In a move that was nearly 27 years in the making, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) issued long-awaited final regulations under §336(e) (the Final Regulations) on May 10. Section 336(e) was enacted in 1986 as part of the legislation repealing the General Utilities doctrine and is meant to provide taxpayers relief from the potential multiple taxation that can result when a transfer of appreciated corporate stock is taxed to a seller without providing a corresponding step-up in the basis of the target’s assets. Specifically, §336(e) provides that, “under regulations prescribed by the Secretary,” if (1) a corporation (seller) owns stock in another corporation (target) meeting the requirements of §1504(a)(2) (i.e., at least 80% vote and value), and (2) the seller sells, exchanges, or distributes all of the target’s stock, an election (a §336(e) election) may be made to treat such sale, exchange, or distribution as a disposition of all of the target’s assets, and no gain or loss will be recognized on the sale, exchange, or distribution of the target’s stock.

In brief, the Final Regulations do not offer a significant departure from the proposed §336(e) regulations that were issued in August 2008 (the Proposed Regulations). However, the Final Regulations make several important changes to the rules included in the Proposed Regulations, including those that are summarized below.

- In the case of a distribution of the target’s stock, the Final Regulations permit the target’s realized losses in the deemed asset disposition to offset the target’s realized gains in that deemed transaction. Thus, the Final Regulations disallow the losses realized by the target that exceed the target’s realized gains on account of the deemed asset disposition, but only in proportion to the target’s stock that was disposed of by the seller in one or more distributions.