New York Advisory Opinion TSB-A-11(3)C: Does a parent corporation succeed to a target's investment tax credit carryover when it acquires the target's stock with a joint IRC section 338(h)(10) election?
Plain-English summary
The parent corporation bought the stock of a target and made a joint IRC § 338(h)(10) election with the seller. That election treats the stock purchase as a deemed sale of the target's assets while the target is in the selling consolidated group, followed by a deemed liquidation of the target into the parent under IRC §§ 332 and 337. The parent asked whether it could then use the target's investment tax credit (ITC) carryover.
The Department said yes. Because the § 338(h)(10) election produces a deemed § 332 liquidation of the target into the parent, IRC § 381(a)(1) makes the acquiring corporation succeed to the target's tax attributes listed in § 381(c) -- and § 381(c)(24) includes the general business credit under IRC § 38 (which historically encompassed the investment tax credit). So the parent succeeds to the target's ITC carryover, provided the parent meets the ITC's own requirements (such as keeping the underlying property in qualified use).
What this means for you
Buyers using section 338(h)(10)
A stock purchase dressed up as an asset deal via § 338(h)(10) doesn't strand the target's credit carryovers -- the deemed liquidation lets the acquirer inherit them under the federal carryover rules New York follows. But inheriting the carryover isn't the end: you must still satisfy the ITC's substantive conditions.
Accountants and tax professionals
The mechanism is § 338(h)(10) -> deemed asset sale -> deemed § 332 liquidation -> § 381(a)(1) attribute succession, with the general business credit carried under § 381(c)(24). Confirm continued qualified use of the credit property so the inherited carryover survives at the parent level.
Common questions
Q: Can a parent use the target's ITC carryover after a 338(h)(10) acquisition?
A: Yes, because the deemed § 332 liquidation makes the parent succeed to the target's tax attributes under IRC § 381(a)(1), including the general business credit (§ 381(c)(24)).
Q: Is succession automatic?
A: The carryover transfers, but the parent must still meet the investment tax credit's own requirements to use it.
Q: What turns the stock purchase into an asset sale and liquidation?
A: The joint IRC § 338(h)(10) election, which yields a deemed asset sale followed by a deemed § 332 liquidation into the parent.
Citations and references
- Internal Revenue Code § 338(h)(10) (joint election treating a stock purchase as a deemed asset sale)
- Internal Revenue Code § 332 (deemed complete liquidation of the target into the parent)
- Internal Revenue Code § 381(a)(1) (acquiring corporation succeeds to the distributor's tax attributes); Internal Revenue Code § 381(c)(24) (general business credit among the carryover items)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2011.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a11_3c.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-11(3)C
Corporation Tax
February 18, 2011
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C091113A
On November 13, 2009, the Department of Taxation and Finance received a Petition for
Advisory Opinion from name and address redacted. Petitioner asks whether a parent corporation
(Parent) succeeds to an investment tax credit (ITC) carryover of its wholly owned subsidiary (Target),
when Parent sells Target’s stock to a third party purchaser (Purchaser) and makes a joint election with
Purchaser under IRC § 338(h)(10) to treat the stock sale as a deemed asset sale.
We conclude that Parent may succeed to the ITC carryover of Target where Parent meets its
burden of proof to substantiate the amount of the credit.
Facts
Parent files its federal income tax return on a consolidated basis with an affiliated group of
corporations. Target is a wholly owned subsidiary of Parent and files its federal income tax return
with Parent as a member of the consolidated group. Parent and Target also filed New York State
general business corporation combined franchise tax returns with the members of the consolidated
group.
Target, a manufacturing company with operations located in New York, became eligible to
claim a New York ITC (Tax Law § 210.12) for equipment and other property used in its
manufacturing business. Due to limitations that prevent a taxpayer from using an ITC to reduce its tax
liability below certain minimum taxable amounts, Target was not able to use the credit against its tax
liability in the year the credit was claimed but was allowed to carry forward its unused ITC to its
succeeding fifteen taxable years. [Tax Law §§ 210.12(a) & (e)]. Prior to the expiration of Target’s
ITC carry forward period, but after the date of the ITC property’s useful life, Parent sold all of its
stock in Target to an unrelated corporation (Purchaser). Parent and Purchaser made a joint IRC §
338(h)(10) election to treat the stock sale as a deemed asset sale.
