AGUB is allocated among target's assets in accordance with [§ 1.338-6](/cfr/26/1.338-6.md) 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](/cfr/26/1.338-7.md).
- (b) **Determination of AGUB—**
  - (1) **General rule.** AGUB is the sum of—
    - (i) The grossed-up basis in the purchasing corporation's recently purchased target stock;
    - (ii) The purchasing corporation's basis in nonrecently purchased target stock; and
    - (iii) **The liabilities of new target.**
  - (2) **Time and amount of AGUB—**
    - (i) **Original determination.** AGUB is initially determined at the beginning of the day after the acquisition date of target. General principles of tax law apply in determining the timing and amount of the elements of AGUB.
    - (ii) **Redetermination of AGUB.** AGUB is redetermined at such time and in such amount as an increase or decrease would be required, under general principles of tax law, with respect to an element of AGUB. For example, AGUB is redetermined because of an increase or decrease in the amount paid or incurred for recently purchased stock or nonrecently purchased stock or because liabilities not originally taken into account in determining AGUB are subsequently taken into account. An increase or decrease to one element of AGUB also may cause an increase or decrease to another element of AGUB. For example, if there is an increase in the amount paid or incurred for recently purchased stock after the acquisition date, any increase in the basis of nonrecently purchased stock because a gain recognition election was made is also taken into account when AGUB is redetermined. Increases or decreases with respect to the elements of AGUB result in the reallocation of AGUB among target's assets under [§ 1.338-7](/cfr/26/1.338-7.md).
    - (iii) **Examples.** The following examples illustrate this [paragraph (b)(2)](#b-2):
- (c) **Grossed-up basis of recently purchased stock.** The purchasing corporation's grossed-up basis of recently purchased target stock (as defined in [section 338(b)(6)(A)](/cfr/26/338.md?p=b-6-A)) is an amount equal to—
  - (1) The purchasing corporation's 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)](#c-3) of this section;
  - (2) Multiplied by a fraction, the numerator of which is 100 minus the number that 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 the number equal to the percentage of target stock (by value, determined on the acquisition date) attributable to the purchasing corporation's recently purchased target stock;
  - (3) Plus the acquisition costs the purchasing corporation incurred in connection with its purchase of the recently purchased stock that are capitalized in the basis of such stock (e.g., brokerage commissions and any similar costs incurred by the purchasing corporation to acquire the stock).
- (d) **Basis of nonrecently purchased stock; gain recognition election—**
  - (1) **No gain recognition election.** In the absence of a gain recognition election under [section 338(b)(3)](/cfr/26/338.md?p=b-3) and this section, the purchasing corporation retains its basis in the nonrecently purchased stock.
  - (2) **Procedure for making gain recognition election.** A gain recognition election may be made for nonrecently purchased stock of target (or a target affiliate) only if a [section 338](/cfr/26/338.md) election is made for target (or the target affiliate). The gain recognition election is made by attaching a gain recognition statement to a timely filed Form 8023 for target. The gain recognition statement must contain the information specified in the form and its instructions. The gain recognition election is irrevocable. If a [section 338(h)(10)](/cfr/26/338.md?p=h-10) election is made for target, see [§ 1.338(h)(10)-1(d)(1)](/cfr/26/1.338..1.md) (providing that the purchasing corporation is automatically deemed to have made a gain recognition election for its nonrecently purchased T stock).
  - (3) **Effect of gain recognition election—**
    - (i) **In general.** If the purchasing corporation makes a gain recognition election, then for all purposes of the Internal Revenue Code—
      - (A) The purchasing corporation is treated as if it sold on the acquisition date the nonrecently purchased target stock for the basis amount determined under [paragraph (d)(3)(ii)](#d-3-ii) of this section; and
      - (B) The purchasing corporation's basis on the acquisition date in nonrecently purchased target stock immediately following the deemed sale in [paragraph (d)(3)(i)(A)](#d-3-i-A) of this section is the basis amount.
    - (ii) **Basis amount.** The basis amount is equal to the amount in paragraphs [(c)(1)](#c-1) and [(2)](#c-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)](#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. Thus, 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.
    - (iii) **Losses not recognized.** Only gains (unreduced by losses) on the nonrecently purchased target stock are recognized.
    - (iv) **Stock subject to election.** The gain recognition election applies to—
      - (A) All nonrecently purchased target stock; and
      - (B) Any nonrecently purchased stock in a target affiliate having the same acquisition date as target if such target affiliate stock is held by the purchasing corporation on such date.
- (e) **Liabilities of new target—**
  - (1) **In general.** The liabilities of new target are the liabilities of target as of the beginning of the day after the acquisition date (but see [§ 1.338-1(d)](/cfr/26/1.338-1.md?p=d) (regarding certain transactions on the acquisition date)). In order to be taken into account in AGUB, a liability must be a liability of target that is properly taken into account in basis under general principles of tax law that would apply if new target had acquired its assets from an unrelated person for consideration that included discharge of the liabilities of that unrelated person. Such liabilities may include liabilities for the tax consequences resulting from the deemed sale.
  - (2) **Time and amount of liabilities.** The time for taking into account liabilities of old target in determining AGUB and the amount of the liabilities taken into account is determined as if new target had acquired its assets from an unrelated person for consideration that included the discharge of its liabilities.
  - (3) **Interaction with deemed sale tax consequences.** In general, see [§ 1.338-4(e)](/cfr/26/1.338-4.md?p=e). Although ADSP and AGUB are not necessarily linked, if an increase in the amount realized for recently purchased stock of target is taken into account after the acquisition date, and if the tax on the deemed sale tax consequences is a liability of target, any increase in that liability is also taken into account in redetermining AGUB.
- (f) **Adjustments by the Internal Revenue Service.** In connection with the examination of a return, the Commissioner may increase (or decrease) AGUB under the authority of [section 338(b)(2)](/cfr/26/338.md?p=b-2) and allocate such amounts to target's assets under the authority of [section 338(b)(5)](/cfr/26/338.md?p=b-5) so that AGUB and the basis of target's assets properly reflect the cost to the purchasing corporation of its interest in target's assets. Such items may include distributions from target to the purchasing corporation, capital contributions from the purchasing corporation to target during the 12-month acquisition period, or acquisitions of target stock by the purchasing corporation after the acquisition date from minority shareholders. See also [§ 1.338-1(d)](/cfr/26/1.338-1.md?p=d) (regarding certain transactions on the acquisition date).
- (g) **Examples.** The following examples illustrate this section. For purposes of the examples in this [paragraph (g)](#g), T has no liabilities other than the tax liability for the deemed sale tax consequences, T shareholders incur no costs in selling the T stock, and P incurs no costs in acquiring the T stock. The examples are as follows:
- (h) **Effective/applicability date.** [Paragraph (d)(3)(ii)](#d-3-ii) of this section is applicable to any qualified stock purchase or qualified stock disposition (as defined in [§ 1.336-1(b)(6)](/cfr/26/1.336-1.md?p=b-6)) for which the acquisition date or disposition date (as defined in [§ 1.336-1(b)(8)](/cfr/26/1.336-1.md?p=b-8)), respectively, is on or after May 15, 2013.

