Using Corporation To Buy Stock When a buyer is required to purchase stock, for whatever reason, the use of an intermediary corporation and an election under Section 338 can alleviate many of the disadvantages." To utilize Section 338, the buyer would form a corporation, which would purchase the stock and elect within 75 days of the purchase to obtain a stepped-up basis in its subsidiary's assets equal to the basis in the sub, sidiary's stock. The tax result under a Section 338 election should be approximately the I~ same as if the buying corporation had purchased the assets directly. It will not always be identical, however, for three major reasons (which buyers should consider when negotiating a stock purchase):
1. An election under Section 338 can result in recapture of depreciation and investment tax credit." 2. It is anticipated that IRS regulations will provide that the cost basis in the subsidiary's stock will be allocated to the assets not according to the values negotiated by the parties, but according to fair market values (thus, an appraisal may be required). 3. The tax attributes and tax history of the subsidiary are lost" (including both net operating loss and investment tax credit carryovers, although the subsidiary can probably obtain the investment tax credit on Section 338 property subject to the dollar limits on acquisition of used property)." In addition to obtaining a step-up in the basis of the assets, there are other advantages to using a corporation to acquire stock. When an individual is to buy the business through the purchase of stock, the entire purchase price will be allocated to his basis in the stock, and any withdrawals of funds from the acquired corporation I will be taxable either as dividends or from the sale of the stock. However, \ by forming a corporation to purchase the stock, the buyer has some flexibility to allocate his contributions to the new corporation (which will be equal to the purchase price of the stock of the corporation being purchased) to either equity or debt, subject to the debt-equity regulations" The portion allocated to debt can be recovered by the individual from the parent corporation as a tax-free return of capital. If an outside lender is going to finance part of the purchase price, hav-
the subsidiary's taxable income, thus achieving an overall tax benefit for the controlled group. Buying A Loss Corporation While a buyer of assets cannot obtain the benefit of a purchased corporation's net operating loss carryover, unless there is a "e" reorganization, a buyer of stock may be able to. The carryover can be beneficial when either (1) the buyer believes he can make the business profitable or (2) a corporate buyer will be able to use the purchased corporation's net operating continued on page 156
ing a new corporation borrow the funds to purchase the stock can generate a tax benefit when repaying the loan. Repayment of the loan with after-tax dollars is "cheaper" for a corporation than for an individual since corporate tax rates are lower. Of course, for this transaction to work, the parent corporation must obtain the funds to repay the loan. This can be done by having the subsidiary pay dividends tax-free to the parent." The parent and subsidiary could file consolidated returns, so the interest on the loan paid by the parent will offset
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