Analysis
Under IRC § 338, an election may be made by the purchaser in a qualified stock purchase,
which generally is one involving the purchase of 80 percent or more of the stock of a corporation
within a 12 month period. Pursuant to this election, the target corporation (old target) is treated as
having sold all of its assets at the close of the acquisition date (the date of the qualified stock purchase)
at fair market value in a single transaction and is then treated as a new corporation (new target) which
purchased all of the assets as of the beginning of the day after the acquisition date. The result of the
election is that the difference between the fair market value of the assets and the adjusted basis of the
assets is recognized as gain or loss of old target, and the basis of the assets in the hands of new target
is increased or decreased to recognize the gain or loss (stepped up or down), as the case may be.
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Under IRC § 338(h)(10), the seller and purchaser of target stock may make a joint election
under IRC § 338(h)(10) to treat the purchase and sale of stock of a target corporation as the purchase
and sale of the assets of the target corporation, followed by a distribution of the proceeds of the
deemed asset sale to the selling shareholder, after which the target corporation ceases to exist. This
election may be made for the target corporation only under certain circumstances, one of which is that
the target is a member of a selling consolidated group. The effect is that there will be only one level of
federal income tax on the transaction, which will be imposed on the target corporation on the deemed
sale of its assets while a member of the selling consolidated group. No gain or loss is recognized on
the sale of target stock by members of the consolidated group. (See Treasury Regulation §
1.338(h)(10)-1). Where an election under IRC § 338(h)(10) is made for target, a section 338 election
is deemed made for the target.
Treasury Regulation § 1.338(h)(10)-1(d)(3) provides the tax characterizations of the deemed
sale of target’s assets, stating that old target (“old T”) is treated as transferring all of its assets to an
unrelated person in exchange for consideration that includes the discharge of its liabilities, and realizes
the tax consequences from the deemed asset sale before the close of the acquisition date (the date of
the qualified stock purchase) while old T is a member of the selling consolidated group.
Section 1.338(h)(10)-1(d)(4) of the Treasury Regulations provides the tax characterization of
the deemed liquidation of the old target and the selling consolidated group as follows:
“(i) In general. Old T is treated as if, before the close of the acquisition date,
after the deemed asset sale in paragraph (d)(3) of this section, and while old T is a
member of the selling consolidated group…, it transferred all of its assets to members
of the selling consolidated group,…and ceased to exist. The transfer from old T is
characterized for Federal Income tax purposes in the same manner as if the parties had
actually engaged in the transactions deemed to occur because of this section and
taking into account other transactions that actually occurred or are deemed to occur.
For example, the transfer may be treated as a distribution in pursuance of a plan of
reorganization, a distribution in complete cancellation or redemption of all its stock,
one of a series of distributions in complete cancellation or redemption of all its stock
in accordance with a plan of liquidation, or part of a circular flow of cash. In most
cases, the transfer will be treated as a distribution in complete liquidation to which
section 336 or 337 applies.”
Petitioner states that the transaction will satisfy all of the requirements of an IRC § 338(h)(10)
election, and for federal tax purposes, the purchase of Target’s stock will be treated as if it transferred
its assets to an unrelated third party while it was a member of the selling consolidated group. After the
asset sale, but before the close of the acquisition date, Target will be treated as if it had distributed the
proceeds to Parent in a complete liquidation pursuant to IRC §§ 332 and 337.
IRC § 381(a)(1) provides that, in the case of a liquidation of a subsidiary corporation in
accordance with IRC § 332, the acquiring corporation shall succeed to and take into account, as of the
close of the day of distribution, the items of the distributor corporation described in IRC § 381(c),
subject to certain limitations. Section 381(c)(24) provides that those items include the general
business credit under IRC § 38. The general business credit includes many credits, including the
former federal investment tax credit which has since been repealed. Therefore, for federal income tax
purposes, as the result of Parent’s joint election under IRC § 338(h)(10), Parent’s sale of Target’s
stock will be treated as a deemed asset sale, and before the close of the acquisition date, Target will be
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treated as if it distributed its proceeds to Parent in a complete liquidation pursuant to IRC § 332. Also,
under IRC § 381(a)(1) Parent would have been able to succeed to any ITC carryover of Target on the
day of distribution assuming the federal ITC was still allowed to be claimed for federal tax purposes.