# §1.338-6. Allocation of ADSP and AGUB among target assets.

- (a) **Scope—**
  - (1) **In general.** This section prescribes rules for allocating ADSP and AGUB among the acquisition date assets of a target for which a [section 338](/cfr/26/338.md) election is made.
  - (2) **Fair market value—**
    - (i) **In general.** Generally, the fair market value of an asset is its gross fair market value (i.e., fair market value determined without regard to mortgages, liens, pledges, or other liabilities). However, for purposes of determining the amount of old target's deemed sale tax consequences, the fair market value of any property subject to a nonrecourse indebtedness will be treated as being not less than the amount of such indebtedness. (For purposes of the preceding sentence, a liability that was incurred because of the acquisition of the property is disregarded to the extent that such liability was not taken into account in determining old target's basis in such property.)
    - (ii) **Transaction costs.** Transaction costs are not taken into account in allocating ADSP or AGUB to assets in the deemed sale (except indirectly through their effect on the total ADSP or AGUB to be allocated).
    - (iii) **Internal Revenue Service authority.** In connection with the examination of a return, the Internal Revenue Service may challenge the taxpayer's determination of the fair market value of any asset by any appropriate method and take into account all factors, including any lack of adverse tax interests between the parties.
- (b) **General rule for allocating ADSP and AGUB—**
  - (1) **Reduction in the amount of consideration for Class I assets.** Both ADSP and AGUB, in the respective allocation of each, are first reduced by the amount of Class I assets. Class I assets are cash and general deposit accounts (including savings and checking accounts) other than certificates of deposit held in banks, savings and loan associations, and other depository institutions. If the amount of Class I assets exceeds AGUB, new target will immediately realize ordinary income in an amount equal to such excess. The amount of ADSP or AGUB remaining after the reduction is to be allocated to the remaining acquisition date assets.
  - (2) **Other assets—**
    - (i) **In general.** Subject to the limitations and other rules of [paragraph (c)](#c) of this section, ADSP and AGUB (as reduced by the amount of Class I assets) are allocated among Class II acquisition date assets of target in proportion to the fair market values of such Class II assets at such time, then among Class III assets so held in such proportion, then among Class IV assets so held in such proportion, then among Class V assets so held in such proportion, then among Class VI assets so held in such proportion, and finally to Class VII assets. If an asset is described below as includible in more than one class, then it is included in such class with the lower or lowest class number (for instance, Class III has a lower class number than Class IV).
    - (ii) **Class II assets.** Class II assets are actively traded personal property within the meaning of [section 1092(d)(1)](/cfr/26/1092.md?p=d-1) and [§ 1.1092(d)-1](/cfr/26/1.1092..1.md) (determined without regard to [section 1092(d)(3)](/cfr/26/1092.md?p=d-3)). In addition, Class II assets include certificates of deposit and foreign currency even if they are not actively traded personal property. Class II assets do not include stock of target affiliates, whether or not of a class that is actively traded, other than actively traded stock described in [section 1504(a)(4)](/cfr/26/1504.md?p=a-4). Examples of Class II assets include U.S. government securities and publicly traded stock.
    - (iii) **Class III assets.** Class III assets are assets that the taxpayer marks to market at least annually for Federal income tax purposes and debt instruments (including accounts receivable). However, Class III assets do not include—
      - (A) Debt instruments issued by persons related at the beginning of the day following the acquisition date to the target under section [267(b)](/cfr/26/267.md?p=b) or [707](/cfr/26/707.md);
      - (B) Contingent debt instruments subject to [§ 1.1275-4](/cfr/26/1.1275-4.md), [§ 1.483-4](/cfr/26/1.483-4.md), or [section 988](/cfr/26/988.md), unless the instrument is subject to the non-contingent bond method of [§ 1.1275-4(b)](/cfr/26/1.1275-4.md?p=b) or is described in [§ 1.988-2(b)(2)(i)(B)(2)](/cfr/26/1.988-2.md?p=b-2-i-B-2); and
      - (C) **Debt instruments convertible into the stock of the issuer or other property.**
    - (iv) **Class IV assets.** Class IV assets are stock in trade of the taxpayer or other property of a kind that would properly be included in the inventory of taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business.
    - (v) **Class V assets.** Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets.
    - (vi) **Class VI assets.** Class VI assets are all [section 197](/cfr/26/197.md) intangibles, as defined in [section 197](/cfr/26/197.md), except goodwill and going concern value.
    - (vii) **Class VII assets.** Class VII assets are goodwill and going concern value (whether or not the goodwill or going concern value qualifies as a [section 197](/cfr/26/197.md) intangible).
  - (3) **Other items designated by the Internal Revenue Service.** Similar items may be added to any class described in this [paragraph (b)](#b) by designation in the Internal Revenue Bulletin by the Internal Revenue Service (see [§ 601.601(d)(2)](/cfr/26/601.601.md?p=d-2) of this chapter).
- (c) **Certain limitations and other rules for allocation to an asset—**
  - (1) **Allocation not to exceed fair market value.** The amount of ADSP or AGUB allocated to an asset (other than Class VII assets) cannot exceed the fair market value of that asset at the beginning of the day after the acquisition date.
  - (2) **Allocation subject to other rules.** The amount of ADSP or AGUB allocated to an asset is subject to other provisions of the Internal Revenue Code or general principles of tax law in the same manner as if such asset were transferred to or acquired from an unrelated person in a sale or exchange. For example, if the deemed asset sale is a transaction described in [section 1056(a)](/cfr/26/1056.md?p=a) (relating to basis limitation for player contracts transferred in connection with the sale of a franchise), the amount of AGUB allocated to a contract for the services of an athlete cannot exceed the limitation imposed by that section. As another example, [section 197(f)(5)](/cfr/26/197.md?p=f-5) applies in determining the amount of AGUB allocated to an amortizable [section 197](/cfr/26/197.md) intangible resulting from an assumption-reinsurance transaction.
  - (3) **Special rule for allocating AGUB when purchasing corporation has nonrecently purchased stock—**
    - (i) **Scope.** This [paragraph (c)(3)](#c-3) applies if at the beginning of the day after the acquisition date—
      - (A) The purchasing corporation holds nonrecently purchased stock for which a gain recognition election under [section 338(b)(3)](/cfr/26/338.md?p=b-3) and [§ 1.338-5(d)](/cfr/26/1.338-5.md?p=d) is not made; and
      - (B) The hypothetical purchase price determined under [paragraph (c)(3)(ii)](#c-3-ii) of this section exceeds the AGUB determined under [§ 1.338-5(b)](/cfr/26/1.338-5.md?p=b).
    - (ii) **Determination of hypothetical purchase price.** Hypothetical purchase price is the AGUB that would result if a gain recognition election were made.
    - (iii) **Allocation of AGUB.** Subject to the limitations in paragraphs [(c)(1)](#c-1) and [(2)](#c-2) of this section, the portion of AGUB (after reduction by the amount of Class I assets) to be allocated to each Class II, III, IV, V, VI, and VII asset of target held at the beginning of the day after the acquisition date is determined by multiplying—
      - (A) The amount that would be allocated to such asset under the general rules of this section were AGUB equal to the hypothetical purchase price; by
      - (B) A fraction, the numerator of which is actual AGUB (after reduction by the amount of Class I assets) and the denominator of which is the hypothetical purchase price (after reduction by the amount of Class I assets).
  - (4) **Liabilities taken into account in determining amount realized on subsequent disposition.** In determining the amount realized on a subsequent sale or other disposition of property deemed purchased by new target, [§ 1.1001-2(a)(3)](/cfr/26/1.1001-2.md?p=a-3) shall not apply to any liability that was taken into account in AGUB.
  - (5) **Allocation to certain nuclear decommissioning funds—**
    - (i) **General rule.** For purposes of allocating ADSP or AGUB among the acquisition date assets of a target (and for no other purpose), a taxpayer may elect to treat a nonqualified nuclear decommissioning fund (as defined in [paragraph (c)(5)(ii)](#c-5-ii) of this section) of the target as if—
      - (A) Such fund were an entity classified as a corporation;
      - (B) The stock of the corporation were among the acquisition date assets of the target and a Class V asset;
      - (C) The corporation owned the assets of the fund;
      - (D) The corporation bore the responsibility for decommissioning one or more nuclear power plants to the extent assets of the fund are expected to be used for that purpose; and
      - (E) A [section 338(h)(10)](/cfr/26/338.md?p=h-10) election were made for the corporation (regardless of whether the requirements for a [section 338(h)(10)](/cfr/26/338.md?p=h-10) election are otherwise satisfied).
    - (ii) **Definition of nonqualified nuclear decommissioning fund.** A nonqualified nuclear decommissioning fund means a trust, escrow account, Government fund or other type of agreement—
      - (A) That is established in writing by the owner or licensee of a nuclear generating unit for the exclusive purpose of funding the decommissioning of one or more nuclear power plants;
      - (B) That is described to the Nuclear Regulatory Commission in a report described in [10 CFR 50.75(b)](/cfr/10/50.75.md?p=b) as providing assurance that funds will be available for decommissioning;
      - (C) That is not a Nuclear Decommissioning Reserve Fund, as described in [section 468A](/cfr/26/468A.md);
      - (D) That is maintained at all times in the United States; and
      - (E) The assets of which are to be used only as permitted by [10 CFR 50.82(a)(8)](/cfr/10/50.82.md?p=a-8).
    - (iii) **Availability of election.** P may make the election described in this [paragraph (c)(5)](#c-5) regardless of whether the selling consolidated group (or the selling affiliate or the S corporation shareholders) also makes the election. In addition, the selling consolidated group (or the selling affiliate or the S corporation shareholders) may make the election regardless of whether P also makes the election. If T is an S corporation, all of the S corporation shareholders, including those that do not sell their stock, must consent to the election for the election to be effective as to any S corporation shareholder.
    - (iv) **Time and manner of making election.** The election described in this [paragraph (c)(5)](#c-5) is made by taking a position on an original or amended tax return for the taxable year of the qualified stock purchase that is consistent with having made the election. Such tax return must be filed no later than the later of 30 days after the date on which the [section 338](/cfr/26/338.md) election is due or the day the original tax return for the taxable year of the qualified stock purchase is due (with extensions).
    - (v) **Irrevocability of election.** An election made pursuant to this [paragraph (c)(5)](#c-5) is irrevocable.
    - (vi) **Effective/applicability date.** This [paragraph (c)(5)](#c-5) applies to qualified stock purchases occurring on or after September 11, 2007. For qualified stock purchases occurring before September 11, 2007 and on or after September 15, 2004, see [§ 1.338-6T](/cfr/26/1.338-6T.md) as contained in [26 CFR part 1](/cfr/26/part1.md) in effect on April 1, 2007. For qualified stock purchases occurring before September 15, 2004, see § 1.338-6 as contained in [26 CFR part 1](/cfr/26/part1.md) in effect on April 1, 2004.
- (d) **Examples.** The following examples illustrate §§ [1.338-4](/cfr/26/1.338-4.md), [1.338-5](/cfr/26/1.338-5.md), and this section:

