Anti-churning rules applied to goodwill in deemed asset sale
Distribution of section 197 intangibles pursuant to 336(e) election
TAX ALERT |
Authored by RSM US LLP
The IRS recently ruled that as part of planned taxable stock sale to an unrelated purchaser, in which a section 336(e) election has been made to treat the internal stock distributions as asset sales, the intangible property (including goodwill, going concern value or other section 197 intangible) deemed transferred, will be subject to the anti-churning rules of section 197(f)(9).
Therefore, taxpayers making a section 336(e) election need to carefully consider the application of the anti-churning rules if the section 336(e) election is made in connection with a distribution and/or disposition.
Anti-churning rules generally
In general, certain intangibles are amortizable under section 197(a) (amortizable section 197 intangibles). However, the anti-churning rules exclude intangibles from the application of section 197(a) to the extent that the intangible asset was acquired after Aug. 10, 1993 (the effective date),and was held by the taxpayer or a related party within the meaning of section 197(f)(9)(C) between July 25, 1991 and the effective date (collectively, the transition period).
By definition, intangible assets, which were created after the effective date are not subject to the anti-churning rules, regardless of the relationship between the transferring parties. Thus, while the application of the anti-churning rules narrows as time goes on, taxpayers need to be aware of the circumstances in which the anti-churning rules apply, i.e., if assets are transferred to related parties and the businesses were created prior to the effective date.
Section 336(e) deemed asset sale
Section 336(e) is available to certain transactions, thereby permitting a domestic corporation or S corporation shareholder that makes a ‘qualified stock disposition’ of another domestic corporation to elect to treat the qualified stock disposition as a deemed asset sale.1 The section 336(e) election is available to transactions that had a disposition date on or after May 15, 2013.
Generally, a ‘qualified stock disposition’ (QSD) is a transaction, or series of transactions, in which target stock meeting the requirements of section 1504(a)(2) (i.e., 80% vote and value) is sold, exchanged, distributed or any combination thereof, by the seller during the 12-month disposition period, in a disposition that does not result in a carryover or substituted basis.2
The mechanics of section 336(e) generally operate to treat the sale or distribution of stock of the target as a sale by the target (old target) of its assets to an unrelated person, followed by a liquidation of the old target into the seller. Mechanically, old target is treated as selling its assets to an unrelated person in a single transaction.3
Private Letter Ruling 202120005
In a PLR released on May 21, 2021, the IRS ruled that where a section 336(e) election is made with respect to distributions, the anti-churning rules of section 197(f)(9) will apply to any section 197 intangible deemed transferred pursuant to such election. Said differently, this PLR held that the anti-churning rules apply to a QSD when there was a distribution as part of the overall transaction, even if done pursuant to an integrated third-party sale.
The steps of the transactions were as follows:
Qualified stock disposition with a section 336(e) election (distribution)
Taxable stock sale
In the case of the PLR discussed herein, all of the intangible assets transferred pursuant to the QSD (and ultimate sale) remained within the consolidated group to which the old targets were (and continued to be) members. While section 336 provides that the deemed asset sale is treated as being made to an unrelated person; the IRS, in the context of the transaction to which the PLR was issued, applied the anti-churning rules nonetheless. The ruling appears consistent with the purpose of the anti-churning rules in that, prior to the distribution and election, the consolidated group held the intangible assets; and after the distribution and election, the consolidated group still held the intangible assets.
This PLR would seem to suggest that a taxpayer cannot escape the anti-churning rules by using deemed asset sales, even if they are deemed to be made to an unrelated party, when you have the intangible assets remaining within the same consolidated group. As such, taxpayers should take into consideration the anti-churning rules, when using section 336(e) elections on distributions made in pursuance of a third-party sale.
1Reg. section 1.336-1(b)(1),(4).
2Reg. section 1.336-1(b)(5),(6).
3Reg. section 1.336-2(b)(1)(i)(A).
Call us at +1 213.873.1700, email us at email@example.com or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Patrick Phillips, Nate Meyers and originally appeared on 2021-10-04.
2021 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.