This Opinion reaches no conclusion with regard to the way Parent and Target will be treated for
federal income tax purposes under IRC §§ 338 and 381. Assuming these transactions qualify under
IRC § 338(h)(10) and that Parent would succeed to the carry over credit, if any, of Target pursuant to
IRC § 381(a)(1), it must be decided whether any Parent will succeed to New York ITC carryover of
Target under such circumstances.
For purposes of computing the entire net income base under Tax Law Article 9-A, where a
parent corporation and a target file a consolidated return, the starting point for each corporation is its
federal taxable income computed as if it had filed separately for federal income tax purposes. Section
208.9 of the Tax Law defines entire net income as “total net income from all sources, which shall be
presumably the same as the entire taxable income…which the taxpayer is required to report to the
United States treasury department…except as hereinafter provided…” After determining federal
taxable income, it must be adjusted as required by section 208.9 and section 210.3(d) and (e) of the
Tax Law to arrive at entire net income.
Therefore, when a parent corporation and a target corporation file a federal consolidated
return, the starting point for each corporation to compute its entire net income is its federal taxable
income computed as if it had filed separately for federal income tax purposes (pro forma federal
return). For purposes of determining entire net income, the Federal taxable income of Target will
reflect the IRC § 338(h)(10) election and any gain or loss on the deemed sale of its assets described in
section 1-338(h)(10)-1 of the Treasury Regulations. Also, the federal taxable income of a member of
the selling consolidated group that sold the stock of target corporation will not include any gain or loss
on the sale or exchange of stock of the target corporation. The entire net income of the selling
corporation will also not reflect any such gain or loss since there is no modification under sections
208.9 or section 210.3(d) and (e) of the Tax Law that would require the selling corporation to include
the gain or loss in entire net income.
Tax Law section 210.12(a) provides that a taxpayer is allowed an ITC against its corporate
franchise tax liability for investments in qualified tangible personal property and real property. The
ITC cannot reduce the tax liability to less than the higher of the minimum tax on the minimum taxable
income base or the fixed dollar minimum tax. Any ITC that cannot be used in the taxable year in
which property is placed in service may be carried forward to the taxpayer’s succeeding fifteen taxable
years. Tax Law § 210.12(e). If property for which an ITC has been taken is disposed of or is not in
qualified use before the end of its useful life, then the difference between the ITC taken and the ITC
allowed, based on actual use of the property, must be recaptured in the year of disposition or where the
property otherwise ceases to be in qualified use. Tax Law § 210.12(g).
In Matter of the Petition of AIL Systems, Inc., (Tax Appeals Tribunal, October 21, 2002), the
Tax Appeals Tribunal, relying on TSB-M-86(3)C, held that the sale of a corporation to a purchaser
that elects to treat the transaction as a sale of assets under IRC § 338(h)(10) requires the target
corporation to add back any New York ITC’s claimed in prior years when it files its final return. The
Tribunal noted that New York will follow the federal treatment under IRC § 338, and, accordingly,
New York will require old target to recapture any unearned investment tax credit in such situations.
Also, when the new target files reports as a new corporation, it would have a stepped up basis for the
property and may claim a new ITC on such property if the property otherwise qualifies.
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It is concluded that Parent will succeed to Target’s ITC carryover when Parent can adequately
produce the information substantiating the amount of that carryover. Parent will succeed only to
Target’s remaining years of the carry forward period relating to that carried forward amount.
DATED: February 18, 2011
NOTE:
/S/
DANIEL SMIRLOCK
Deputy Commissioner and Counsel
An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts
set forth therein and is binding on the Department only with respect to the person or entity to
whom it is issued and only if the person or entity fully and accurately describes all relevant
facts. An Advisory Opinion is based on the law, regulations, and Department policies in
effect as of the date the Opinion is issued or for the specific time period at issue in the
Opinion.