# §1.338-7. Allocation of redetermined ADSP and AGUB among target assets.

- (a) **Scope.** ADSP and AGUB are 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 ADSP or AGUB. This section provides rules for allocating redetermined ADSP or AGUB.
- (b) **Allocation of redetermined ADSP and AGUB.** When ADSP or AGUB is redetermined, a new allocation of ADSP or AGUB is made by allocating the redetermined ADSP or AGUB amount under the rules of [§ 1.338-6](/cfr/26/1.338-6.md). If the allocation of the redetermined ADSP or AGUB amount under [§ 1.338-6](/cfr/26/1.338-6.md) to a given asset is different from the original allocation to it, the difference is added to or subtracted from the original allocation to the asset, as appropriate. (See [paragraph (d)](#d) of this section for new target's treatment of the amount so allocated.) Amounts allocable to an acquisition date asset (or with respect to a disposed-of acquisition date asset) are subject to all the asset allocation rules (for example, the fair market value limitation in [§ 1.338-6(c)(1)](/cfr/26/1.338-6.md?p=c-1)) as if the redetermined ADSP or AGUB were the ADSP or AGUB on the acquisition date.
- (c) **Special rules for ADSP—**
  - (1) **Increases or decreases in deemed sale tax consequences taxable notwithstanding old target ceases to exist.** To the extent general principles of tax law would require a seller in an actual asset sale to account for events relating to the sale that occur after the sale date, target must make such an accounting. Target is not precluded from realizing additional deemed sale tax consequences because the target is treated as a new corporation after the acquisition date.
  - (2) **Procedure for transactions in which section 338(h)(10) is not elected—**
    - (i) **Deemed sale tax consequences included in new target's return.** If an election under [section 338(h)(10)](/cfr/26/338.md?p=h-10) is not made, any additional deemed sale tax consequences of old target resulting from an increase or decrease in the ADSP are included in new target's income tax return for new target's taxable year in which the increase or decrease is taken into account. For example, if after the acquisition date there is an increase in the allocable ADSP of [section 1245](/cfr/26/1245.md) property for which the recomputed basis (but not the adjusted basis) exceeds the portion of the ADSP allocable to that particular asset on the acquisition date, the additional gain is treated as ordinary income to the extent it does not exceed such excess amount. See [paragraph (c)(2)(ii)](#c-2-ii) of this section for the special treatment of old target's carryovers and carrybacks. Although included in new target's income tax return, the deemed sale tax consequences are separately accounted for as an item of old target and may not be offset by income, gain, deduction, loss, credit, or other amount of new target. The amount of tax on income of old target resulting from an increase or decrease in the ADSP is determined as if such deemed sale tax consequences had been recognized in old target's taxable year ending at the close of the acquisition date. However, because the income resulting from the increase or decrease in ADSP is reportable in new target's taxable year of the increase or decrease, not in old target's taxable year ending at the close of the acquisition date, there is not a resulting underpayment of tax in that past taxable year of old target for purposes of calculation of interest due.
    - (ii) **Carryovers and carrybacks—**
      - (A) **Loss carryovers to new target taxable years.** A net operating loss or net capital loss of old target may be carried forward to a taxable year of new target, under the principles of section [172](/cfr/26/172.md) or [1212](/cfr/26/1212.md), as applicable, but is allowed as a deduction only to the extent of any recognized income of old target for such taxable year, as described in [paragraph (c)(2)(i)](#c-2-i) of this section. For this purpose, however, taxable years of new target are not taken into account in applying the limitations in section [172(b)(1)](/cfr/26/172.md?p=b-1) or [1212(a)(1)(B)](/cfr/26/1212.md?p=a-1-B) (or other similar limitations). In applying sections [172(b)](/cfr/26/172.md?p=b) and [1212(a)(1)](/cfr/26/1212.md?p=a-1), only income, gain, loss, deduction, credit, and other amounts of old target are taken into account. Thus, if old target has an unexpired net operating loss at the close of its taxable year in which the deemed asset sale occurred that could be carried forward to a subsequent taxable year, such loss may be carried forward until it is absorbed by old target's income.
      - (B) **Loss carrybacks to taxable years of old target.** An ordinary loss or capital loss accounted for as a separate item of old target under [paragraph (c)(2)(i)](#c-2-i) of this section may be carried back to a taxable year of old target under the principles of section [172](/cfr/26/172.md) or [1212](/cfr/26/1212.md), as applicable. For this purpose, taxable years of new target are not taken into account in applying the limitations in section [172(b)](/cfr/26/172.md?p=b) or [1212(a)](/cfr/26/1212.md?p=a) (or other similar limitations).
      - (C) **Credit carryovers and carrybacks.** The principles described in paragraphs [(c)(2)(ii)(A)](#c-2-ii-A) and [(B)](#c-2-ii-B) of this section apply to carryovers and carrybacks of amounts for purposes of determining the amount of a credit allowable under part IV, subchapter A, chapter 1 of the Internal Revenue Code. Thus, for example, credit carryovers of old target may offset only income tax attributable to items described in [paragraph (c)(2)(i)](#c-2-i) of this section.
  - (3) **Procedure for transactions in which section 338(h)(10) is elected.** If an election under [section 338(h)(10)](/cfr/26/338.md?p=h-10) is made, any changes in the deemed sale tax consequences caused by an increase or decrease in the ADSP are accounted for in determining the taxable income (or other amount) of the member of the selling consolidated group, the selling affiliate, or the S corporation shareholders to which such income, loss, or other amount is attributable for the taxable year in which such increase or decrease is taken into account.
- (d) **Special rules for AGUB—**
  - (1) **Effect of disposition or depreciation of acquisition date assets.** If an acquisition date asset has been disposed of, depreciated, amortized, or depleted by new target before an amount is added to the original allocation to the asset, the increased amount otherwise allocable to such asset is taken into account under general principles of tax law that apply when part of the cost of an asset not previously taken into account in basis is paid or incurred after the asset has been disposed of, depreciated, amortized, or depleted. A similar rule applies when an amount is subtracted from the original allocation to the asset. For purposes of the preceding sentence, an asset is considered to have been disposed of to the extent that its allocable portion of the decrease in AGUB would reduce its basis below zero.
  - (2) **Section 38 property.** [Section 1.47-2(c)](/cfr/26/1.47-2.md?p=c) applies to a reduction in basis of [section 38](/cfr/26/38.md) property under this section.
- (e) **Examples.** The following examples illustrate this section. Any amount described in the following examples is exclusive of interest. For rules characterizing deferred contingent payments as principal or interest, see §§ [1.483-4](/cfr/26/1.483-4.md), [1.1274-2(g)](/cfr/26/1.1274-2.md?p=g), and [1.1275-4(c)](/cfr/26/1.1275-4.md?p=c). The examples are as follows:

# §1.338-8. Asset and stock consistency.

- (a) **Introduction—**
  - (1) **Overview.** This section implements the consistency rules of sections [338(e)](/cfr/26/338.md?p=e) and [(f)](/cfr/26/338.md?p=f). Under this section, no election under [section 338](/cfr/26/338.md) is deemed made or required with respect to target or any target affiliate. Instead, the person acquiring an asset may have a carryover basis in the asset.
  - (2) **General application.** The consistency rules generally apply if the purchasing corporation acquires an asset directly from target during the target consistency period and target is a subsidiary in a consolidated group. In such a case, gain from the sale of the asset is reflected under the investment adjustment provisions of the consolidated return regulations in the basis of target stock and may reduce gain from the sale of the stock. See [§ 1.1502-32](/cfr/26/1.1502-32.md) (investment adjustment provisions). Under the consistency rules, the purchasing corporation generally takes a carryover basis in the asset, unless a [section 338](/cfr/26/338.md) election is made for target. Similar rules apply if the purchasing corporation acquires an asset directly from a lower-tier target affiliate if gain from the sale is reflected under the investment adjustment provisions in the basis of target stock.
  - (3) **Extensions of the general rules.** If an arrangement exists, [paragraph (f)](#f) of this section generally extends the carryover basis rule to certain cases in which the purchasing corporation acquires assets indirectly from target (or a lower-tier target affiliate). To prevent avoidance of the consistency rules, [paragraph (j)](#j) of this section also may extend the consistency period or the 12-month acquisition period and may disregard the presence of conduits.
  - (4) **Application where certain dividends are paid.** [Paragraph (g)](#g) of this section extends the carryover basis rule to certain cases in which dividends are paid to a corporation that is not a member of the same consolidated group as the distributing corporation. Generally, this rule applies where a 100 percent dividends received deduction is used in conjunction with asset dispositions to achieve an effect similar to that available under the investment adjustment provisions of the consolidated return regulations.
  - (5) **Application to foreign target affiliates.** [Paragraph (h)](#h) of this section extends the carryover basis rule to certain cases involving target affiliates that are controlled foreign corporations.
  - (6) **Stock consistency.** This section limits the application of the stock consistency rules to cases in which the rules are necessary to prevent avoidance of the asset consistency rules. Following the general treatment of a [section 338(h)(10)](/cfr/26/338.md?p=h-10) election, a sale of a corporation's stock is treated as a sale of the corporation's assets if a [section 338(h)(10)](/cfr/26/338.md?p=h-10) election is made. Because gain from this asset sale may be reflected in the basis of the stock of a higher-tier target, the carryover basis rule may apply to the assets.
- (b) **Consistency for direct acquisitions—**
  - (1) **General rule.** The basis rules of [paragraph (d)](#d) of this section apply to an asset if—
    - (i) The asset is disposed of during the target consistency period;
    - (ii) The basis of target stock, as of the target acquisition date, reflects gain from the disposition of the asset (see [paragraph (c)](#c) of this section); and
    - (iii) The asset is owned, immediately after its acquisition and on the target acquisition date, by a corporation that acquires stock of target in the qualified stock purchase (or by an affiliate of an acquiring corporation).
  - (2) **Section 338(h)(10) elections.** For purposes of this section, if a [section 338(h)(10)](/cfr/26/338.md?p=h-10) election is made for a corporation acquired in a qualified stock purchase—
    - (i) The acquisition is treated as an acquisition of the corporation's assets (see [§ 1.338(h)(10)-1](/cfr/26/1.338..1.md)); and
    - (ii) **The corporation is not treated as target.**
- (c) **Gain from disposition reflected in basis of target stock.** For purposes of this section:
  - (1) **General rule.** Gain from the disposition of an asset is reflected in the basis of a corporation's stock if the gain is taken into account under [§ 1.1502-32](/cfr/26/1.1502-32.md), directly or indirectly, in determining the basis of the stock, after applying [section 1503(e)](/cfr/26/1503.md?p=e) and other provisions of the Internal Revenue Code.
  - (2) **Gain not reflected if section 338 election made for target.** Gain from the disposition of an asset that is otherwise reflected in the basis of target stock as of the target acquisition date is not considered reflected in the basis of target stock if a [section 338](/cfr/26/338.md) election is made for target.
  - (3) **Gain reflected by reason of distributions.** Gain from the disposition of an asset is not considered reflected in the basis of target stock merely by reason of the receipt of a distribution from a target affiliate that is not a member of the same consolidated group as the distributee. See [paragraph (g)](#g) of this section for the treatment of dividends eligible for a 100 percent dividends received deduction.
  - (4) **Controlled foreign corporations.** For a limitation applicable to gain of a target affiliate that is a controlled foreign corporation, see [paragraph (h)(2)](#h-2) of this section.
  - (5) **Gain recognized outside the consolidated group.** Gain from the disposition of an asset by a person other than target or a target affiliate is not reflected in the basis of a corporation's stock unless the person is a conduit, as defined in [paragraph (j)(4)](#j-4) of this section.
- (d) **Basis of acquired assets—**
  - (1) **Carryover basis rule.** If this [paragraph (d)](#d) applies to an asset, the asset's basis immediately after its acquisition is, for all purposes of the Internal Revenue Code, its adjusted basis immediately before its disposition.
  - (2) **Exceptions to carryover basis rule for certain assets.** The carryover basis rule of [paragraph (d)(1)](#d-1) of this section does not apply to the following assets—
    - (i) Any asset disposed of in the ordinary course of a trade or business (see [section 338(e)(2)(A)](/cfr/26/338.md?p=e-2-A));
    - (ii) Any asset the basis of which is determined wholly by reference to the adjusted basis of the asset in the hands of the person that disposed of the asset (see [section 338(e)(2)(B)](/cfr/26/338.md?p=e-2-B));
    - (iii) Any debt or equity instrument issued by target or a target affiliate (see [paragraph (h)(3)](#h-3) of this section for an exception relating to the stock of a target affiliate that is a controlled foreign corporation);
    - (iv) Any asset the basis of which immediately after its acquisition would otherwise be less than its adjusted basis immediately before its disposition; and
    - (v) **Any asset identified by the Internal Revenue Service in a revenue ruling or revenue procedure.**
  - (3) **Exception to carryover basis rule for de minimis assets.** The carryover basis rules of this section do not apply to an asset if the asset is not disposed of as part of the same arrangement as the acquisition of target and the aggregate amount realized for all assets otherwise subject to the carryover basis rules of this section does not exceed $250,000.
  - (4) **Mitigation rule—**
    - (i) **General rule.** If the carryover basis rules of this section apply to an asset and the asset is transferred to a domestic corporation in a transaction to which [section 351](/cfr/26/351.md) applies or as a contribution to capital and no gain is recognized, the transferor's basis in the stock of the transferee (but not the transferee's basis in the asset) is determined without taking into account the carryover basis rules of this section.
    - (ii) **Time for transfer.** This [paragraph (d)(4)](#d-4) applies only if the asset is transferred before the due date (including extensions) for the transferor's income tax return for the year that includes the last date for which a [section 338](/cfr/26/338.md) election may be made for target.
- (e) **Examples—**
  - (1) **In general.** For purposes of the examples in this section, unless otherwise stated, the basis of each asset is the same for determining earnings and profits and taxable income, the exceptions to [paragraph (d)(1)](#d-1) of this section do not apply, the taxable year of all persons is the calendar year, and the following facts apply: S is the common parent of a consolidated group that includes T, T1, T2, and T3; S owns all of the stock of T and T3; and T owns all of the stock of T1, which owns all of the stock of T2. B is unrelated to the S group and owns all of the stock of P, which owns all of the stock of P1. Y and Y1 are partnerships that are unrelated to the S group but may be related to the P group. Z is a corporation that is not related to any of the other parties.
  - (2) **Direct acquisitions.** Paragraphs [(b)](#b), [(c)](#c), and [(d)](#d) of this section may be illustrated by the following examples:
- (f) **Extension of consistency to indirect acquisitions—**
  - (1) **Introduction.** If an arrangement exists (see [paragraph (j)(5)](#j-5) of this section), this [paragraph (f)](#f) generally extends the consistency rules to indirect acquisitions that have the same effect as direct acquisitions. For example, this [paragraph (f)](#f) applies if, pursuant to an arrangement, target sells an asset to an unrelated person who then sells the asset to the purchasing corporation.
  - (2) **General rule.** This [paragraph (f)](#f) applies to an asset if, pursuant to an arrangement—
    - (i) The asset is disposed of during the target consistency period;
    - (ii) The basis of target stock as of, or at any time before, the target acquisition date reflects gain from the disposition of the asset; and
    - (iii) The asset ownership requirements of [paragraph (b)(1)(iii)](#b-1-iii) of this section are not satisfied, but the asset is owned, at any time during the portion of the target consistency period following the target acquisition date, by—
      - (A) **A corporation—** (1) The basis of whose stock, as of, or at any time before, the target acquisition date, reflects gain from the disposition of the asset; and

