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 that merger S receives consideration consisting of P voting stock.
Viewed independently of any other step, P’s acquisition of the T stock does not constitute a qualified stock purchase because the acquisition qualifies as a tax-free reorganization under sections 368(a)(1)(A) and 368(a)(2)(E). See section 338(h)(3)(A)(ii). As part of the plan that includes P’s acquisition of the T stock, T subsequently merges into P; viewed independently, that upstream merger qualifies as a liquidation described in section 332.
Under the step transaction doctrine the two steps are integrated. P’s acquisition of the T stock followed by T’s merger into P is treated as an acquisition by P of T’s assets in a reorganization described in section 368(a). Because there is no qualified stock purchase, P and S cannot — and do not — make a section 338(h)(10) election with respect to P’s purchase of the T stock, and P takes T’s assets and liabilities with a carryover basis.
Because the merger of Y into T qualifies as a tax-free (A)/(E) reorganization, P’s acquisition of the T stock is not a qualified stock purchase under section 338(h)(3)(A)(ii).
Without a qualified stock purchase there is no election to make; pursuant to Treas. Reg. § 1.338-3(c)(1)(i) and (c)(2), no section 338(h)(10) election can be made for P’s acquisition of the T stock.
P’s acquisition of the T stock and T’s subsequent upstream merger into P are collapsed and treated as an acquisition by P of T’s assets in a reorganization described in section 368(a).
As a reorganization rather than a taxable asset purchase, P succeeds to T’s assets and liabilities with a carryover basis instead of a stepped-up cost basis.
