P owns all of the stock of Y, a newly formed subsidiary, and S owns all of the stock of T. Each of P, S, T, and Y is a domestic corporation. P acquires all of the T stock in a statutory merger of Y into T, with T surviving. In the merger, S receives consideration consisting of 50% P voting stock and 50% cash. Viewed independently of any other step, P’s acquisition of the T stock constitutes a qualified stock purchase.
As part of the plan that includes P’s acquisition of the T stock, T subsequently merges into P. Viewed independently of any other step, T’s merger into P qualifies as a liquidation described in section 332. Absent the application of paragraph (c)(2) of this section, the step transaction doctrine would apply to treat P’s acquisition of the T stock and T’s merger into P as an acquisition by P of T’s assets in a reorganization described in section 368(a).
P and S do not make a section 338(h)(10) election with respect to P’s purchase of the T stock. Because no election is made, P’s acquisition of the T stock and T’s merger into P is treated as part of a reorganization described in section 368(a), and P takes the T assets with a carryover basis.
Without a section 338(h)(10) election, the stock purchase and the upstream merger are stepped together and treated as a single acquisition of Target’s assets in a section 368(a) reorganization.
Viewed in isolation, P’s stock acquisition is a qualified stock purchase and T’s merger into P is a section 332 liquidation, but the step transaction doctrine collapses them.
S receives 50% P voting stock and 50% cash in the merger of Y into T, with T surviving as the acquired target.
Because the combined steps are a reorganization rather than an asset purchase, P takes Target’s assets and liabilities with a carryover basis.