        (2) That is affiliated, at any time during the target consistency period, with a corporation that acquires stock of target in the qualified stock purchase; or

      - (B) A corporation that at the time it owns the asset is affiliated with a corporation described in [paragraph (f)(2)(iii)(A)](#f-2-iii-A) of this section.
  - (3) **Basis of acquired assets.** If this [paragraph (f)](#f) applies to an asset, the principles of the basis rules of [paragraph (d)](#d) of this section apply to the asset as of the date, following the disposition with respect to which gain is reflected in the basis of target's stock, that the asset is first owned by a corporation described in [paragraph (f)(2)(iii)](#f-2-iii) of this section. If the principles of the carryover basis rule of [paragraph (d)(1)](#d-1) of this section apply to an asset, the asset's basis also is reduced (but not below zero) by the amount of any reduction in its basis occurring after the disposition with respect to which gain is reflected in the basis of target's stock.
  - (4) **Examples.** This [paragraph (f)](#f) may be illustrated by the following examples:
- (g) **Extension of consistency if dividends qualifying for 100 percent dividends received deduction are paid—**
  - (1) **General rule for direct acquisitions from target.** Unless a [section 338](/cfr/26/338.md) election is made for target, the basis rules of [paragraph (d)](#d) of this section apply to an asset if—
    - (i) Target recognizes gain (whether or not deferred) on disposition of the asset during the portion of the target consistency period that ends on the target acquisition date;
    - (ii) The asset is owned, immediately after the asset disposition and on the target acquisition date, by a corporation that acquires stock of target in the qualified stock purchase (or by an affiliate of an acquiring corporation); and
    - (iii) During the portion of the target consistency period that ends on the target acquisition date, the aggregate amount of dividends paid by target, to which [section 243(a)(3)](/cfr/26/243.md?p=a-3) applies, exceeds the greater of—
      - (A) $250,000; or
      - (B) 125 percent of the yearly average amount of dividends paid by target, to which [section 243(a)(3)](/cfr/26/243.md?p=a-3) applies, during the three calendar years immediately preceding the year in which the target consistency period begins (or, if shorter, the period target was in existence).
  - (2) **Other direct acquisitions having same effect.** The basis rules of [paragraph (d)](#d) of this section also apply to an asset if the effect of a transaction described in [paragraph (g)(1)](#g-1) of this section is achieved through any combination of disposition of assets and payment of dividends to which [section 243(a)(3)](/cfr/26/243.md?p=a-3) applies (or any other dividends eligible for a 100 percent dividends received deduction). See [paragraph (h)(4)](#h-4) of this section for additional rules relating to target affiliates that are controlled foreign corporations.
  - (3) **Indirect acquisitions.** The principles of [paragraph (f)](#f) of this section also apply for purposes of this [paragraph (g)](#g).
  - (4) **Examples.** This [paragraph (g)](#g) may be illustrated by the following examples:
- (h) **Consistency for target affiliates that are controlled foreign corporations—**
  - (1) **In general.** This [paragraph (h)](#h) applies only if target is a domestic corporation. For additional rules that may apply with respect to controlled foreign corporations, see [paragraph (g)](#g) of this section. The definitions and nomenclature of § [1.338-2(b)](/cfr/26/1.338-2.md?p=b) and [(c)](/cfr/26/1.338-2.md?p=c) and [paragraph (e)](#e) of this section apply for purposes of this section.
  - (2) **Income or gain resulting from asset dispositions—**
    - (i) **General rule.** Income or gain of a target affiliate that is a controlled foreign corporation from the disposition of an asset is not reflected in the basis of target stock under [paragraph (c)](#c) of this section unless the income or gain results in an inclusion under section [951(a)(1)(A)](/cfr/26/951.md?p=a-1-A), [951(a)(1)(C)](/cfr/26/951.md?p=a-1-C), [1291](/cfr/26/1291.md) or [1293](/cfr/26/1293.md).
    - (ii) **Basis of controlled foreign corporation stock.** If, by reason of [paragraph (h)(2)(i)](#h-2-i) of this section, the carryover basis rules of this section apply to an asset, no increase in basis in the stock of a controlled foreign corporation under section [961(a)](/cfr/26/961.md?p=a) or [1293(d)(1)](/cfr/26/1293.md?p=d-1), or under regulations issued pursuant to [section 1297(b)(5)](/cfr/26/1297.md?p=b-5), is allowed to target or a target affiliate to the extent the increase is attributable to income or gain described in [paragraph (h)(2)(i)](#h-2-i) of this section. A similar rule applies to the basis of any property by reason of which the stock of the controlled foreign corporation is considered owned under section [958(a)(2)](/cfr/26/958.md?p=a-2) or [1297(a)](/cfr/26/1297.md?p=a).
    - (iii) **Operating rule.** For purposes of this [paragraph (h)(2)](#h-2)—
      - (A) If there is an income inclusion under section [951 (a)(1)(A)](/cfr/26/951.md?p=a-1-A) or [(C)](/cfr/26/951.md?p=a-1-C), the shareholder's income inclusion is first attributed to the income or gain of the controlled foreign corporation from the disposition of the asset to the extent of the shareholder's pro rata share of such income or gain; and
      - (B) Any income or gain under [section 1293](/cfr/26/1293.md) is first attributed to the income or gain from the disposition of the asset to the extent of the shareholder's pro rata share of the income or gain.
    - (iv) **Increase in asset or stock basis—**
      - (A) If the carryover basis rules under [paragraph (h)(2)(i)](#h-2-i) of this section apply to an asset, and the purchasing corporation disposes of the asset to an unrelated party in a taxable transaction and recognizes and includes in its U.S. gross income or the U.S. gross income of its shareholders the greater of the income or gain from the disposition of the asset by the selling controlled foreign corporation that was reflected in the basis of the target stock under [paragraph (c)](#c) of this section, or the gain recognized on the asset by the purchasing corporation on the disposition of the asset, then the purchasing corporation or the target or a target affiliate, as appropriate, shall increase the basis of the selling controlled foreign corporation stock subject to [paragraph (h)(2)(ii)](#h-2-ii) of this section, as of the date of the disposition of the asset by the purchasing corporation, by the amount of the basis increase that was denied under [paragraph (h)(2)(ii)](#h-2-ii) of this section. The preceding sentence shall apply only to the extent that the controlled foreign corporation stock is owned (within the meaning of [section 958(a)](/cfr/26/958.md?p=a)) by a member of the purchasing corporation's affiliated group.
      - (B) If the carryover basis rules under [paragraph (h)(2)(i)](#h-2-i) of this section apply to an asset, and the purchasing corporation or the target or a target affiliate, as appropriate, disposes of the stock of the selling controlled foreign corporation to an unrelated party in a taxable transaction and recognizes and includes in its U.S. gross income or the U.S. gross income of its shareholders the greater of the gain equal to the basis increase that was denied under [paragraph (h)(2)(ii)](#h-2-ii) of this section, or the gain recognized in the stock by the purchasing corporation or by the target or a target affiliate, as appropriate, on the disposition of the stock, then the purchasing corporation shall increase the basis of the asset, as of the date of the disposition of the stock of the selling controlled foreign corporation by the purchasing corporation or by the target or a target affiliate, as appropriate, by the amount of the basis increase that was denied pursuant to [paragraph (h)(2)(i)](#h-2-i) of this section. The preceding sentence shall apply only to the extent that the asset is owned (within the meaning of [section 958(a)](/cfr/26/958.md?p=a)) by a member of the purchasing corporation's affiliated group.
  - (3) **Stock issued by target affiliate that is a controlled foreign corporation.** The exception to the carryover basis rules of this section provided in [paragraph (d)(2)(iii)](#d-2-iii) of this section does not apply to stock issued by a target affiliate that is a controlled foreign corporation. After applying the carryover basis rules of this section to the stock, the basis in the stock is increased by the amount treated as a dividend under [section 1248](/cfr/26/1248.md) on the disposition of the stock (or that would have been so treated but for [section 1291](/cfr/26/1291.md)), except to the extent the basis increase is attributable to the disposition of an asset in which a carryover basis is taken under this section.
  - (4) **Certain distributions—**
    - (i) **General rule.** In the case of a target affiliate that is a controlled foreign corporation, [paragraph (g)](#g) of this section applies with respect to the target affiliate by treating any reference to a dividend to which [section 243(a)(3)](/cfr/26/243.md?p=a-3) applies as a reference to any amount taken into account under [§ 1.1502-32](/cfr/26/1.1502-32.md) in determining the basis of target stock that is—
      - (A) A dividend;
      - (B) An amount treated as a dividend under [section 1248](/cfr/26/1248.md) (or that would have been so treated but for [section 1291](/cfr/26/1291.md)); or
      - (C) **An amount included in income under section 951(a)(1)(B).**
    - (ii) **Basis of controlled foreign corporation stock.** If the carryover basis rules of this section apply to an asset, the basis in the stock of the controlled foreign corporation (or any property by reason of which the stock is considered owned under [section 958(a)(2)](/cfr/26/958.md?p=a-2)) is reduced (but not below zero) by the sum of any amounts that are treated, solely by reason of the disposition of the asset, as a dividend, amount treated as a dividend under [section 1248](/cfr/26/1248.md) (or that would have been so treated but for [section 1291](/cfr/26/1291.md)), or amount included in income under [section 951(a)(1)(B)](/cfr/26/951.md?p=a-1-B). For this purpose, any dividend, amount treated as a dividend under [section 1248](/cfr/26/1248.md) (or that would have been so treated but for [section 1291](/cfr/26/1291.md)), or amount included in income under [section 951(a)(1)(B)](/cfr/26/951.md?p=a-1-B) is considered attributable first to earnings and profits resulting from the disposition of the asset.
    - (iii) **Increase in asset or stock basis—**
      - (A) If the carryover basis rules under paragraphs [(g)](#g) and [(h)(4)(i)](#h-4-i) of this section apply to an asset, and the purchasing corporation disposes of the asset to an unrelated party in a taxable transaction and recognizes and includes in its U.S. gross income or the U.S. gross income of its shareholders the greater of the gain equal to the basis increase denied in the asset pursuant to paragraphs [(g)](#g) and [(h)(4)(i)](#h-4-i) of this section, or the gain recognized on the asset by the purchasing corporation on the disposition of the asset, then the purchasing corporation or the target or a target affiliate, as appropriate, shall increase the basis of the selling controlled foreign corporation stock subject to [paragraph (h)(4)(ii)](#h-4-ii) of this section, as of the date of the disposition of the asset by the purchasing corporation, by the amount of the basis reduction under [paragraph (h)(4)(ii)](#h-4-ii) of this section. The preceding sentence shall apply only to the extent that the controlled foreign corporation stock is owned (within the meaning of [section 958(a)](/cfr/26/958.md?p=a)) by a member of the purchasing corporation's affiliated group.
      - (B) If the carryover basis rules under paragraphs [(g)](#g) and [(h)(4)(i)](#h-4-i) of this section apply to an asset, and the purchasing corporation or the target or a target affiliate, as appropriate, disposes of the stock of the selling controlled foreign corporation to an unrelated party in a taxable transaction and recognizes and includes in its U.S. gross income or the U.S. gross income of its shareholders the greater of the amount of the basis reduction under [paragraph (h)(4)(ii)](#h-4-ii) of this section, or the gain recognized in the stock by the purchasing corporation or by the target or a target affiliate, as appropriate, on the disposition of the stock, then the purchasing corporation shall increase the basis of the asset, as of the date of the disposition of the stock of the selling controlled foreign corporation by the purchasing corporation or by the target or a target affiliate, as appropriate, by the amount of the basis increase that was denied pursuant to paragraphs [(g)](#g) and [(h)(4)(i)](#h-4-i) of this section. The preceding sentence shall apply only to the extent that the asset is owned (within the meaning of [section 958(a)](/cfr/26/958.md?p=a)) by a member of the purchasing corporation's affiliated group.
  - (5) **Examples.** This [paragraph (h)](#h) may be illustrated by the following examples:
    - (i) [Reserved]
- (j) **Anti-avoidance rules.** For purposes of this section—
  - (1) **Extension of consistency period.** The target consistency period is extended to include any continuous period that ends on, or begins on, any day of the consistency period during which a purchasing corporation, or any person related, within the meaning of section [267(b)](/cfr/26/267.md?p=b) or [707(b)(1)](/cfr/26/707.md?p=b-1), to a purchasing corporation, has an arrangement—
    - (i) To purchase stock of target; or
    - (ii) To own an asset to which the carryover basis rules of this section apply, taking into account the extension.
  - (2) **Qualified stock purchase and 12-month acquisition period.** The 12-month acquisition period is extended if, pursuant to an arrangement, a corporation acquires by purchase stock of another corporation satisfying the requirements of [section 1504(a)(2)](/cfr/26/1504.md?p=a-2) over a period of more than 12 months.
  - (3) **Acquisitions by conduits—**
    - (i) **Asset ownership—**
      - (A) **General rule.** A corporation is treated as owning any portion of an asset attributed to the corporation from a conduit under [section 318(a)](/cfr/26/318.md?p=a) (treating any asset as stock for this purpose), for purposes of—

