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 make a section 338(h)(10) election with respect to P’s purchase of the T stock. Pursuant to paragraph (c)(2) of this section, as a result of the election, for all Federal tax purposes P’s acquisition of the T stock is treated as a qualified stock purchase and is not treated as part of a reorganization described in section 368(a).
When a section 338(h)(10) election is made, paragraph (c)(2) treats P’s stock acquisition as a qualified stock purchase rather than as part of 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 election controls the characterization.
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 election applies, Target is treated as selling its assets in a deemed asset sale rather than as a party to a reorganization.
