Sale of a Corporation
Shareholders in a sale of a Corporation have many options depending on the motivation of the parties. For example, minimizing tax paid through the transactions may not be synonymous with maximum proceeds, so true motivation of the parties matters. Shareholders have an option to sell to an acquiring corporation as a 1) taxable asset sale, 2) taxable stock sale, 3) taxable stock sale treated as an asset sale under IRC, or 4) as a non-taxable merger or consolidation, otherwise known as a reorganization. Straight stock sales provide the simplest form of sale for the seller, where shareholders are assured a single level of taxation at the most favorable long-term capital gains rates. This form of sale will be least appealing to the acquirer (A) because a stock purchase allows no recovery or amortization to A as an investment.
The law, however, allows a stock sale to be treated as an asset sale, which could provide the acquirer high incentive due to stepped up bases in the assets. The taxable stock form of sale and acquisition will require that both the target corporation (T), its shareholder sellers (SH), and acquirer (A) make a decision under the IRC whether or not to make a Section 338(h)(10) or a Section 336(e) election. If T is a C-Corporation as intended by regulatory application of Section 336, not a common parent, and is not a member of an affiliated group as defined by Section 1504, or as intended in regulatory application of Section 338, then a stock sale treated as an asset sale would require a Section 336(e) election. Section 336 election will provide the potentially large incentive to A for stepped up bases in assets. T could engage in a Section 336(e) election, which provides the benefit to SH of a single level of taxation like a straight stock sale, but may, however, expose SH to ordinary income due to the asset sale treatment of the sale under Section 1245 recapture requirements.
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