        (1) The asset ownership requirements of this section; and

        (2) Determining whether a controlled foreign corporation is a target affiliate for purposes of [paragraph (h)](#h) of this section.

      - (B) **Application of carryover basis rule.** If the basis rules of this section apply to the asset, the basis rules of this section apply to the entire asset (not just the portion for which ownership is attributed).
    - (ii) **Stock acquisitions—**
      - (A) **Purchase by conduit.** A corporation is treated as purchasing stock of another corporation attributed to the corporation from a conduit under [section 318(a)](/cfr/26/318.md?p=a) on the day the stock is purchased by the conduit. The corporation is not treated as purchasing the stock, however, if the conduit purchased the stock more than two years before the date the stock is first attributed to the corporation.
      - (B) **Purchase of conduit by corporation.** If a corporation purchases an interest in a conduit (treating the interest as stock for this purpose), the corporation is treated as purchasing on that date any stock owned by a conduit on that date and attributed to the corporation under [section 318(a)](/cfr/26/318.md?p=a) with respect to the interest in the conduit that was purchased.
      - (C) **Purchase of conduit by conduit.** If a conduit (the first conduit) purchases an interest in a second conduit (treating the interest as stock for this purpose), the first conduit is treated as purchasing on that date any stock owned by a conduit on that date and attributed to the first conduit under [section 318(a)](/cfr/26/318.md?p=a) with respect to the interest in the second conduit that was purchased.
  - (4) **Conduit.** A person (other than a corporation) is a conduit as to a corporation if—
    - (i) The corporation would be treated under section [318(a)(2)(A)](/cfr/26/318.md?p=a-2-A) and [(B)](/cfr/26/318.md?p=a-2-B) (attribution from partnerships, estates, and trusts) as owning any stock owned by the person; and
    - (ii) The corporation, together with its affiliates, would be treated as owning an aggregate of at least 50 percent of the stock owned by the person.
  - (5) **Existence of arrangement.** The existence of an arrangement is determined under all the facts and circumstances. For an arrangement to exist, there need not be an enforceable, written, or unconditional agreement, and all the parties to the transaction need not have participated in each step of the transaction. One factor indicating the existence of an arrangement is the participation of a related party. For this purpose, persons are related if they are related within the meaning of section [267(b)](/cfr/26/267.md?p=b) or [707(b)(1)](/cfr/26/707.md?p=b-1).
  - (6) **Predecessor and successor—**
    - (i) **Persons.** A reference to a person (including target, target affiliate, and purchasing corporation) includes, as the context may require, a reference to a predecessor or successor. For this purpose, a predecessor is a transferor or distributor of assets to a person (the successor) in a transaction—
      - (A) To which [section 381(a)](/cfr/26/381.md?p=a) applies; or
      - (B) In which the successor's basis for the assets is determined, directly or indirectly, in whole or in part, by reference to the basis of the transferor or distributor.
    - (ii) **Assets.** A reference to an asset (the first asset) includes, as the context may require, a reference to any asset the basis of which is determined, directly or indirectly, in whole or in part, by reference to the first asset.
  - (7) **Examples.** This [paragraph (j)](#j) may be illustrated by the following examples:

