The tax effects of the familiar transaction whereby a corporation acquires another corporation’s stock by purchase, and then adopts a plan of complete liquidation for the acquired corporation (which qualifies as a subsidiary) within two years, has been changed by The Tax Equity and Fiscal Responsiblity Act of 1982 (TEFRA). The liquidation of a subsidiary according to the re- quirements prescribed by pre-TEFRA tax law will no longer guarantee a step-up in the basis of the subsidiary’s assets. Section 338 of the Internal Revenue Code (Code) requires a timely election on the part of the acquiring corporation in order to step-up the basis of the acquired corporation’s assets. If this election is made, the step up can be accomplished without a bona fide liquidation, as was required prior to the enactment of section 338.
This Article will analyze the changes made by section 338 in the area of corporate acquisitions. Included in the discussion will be a review of the law prior to TEFRA, how the law has changed, the tax effects of such changes, the reasons for the changes, and tax planning ideas.
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