P owns stock of R, and R owns stock of T. As in the companion example, section 338(h)(3) treats P as purchasing T stock it is considered to own under the section 318(a) attribution rules, but stock is not treated as purchased if P is considered to own it before the start of the 12-month acquisition period.
Here the 25% block of R stock is transferred to P by purchase, not by a non-purchase transaction. The remaining constructive and actual acquisitions of R stock and T stock follow the same February Year 1 through December Year 2 timeline. Because that purchased block, and the T stock attributed through it, is treated as owned by P before the 12-month period ends, it is not counted toward the qualified stock purchase.
As a result, the T stock P is treated as acquiring by purchase within any single 12-month period never reaches the 80-percent vote-and-value threshold of section 338(d)(3). Changing the acquisition from a non-purchase to a purchase does not change the outcome: there is no qualified stock purchase, no section 338 election is available, and R’s basis in the T stock is unaffected.
Recharacterizing the 25% block as a purchase does not create a qualified stock purchase; the timing of P’s constructive ownership controls.
T stock P is considered to own before the start of the 12-month acquisition period is not treated as purchased within that period under section 338(h)(3).
Because the pre-period block cannot be counted, the purchased T stock within a single 12-month window never reaches the 80% vote-and-value threshold of section 338(d)(3).
With no qualified stock purchase there is no section 338 election to make and no cost-basis step-up in T’s assets; R’s basis in the T stock carries over.