# §1.338-9. International aspects of section 338.

- (a) **Scope.** This section provides guidance regarding international aspects of [section 338](/cfr/26/338.md). As provided in [§ 1.338-2(c)(18)](/cfr/26/1.338-2.md?p=c-18), a foreign corporation, a DISC, or a corporation for which a [section 936](/cfr/26/936.md) election has been made is considered a target affiliate for all purposes of [section 338](/cfr/26/338.md). In addition, stock described in [section 338(h)(6)(B)(ii)](/cfr/26/338.md?p=h-6-B-ii) held by a target affiliate is not excluded from the operation of [section 338](/cfr/26/338.md).
- (b) **Application of section 338 to foreign targets—**
  - (1) **In general.** For purposes of subtitle A, the deemed sale tax consequences, as defined in [§ 1.338-2(c)(7)](/cfr/26/1.338-2.md?p=c-7), of a foreign target for which a [section 338](/cfr/26/338.md) election is made (FT), and the corresponding earnings and profits, are taken into account in determining the taxation of FT and FT's direct and indirect shareholders. See, however, [section 338(h)(16)](/cfr/26/338.md?p=h-16). For example, the income and earnings and profits of FT are determined, for purposes of sections [551](/cfr/26/551.md), [951](/cfr/26/951.md), [1248](/cfr/26/1248.md), and [1293](/cfr/26/1293.md), by taking into account the deemed sale tax sentence consequences.
  - (2) **Ownership of FT stock on the acquisition date.** A person who transfers FT stock to the purchasing corporation on FT's acquisition date is considered to own the transferred stock at the close of FT's acquisition date. See, e.g., [§ 1.951-1(f)](/cfr/26/1.951-1.md?p=f) (relating to determination of holding period for purposes of [sections 951 through 964](/cfr/26/951..964.md)). If on the acquisition date the purchasing corporation owns a block of FT stock that was acquired before FT's acquisition date, the purchasing corporation is considered to own such block of stock at the close of the acquisition date.
  - (3) **Carryover FT stock—**
    - (i) **Definition.** FT stock is carryover FT stock if—
      - (A) FT was a controlled foreign corporation within the meaning of [section 957](/cfr/26/957.md) (taking into account [section 953(c)](/cfr/26/953.md?p=c)) at any time during the portion of the 12-month acquisition period that ends on the acquisition date; and
      - (B) Such stock is owned as of the beginning of the day after FT's acquisition date by a person other than a purchasing corporation, or by a purchasing corporation if the stock is nonrecently purchased and is not subject to a gain recognition election under [§ 1.338-5(d)](/cfr/26/1.338-5.md?p=d).
    - (ii) **Carryover of earnings and profits.** The earnings and profits of old FT (and associated foreign taxes) attributable to the carryover FT stock (adjusted to reflect deemed sale tax sentence consequences) carry over to new FT solely for purposes of—
      - (A) Characterizing an actual distribution with respect to a share of carryover FT stock as a dividend;
      - (B) Characterizing gain on a post-acquisition date transfer of a share of carryover FT stock as a dividend under [section 1248](/cfr/26/1248.md) (if such section is otherwise applicable);
      - (C) Characterizing an investment of earnings in United States property as income under sections [951(a)(1)(B)](/cfr/26/951.md?p=a-1-B) and [956](/cfr/26/956.md) (if such sections are otherwise applicable); and
      - (D) Determining foreign taxes deemed paid under sections [902](/cfr/26/902.md) and [960](/cfr/26/960.md) with respect to the amount treated as a dividend or income by virtue of this [paragraph (b)(3)(ii)](#b-3-ii) (subject to the operation of [section 338(h)(16)](/cfr/26/338.md?p=h-16)).
    - (iii) **Cap on carryover of earnings and profits.** The amount of earnings and profits of old FT taken into account with respect to a share of carryover FT stock is limited to the amount that would have been included in gross income of the owner of such stock as a dividend under [section 1248](/cfr/26/1248.md) if—
      - (A) The shareholder transferred that share to the purchasing corporation on FT's acquisition date for a consideration equal to the fair market value of that share on that date; or
      - (B) In the case of nonrecently purchased FT stock treated as carryover FT stock, a gain recognition election under [section 338(b)(3)(A)](/cfr/26/338.md?p=b-3-A) applied to that share. For purposes of the preceding sentence, a shareholder that is a controlled foreign corporation is considered to be a United States person, and the principle of [section 1248(c)(2)(D)(ii)](/cfr/26/1248.md?p=c-2-D-ii) (concerning a United States person's indirect ownership of stock in a foreign corporation) applies in determining the correct holding period.
    - (iv) **Post-acquisition date distribution of old FT earnings and profits.** A post-acquisition date distribution with respect to a share of carryover FT stock is considered to be derived first from earnings and profits derived after FT's acquisition date and then from earnings and profits derived on or before FT's acquisition date.
    - (v) **Old FT earnings and profits unaffected by post-acquisition date deficits.** The carryover amount for a share of carryover FT stock is not reduced by deficits in earnings and profits incurred by new FT. This rule applies for purposes of determining the amount of foreign taxes deemed paid regardless of the fact that there are no accumulated earnings and profits. For example, a distribution by new FT with respect to a share of carryover FT stock is treated as a dividend by the distributee to the extent of the carryover amount for that share notwithstanding that new FT has no earnings and profits.
    - (vi) **Character of FT stock as carryover FT stock eliminated upon disposition.** A share of FT stock is not considered carryover FT stock after it is disposed of provided that all gain realized on the transfer is recognized at the time of the transfer, or that, if less than all of the realized gain is recognized, the recognized amount equals or exceeds the remaining carryover amount for that share.
  - (4) **Passive foreign investment company stock.** Stock that is owned as of the beginning of the day after FT's acquisition date by a person other than a purchasing corporation, or by a purchasing corporation if the FT stock is nonrecently purchased stock not subject to a gain recognition election under [§ 1.338-5(d)](/cfr/26/1.338-5.md?p=d), is treated as passive foreign investment company stock to the extent provided in [section 1297(b)(1)](/cfr/26/1297.md?p=b-1).
- (c) **Dividend treatment under section 1248(e).** The principles of this [paragraph (b)](#b) apply to shareholders of a domestic corporation subject to [section 1248(e)](/cfr/26/1248.md?p=e).
- (d) **Allocation of foreign income taxes—**
  - (1) **In general.** Except as provided in [paragraph (d)(3)](#d-3) of this section, if a [section 338](/cfr/26/338.md) election is made for target (whether foreign or domestic), and target's taxable year under foreign law (if any) does not close at the end of the acquisition date, foreign income tax as defined in [§ 1.901-2(a)](/cfr/26/1.901-2.md?p=a)) (other than a withholding tax as defined in [section 901(k)(1)(B)](/cfr/26/901.md?p=k-1-B)) paid or accrued by new target with respect to such foreign taxable year is allocated between old target and new target. If there is more than one [section 338](/cfr/26/338.md) election with respect to target during target's foreign taxable year, foreign income tax paid or accrued with respect to that foreign taxable year is allocated among all old targets and new targets. The allocation is made based on the respective portions of the taxable income (as determined under foreign law) for the foreign taxable year that are attributable under the principles of [§ 1.1502-76(b)](/cfr/26/1.1502-76.md?p=b) to the period of existence of each old target and new target during the foreign taxable year.
  - (2) **Foreign income taxes imposed on partnerships and disregarded entities.** If a [section 338](/cfr/26/338.md) election is made for target and target holds an interest in a disregarded entity (as described in [§ 301.7701-2(c)(2)(i)](/cfr/26/301.7701-2.md?p=c-2-i) of this chapter) or partnership, the rules of § [1.901-2(f)(4)](/cfr/26/1.901-2.md?p=f-4) and [(5)](/cfr/26/1.901-2.md?p=f-5) apply to determine the person who is considered for Federal income tax purposes to pay foreign income tax imposed at the entity level on the income of the disregarded entity or partnership.
  - (3) **Disallowance of foreign tax credits under section 901(m).** For rules that may apply to disallow foreign tax credits by reason of a [section 338](/cfr/26/338.md) election, see [section 901(m)](/cfr/26/901.md?p=m) and §§ [1.901(m)-1](/cfr/26/1.901..1.md) through [1.901(m)-8](/cfr/26/1.901..8.md).
  - (4) **Applicability date.** This [paragraph (d)](#d) applies to foreign income taxes paid or accrued in taxable years beginning on or after December 28, 2021.
- (e) **Operation of section 338(h)(16).** [Reserved]
- (f) **Examples.**
  - (1) Except as otherwise provided, all corporations use the calendar year as the taxable year, have no earnings and profits (or deficit) accumulated for any taxable year, and have only one class of outstanding stock.
  - (2) This section may be illustrated by the following examples:

# §1.338-10. Filing of returns.

- (a) **Returns including tax liability from deemed asset sale—**
  - (1) **In general.** Except as provided in paragraphs [(a)(2)](#a-2) and (3) of this section, any deemed sale tax consequences are reported on the final return of old target filed for old target's taxable year that ends at the close of the acquisition date. Paragraphs [(a)(2)](#a-2), (3) and [(4)](#a-4) of this section do not apply to elections under [section 338(h)(10)](/cfr/26/338.md?p=h-10). If old target is the common parent of an affiliated group, the final return may be a consolidated return (any such consolidated return must also include any deemed sale tax consequences of any members of the consolidated group that are acquired by the purchasing corporation on the same acquisition date as old target).
  - (2) **Old target's final taxable year otherwise included in consolidated return of selling group—**
    - (i) **General rule.** If the selling group files a consolidated return for the period that includes the acquisition date, old target is disaffiliated from that group immediately before the deemed asset sale and must file a deemed sale return separate from the group, which includes only the deemed sale tax consequences and the carryover items specified in [paragraph (a)(2)(iii)](#a-2-iii) of this section. The deemed asset sale occurs at the close of the acquisition date and is the last transaction of old target and the only transaction reported on the separate return. Except as provided in [§ 1.338-1(d)](/cfr/26/1.338-1.md?p=d) (regarding certain transactions on the acquisition date), any transactions of old target occurring on the acquisition date other than the deemed asset sale are included in the selling group's consolidated return. A deemed sale return includes a combined deemed sale return as defined in [paragraph (a)(4)](#a-4) of this section.
    - (ii) **Separate taxable year.** The deemed asset sale included in the deemed sale return under this [paragraph (a)(2)](#a-2) occurs in a separate taxable year, except that old target's taxable year of the sale and the consolidated year of the selling group that includes the acquisition date are treated as the same year for purposes of determining the number of years in a carryover or carryback period.
    - (iii) **Carryover and carryback of tax attributes.** Target's attributes may be carried over to, and carried back from, the deemed sale return under the rules applicable to a corporation that ceases to be a member of a consolidated group.
    - (iv) **Old target is a component member of purchasing corporation's controlled group.** For purposes of its deemed sale return, target is a component member of the controlled group of corporations including the purchasing corporation unless target is treated as an excluded member under [section 1563(b)(2)](/cfr/26/1563.md?p=b-2).
  - (4) **Combined deemed sale return—**
    - (i) **General rule.** Under [section 338(h)(15)](/cfr/26/338.md?p=h-15), a combined deemed sale return (combined return) may be filed for all targets from a single selling consolidated group (as defined in [§ 1.338(h)(10)-1(b)(3)](/cfr/26/1.338..1.md)) that are acquired by the purchasing corporation on the same acquisition date and that otherwise would be required to file separate deemed sale returns. The combined return must include all such targets. For example, T and T1 may be included in a combined return if—
      - (A) T and T1 are directly owned subsidiaries of S;
      - (B) S is the common parent of a consolidated group; and
      - (C) **P makes qualified stock purchases of T and T1 on the same acquisition date.**
    - (ii) **Gain and loss offsets.** Gains and losses recognized on the deemed asset sales by targets included in a combined return are treated as the gains and losses of a single target. In addition, loss carryovers of a target that were not subject to the separate return limitation year restrictions (SRLY restrictions) of the consolidated return regulations while that target was a member of the selling consolidated group may be applied without limitation to the gains of other targets included in the combined return. If, however, a target has loss carryovers that were subject to the SRLY restrictions while that target was a member of the selling consolidated group, the use of those losses in the combined return continues to be subject to those restrictions, applied in the same manner as if the combined return were a consolidated return. A similar rule applies, when appropriate, to other tax attributes.
    - (iii) **Procedure for filing a combined return.** A combined return is made by filing a single corporation income tax return in lieu of separate deemed sale returns for all targets required to be included in the combined return. The combined return reflects the deemed asset sales of all targets required to be included in the combined return. If the targets included in the combined return constitute a single affiliated group within the meaning of [section 1504(a)](/cfr/26/1504.md?p=a), the income tax return is signed by an officer of the common parent of that group. Otherwise, the return must be signed by an officer of each target included in the combined return. Rules similar to the rules in [§ 1.1502-75(j)](/cfr/26/1.1502-75.md?p=j) apply for purposes of preparing the combined return. The combined return must include a statement entitled, “ELECTION TO FILE A COMBINED RETURN UNDER [SECTION 338(h)(15)](/cfr/26/338.md?p=h-15).” The statement must include—
      - (A) The name, address, and employer identification number of each target required to be included in the combined return; and
      - (B) **The following declaration—** EACH TARGET IDENTIFIED IN THIS ELECTION TO FILE A COMBINED RETURN CONSENTS TO THE FILING OF A COMBINED RETURN.
    - (iv) **Consequences of filing a combined return.** Each target included in a combined return is severally liable for any tax associated with the combined return. See [§ 1.338-1(b)(3)](/cfr/26/1.338-1.md?p=b-3).
  - (5) **Deemed sale excluded from purchasing corporation's consolidated return.** Old target may not be considered a member of any affiliated group that includes the purchasing corporation with respect to its deemed asset sale.
  - (6) **Due date for old target's final return—**
    - (i) **General rule.** Old target's final return is generally due on the 15th day of the third calendar month following the month in which the acquisition date occurs. See [section 6072](/cfr/26/6072.md) (time for filing income tax returns).
    - (ii) **Application of § 1.1502-76(c)—**
      - (A) **In general.** [Section 1.1502-76(c)](/cfr/26/1.1502-76.md?p=c) applies to old target's final return if old target was a member of a selling group that did not file consolidated returns for the taxable year of the common parent that precedes the year that includes old target's acquisition date. If the selling group has not filed a consolidated return that includes old target's taxable period that ends on the acquisition date, target may, on or before the final return due date (including extensions), either—

        (1) File a deemed sale return on the assumption that the selling group will file the consolidated return; or

        (2) File a return for so much of old target's taxable period as ends at the close of the acquisition date on the assumption that the consolidated return will not be filed.

      - (B) **Deemed extension.** For purposes of applying [§ 1.1502-76(c)(2)](/cfr/26/1.1502-76.md?p=c-2), an extension of time to file old target's final return is considered to be in effect until the last date for making the election under [section 338](/cfr/26/338.md).
      - (C) **Erroneous filing of deemed sale return.** If, under this [paragraph (a)(6)(ii)](#a-6-ii), target files a deemed sale return but the selling group does not file a consolidated return, target must file a substituted return for old target not later than the due date (including extensions) for the return of the common parent with which old target would have been included in the consolidated return. The substituted return is for so much of old target's taxable year as ends at the close of the acquisition date. Under [§ 1.1502-76(c)(2)](/cfr/26/1.1502-76.md?p=c-2), the deemed sale return is not considered a return for purposes of [section 6011](/cfr/26/6011.md) (relating to the general requirement of filing a return) if a substituted return must be filed.
      - (D) **Erroneous filing of return for regular tax year.** If, under this [paragraph (a)(6)(ii)](#a-6-ii), target files a return for so much of old target's regular taxable year as ends at the close of the acquisition date but the selling group files a consolidated return, target must file an amended return for old target not later than the due date (including extensions) for the selling group's consolidated return. (The amended return is a deemed sale return.)
      - (E) **Last date for payment of tax.** If either a substituted or amended final return of old target is filed under this [paragraph (a)(6)(ii)](#a-6-ii), the last date prescribed for payment of tax is the final return due date (as defined in [paragraph (a)(6)(i)](#a-6-i) of this section).
  - (7) **Examples.** The following examples illustrate this [paragraph (a)](#a):
- (b) **Waiver—**
  - (1) **Certain additions to tax.** An addition to tax or additional amount (addition) under subchapter A of chapter 68 of the Internal Revenue Code arising on or before the last day for making the election under [section 338](/cfr/26/338.md) because of circumstances that would not exist but for an election under [section 338](/cfr/26/338.md) is waived if—
    - (i) Under the particular statute the addition is excusable upon a showing of reasonable cause; and
    - (ii) **Corrective action is taken on or before the last day.**
  - (2) **Notification.** The Internal Revenue Service should be notified at the time of correction (e.g., by attaching a statement to a return that constitutes corrective action) that the waiver rule of this [paragraph (b)](#b) is being asserted.
  - (3) **Elections or other actions required to be specified on a timely filed return—**
    - (i) **In general.** If [paragraph (b)(1)](#b-1) of this section applies or would apply if there were an underpayment, any election or other action that must be specified on a timely filed return for the taxable period covered by the late filed return described in [paragraph (b)(1)](#b-1) of this section is considered timely if specified on a late-filed return filed on or before the last day for making the election under [section 338](/cfr/26/338.md).
    - (ii) **New target in purchasing corporation's consolidated return.** If new target is includible for its first taxable year in a consolidated return filed by the affiliated group of which the purchasing corporation is a member on or before the last day for making the election under [section 338](/cfr/26/338.md), any election or other action that must be specified in a timely filed return for new target's first taxable year (but which is not specified in the consolidated return) is considered timely if specified in an amended return filed on or before such last day, at the place where the consolidated return was filed.
  - (4) **Examples.** The following examples illustrate this [paragraph (b)](#b):
- (c) **Effective/applicability date.** [Paragraph (a)(4)(iii)](#a-4-iii) of this section applies to any taxable year beginning on or after May 30, 2006. However, taxpayers may apply [paragraph (a)(4)(iii)](#a-4-iii) of this section to any original Federal income tax return (including any amended return filed on or before the due date (including extensions) of such original return) timely filed on or after May 30, 2006. For taxable years beginning before May 30, 2006, see § 1.338-10 as contained in [26 CFR part 1](/cfr/26/part1.md) in effect on April 1, 2006.

# §1.338-11. Effect of section 338 election on insurance company targets.

- (a) **In general.** This section provides rules that apply when an election under [section 338](/cfr/26/338.md) is made for a target that is an insurance company. The rules in this section apply in addition to those generally applicable upon the making of an election under [section 338](/cfr/26/338.md). In the case of a conflict between the provisions of this section and other provisions of the Internal Revenue Code or regulations, the rules set forth in this section determine the Federal income tax treatment of the parties and the transaction when a [section 338](/cfr/26/338.md) election is made for an insurance company target.
- (b) **Computation of ADSP and AGUB—**
  - (1) **Reserves taken into account as a liability. Old target's tax reserves—** are the reserves for Federal income tax purposes for any insurance, annuity, and reinsurance contracts deemed sold by old target to new target in the deemed asset sale. The amount of old target's tax reserves is the amount that is properly taken into account by old target for the contracts at the close of the taxable year that includes the deemed sale tax consequences (before giving effect to the deemed asset sale and assumption reinsurance transaction). Old target's tax reserves are a liability of old target taken into account in determining ADSP under [§ 1.338-4](/cfr/26/1.338-4.md) and a liability of new target taken into account in determining AGUB under [§ 1.338-5](/cfr/26/1.338-5.md).
  - (2) **Allocation of ADSP and AGUB to specific insurance contracts.** For purposes of allocating AGUB and ADSP under §§ [1.338-6](/cfr/26/1.338-6.md) and [1.338-7](/cfr/26/1.338-7.md), the fair market value of a specific insurance, reinsurance or annuity contract or group of insurance, reinsurance or annuity contracts (insurance contracts) is the amount of the ceding commission a willing reinsurer would pay a willing ceding company in an arm's length transaction for the reinsurance of the contracts if the gross reinsurance premium for the contracts were equal to old target's tax reserves for the contracts. See [§ 1.197-2(g)(5)](/cfr/26/1.197-2.md?p=g-5) for rules concerning the treatment of the amount allocable to insurance contracts acquired in the deemed asset sale.
- (c) **Application of assumption reinsurance principles—**
  - (1) **In general.** If a target is an insurance company, the deemed sale of insurance contracts is treated for Federal income tax purposes as an assumption reinsurance transaction between old target, as the reinsured or ceding company, and new target, as the reinsurer or acquiring company, at the close of the acquisition date. The Federal income tax treatment of the assumption reinsurance transaction is determined under the applicable provisions of subchapter L, chapter 1, subtitle A of the Internal Revenue Code, as modified by the rules set forth in this section.
  - (2) **Reinsurance premium.** Old target is deemed to pay a gross amount of premium in the assumption reinsurance transaction equal to the amount of old target's tax reserves for the insurance contracts that are acquisition date assets (acquired contracts). New target is deemed to receive a reinsurance premium in the amount of old target's tax reserves for the acquired contracts. See [paragraph (d)](#d) of this section for circumstances in which new target is deemed to receive additional premium. See [§ 1.817-4(d)(2)](/cfr/26/1.817-4.md?p=d-2) for old target's and new target's treatment of the premium.
  - (3) **Ceding commission.** Old target is deemed to receive a ceding commission in an amount equal to the amount of ADSP allocated to the acquired contracts, as determined under §§ [1.338-6](/cfr/26/1.338-6.md) and [1.338-7](/cfr/26/1.338-7.md) and [paragraph (b)](#b) of this section. New target is deemed to pay a ceding commission in an amount equal to the amount of AGUB allocated to the acquired contracts, as determined under §§ [1.338-6](/cfr/26/1.338-6.md) and [1.338-7](/cfr/26/1.338-7.md) and [paragraph (b)](#b) of this section. See [§ 1.817-4(d)(2)](/cfr/26/1.817-4.md?p=d-2) for old target's and new target's treatment of the ceding commission.
  - (4) **Examples.** The following examples illustrate this [paragraph (c)](#c):
- (d) **Reserve increases by new target after the deemed asset sale—**
  - (1) **In general.** If in new target's first taxable year or any subsequent year, new target increases its reserves for any acquired contracts, new target is treated as receiving an additional premium, which is computed under [paragraph (d)(3)](#d-3) of this section, in the assumption reinsurance transaction described in [paragraph (c)(1)](#c-1) of this section. New target includes the additional premium in gross income for the taxable year in which new target increases its reserves for acquired contracts. New target's increase in reserves for the insurance contracts acquired in the deemed asset sale is a liability of new target not originally taken into account in determining AGUB that is subsequently taken into account. Thus, AGUB is increased by the amount of the additional premium included in new target's gross income. See §§ [1.338-5(b)(2)(ii)](/cfr/26/1.338-5.md?p=b-2-ii) and [1.338-7](/cfr/26/1.338-7.md). Old target has no deduction under this [paragraph (d)](#d) and makes no adjustments under §§ [1.338-4(b)(2)(ii)](/cfr/26/1.338-4.md?p=b-2-ii) and [1.338-7](/cfr/26/1.338-7.md).
  - (2) **Exception.** New target is not treated as receiving additional premium under [paragraph (d)(1)](#d-1) of this section if it is under state receivership as of the close of the taxable year for which the increase in reserves occurs.
  - (3) **Amount of additional premium—**
    - (i) **In general.** The additional premium taken into account under this [paragraph (d)](#d) is an amount equal to the sum of the positive amounts described in [paragraphs (d)(3)(ii) through (iv)](#d-3-ii..d-3-iv) of this section. However, the additional premium cannot exceed the limitation described in [paragraph (d)(4)](#d-4) of this section.
    - (ii) **Increases in unpaid loss reserves.** The positive amount with respect to unpaid loss reserves is computed using the formula A/B × (C−[D + E]) where—
      - (A) A equals old target's discounted unpaid losses (determined under [section 846](/cfr/26/846.md)) included in AGUB under paragraph 11(b)(1) of this section;
      - (B) B equals old target's undiscounted unpaid losses (determined under [section 846(b)(1)](/cfr/26/846.md?p=b-1)) as of the close of the acquisition date;
      - (C) C equals new target's undiscounted unpaid losses (determined under [section 846(b)(1)](/cfr/26/846.md?p=b-1)) at the end of the taxable year that are attributable to losses incurred by old target on or before the acquisition date;
      - (D) D (which may be a negative number) equals old target's undiscounted unpaid losses as of the close of the acquisition date, reduced by the cumulative amount of losses, loss adjustment expenses, and reinsurance premiums paid by new target through the end of the taxable year for losses incurred by old target on or before the acquisition date; and
      - (E) E equals the amount obtained by dividing the cumulative amount of reserve increases taken into account under this [paragraph (d)](#d) in prior taxable years by A/B.
    - (iii) **Increases in section 807(c) reserves.** The positive amount with respect to the items referred to in [section 807(c)](/cfr/26/807.md?p=c) other than discounted unpaid loss reserves is the sum of the net increases in such items that are required to be taken into account under [section 807(f)](/cfr/26/807.md?p=f).
    - (iv) **Increases in other reserves.** The positive amount with respect to reserves other than discounted unpaid loss reserves and other items referred to in [section 807(c)](/cfr/26/807.md?p=c) is the net increase of those reserves due to changes in estimate, methodology, or other assumptions used to compute the reserves (including the adoption by new target of a methodology or assumptions different from those used by old target).
  - (4) **Limitation on additional premium.** The additional premium taken into account by new target under [paragraph (d)(1)](#d-1) of this section is limited to the excess, if any, of—
    - (i) The fair market value of old target's assets acquired by new target in the deemed asset sale (other than Class VI and Class VII assets); over
    - (ii) The AGUB allocated to those assets (including increases in AGUB allocated to those assets as the result of reserve increases by new target in prior taxable years).
  - (5) **Treatment of additional premium under section 848.** If a portion of the positive amounts described in paragraphs [(d)(3)(ii)](#d-3-ii) and [(iii)](#d-3-iii) of this section are attributable to an increase in reserves for specified insurance contracts (as defined in [section 848(e)](/cfr/26/848.md?p=e)), new target takes an allocable portion of the additional premium in determining its specified policy acquisition expenses under [section 848(c)](/cfr/26/848.md?p=c) for the taxable year of the reserve increase.
  - (6) **Examples.** The following examples illustrate this [paragraph (d)](#d):
  - (7) **Effective/applicability date—**
    - (i) **In general.** This section applies to increases to reserves made by new target after a deemed asset sale occurring on or after April 10, 2006.
    - (ii) **Application to pre-effective date increases to reserves.** If either new target makes an election under [§ 1.338(i)-1(c)(2)](/cfr/26/1.338..1.md) or old target makes an election under [§ 1.338(i)-1(c)(3)](/cfr/26/1.338..1.md) to apply the rules of this section, in whole, to a qualified stock purchase occurring before April 10, 2006, then the rules contained in this section shall apply in whole to the qualified stock purchase.
    - (iii) **Application of paragraphs (d)(2) and (3) of this section.** Paragraphs [(d)(2)](#d-2) and [(3)](#d-3) of this section apply to taxable years beginning after October 13, 2020. For taxable years beginning on or before such date, see [paragraph (d)](#d) of this section as contained in [26 CFR part 1](/cfr/26/part1.md) revised as of April 1, 2020.
- (e) **Effect of section 338 election on section 846(e) election—**
  - (1) **In general.** New target and old target are treated as the same corporation for purposes of an election by old target to use its historical loss payment pattern under [section 846(e)](/cfr/26/846.md?p=e). See [§ 1.338-1(b)(2)(vii)](/cfr/26/1.338-1.md?p=b-2-vii). Therefore, if old target has a [section 846(e)](/cfr/26/846.md?p=e) election in effect on the acquisition date, new target will continue to use the historical loss payment pattern of old target to discount unpaid losses incurred in accident years covered by the election, unless new target elects to revoke the [section 846(e)](/cfr/26/846.md?p=e) election. In addition, new target may consider old target's historical loss payment pattern when determining whether to make the [section 846(e)](/cfr/26/846.md?p=e) election for a determination year that includes or is subsequent to the acquisition date.
  - (2) **Revocation of existing section 846(e) election.** New target may revoke old target's [section 846(e)](/cfr/26/846.md?p=e) election to use its historical loss payment pattern to discount unpaid losses. If new target elects to revoke old target's [section 846(e)](/cfr/26/846.md?p=e) election, new target will use the industry-wide patterns determined by the Secretary to discount unpaid losses incurred in accident years beginning on or after the acquisition date through the subsequent determination year. New target may revoke old target's [section 846(e)](/cfr/26/846.md?p=e) election by attaching a statement to new target's original tax return for its first taxable year.
- (f) **Effect of section 338 election on old target's capitalization amounts under section 848—**
  - (1) **Determination of net consideration for specified insurance contracts.** For purposes of applying [section 848](/cfr/26/848.md) and [§ 1.848-2(f)](/cfr/26/1.848-2.md?p=f) to the deemed assumption reinsurance transaction, old target's net consideration (either positive or negative) for each category of specified insurance contracts is an amount equal to—
    - (i) The allocable portion of the ceding commission (if any) relating to contracts in that category; less
    - (ii) The amount by which old target's tax reserves for contracts in that category has been reduced as a result of the deemed assumption reinsurance transaction.
  - (2) **Determination of capitalization amount.** Except as provided in [§ 1.381(c)(22)-1(b)(13)](/cfr/26/1.381..1.md)—
    - (i) If, after the deemed asset sale, old target has an amount otherwise required to be capitalized under [section 848](/cfr/26/848.md) for the taxable year or an unamortized balance of specified policy acquisition expenses from prior taxable years, then old target deducts such remaining amount or unamortized balance as an expense incurred in the taxable year that includes the deemed sale tax consequences; and
    - (ii) If, after the deemed asset sale, the negative capitalization amount resulting from the reinsurance transaction exceeds the amount that old target can deduct under [section 848(f)(1)](/cfr/26/848.md?p=f-1), then old target's capitalization amount is treated as zero at the close of the taxable year that includes the deemed sale tax consequences.
  - (3) **Section 381 transactions.** For transactions described in [section 381](/cfr/26/381.md), see [§ 1.381(c)(22)-1(b)(13)](/cfr/26/1.381..1.md).
- (g) **Effect of section 338 election on policyholders surplus account.** Except as specifically provided in [§ 1.381(c)(22)-1(b)(7)](/cfr/26/1.381..1.md), the deemed asset sale effects a distribution of old target's policyholders surplus account to the extent the grossed-up amount realized on the sale to the purchasing corporation of the purchasing corporation's recently purchased target stock (as defined in [§ 1.338-4(c)](/cfr/26/1.338-4.md?p=c)) exceeds old target's shareholders surplus account under [section 815(c)](/cfr/26/815.md?p=c).
- (h) **Effect of section 338 election on section 847 special estimated tax payments.** If old target had elected to claim an additional deduction under [section 847](/cfr/26/847.md) for the taxable year that includes the deemed sale tax consequences or any earlier years, the amount remaining in old target's special loss discount account under [section 847(3)](/cfr/26/847.md?p=3) must be reduced to the extent it relates to contracts transferred to new target and the amount of such reduction must be included in old target's gross income for the taxable year that includes the deemed sale tax consequences. Old target may apply the balance of its special estimated tax account as a credit against any tax resulting from such inclusion in gross income. Any special estimated tax payments remaining after this credit are voided and, therefore, are not available for credit or refund. Under [section 847(1)](/cfr/26/847.md?p=1), new target is permitted to claim a [section 847](/cfr/26/847.md) deduction for losses incurred before the deemed asset sale, subject to the general requirement that new target makes timely special estimated tax payments equal to the tax benefit resulting from this deduction. See [§ 1.381(c)(22)-1(c)(14)](/cfr/26/1.381..1.md) regarding the carryover of the special loss discount account attributable to contracts transferred in a [section 381](/cfr/26/381.md) transaction.