New York Advisory Opinion TSB-A-20(3)C: Does New York follow the federal IRC section 338(h)(10) treatment of a stock sale and a pre-sale asset distribution when computing Article 9-A entire net income?

Plain-English summary

A corporate group sold a New York subsidiary's stock and, just before the sale, had the subsidiary distribute certain "unwanted assets" up to its parent under a plan of liquidation. The buyer and seller jointly elected to treat the deal under IRC § 338(h)(10), which lets the parties treat a qualifying stock sale as if the target had sold its assets and then transferred them, producing a stepped-up asset basis for the buyer. The petitioners asked whether New York would follow that federal treatment for franchise-tax purposes.

The Department said yes to both the sale and the pre-sale distribution. A corporation is subject to the Article 9-A franchise tax (Tax Law § 209(1)), measured on the highest of several bases (Tax Law § 210(1)); the relevant one here is the entire net income base. The starting point for entire net income is federal taxable income (Tax Law § 208(9)). Because IRC § 338(h)(10) shapes the parties' federal taxable income, and because no New York statute requires a modification that would deviate from a valid § 338(h)(10) election, the federal tax effects flow through to the target's New York entire net income. The conclusion is expressly limited to tax law as it existed for years beginning before January 1, 2015 (i.e., before corporate tax reform). The Department also reaffirmed its prior § 338(h)(10) guidance (TSB-A-02(1)C; TSB-A-11(3)C).

What this means for you

Buyers and sellers in M&A deals involving New York corporations

When a deal qualifies for an IRC § 338(h)(10) election, New York generally respects the federal "deemed asset sale" result for entire net income — including a pre-sale distribution structured to mirror the regulation's examples — because the state's tax begins with federal taxable income and adds no contrary modification. Confirm the deal actually conforms to § 338(h)(10) and the regulations; the Department assumed, but did not independently verify, that conformity.

Accountants and tax professionals

The conformity rests on Tax Law § 208(9): start from federal taxable income, then apply only the statutory modifications — none of which override a valid § 338(h)(10) election for these pre-2015 years. For tax years beginning on or after January 1, 2015, re-confirm the rule under reformed Article 9-A.

Common questions

Q: Does New York follow a federal IRC section 338(h)(10) election?
A: Yes, for entire net income, because that figure starts from federal taxable income and no statute directs a different treatment (for years beginning before January 1, 2015).

Q: What about the pre-sale distribution of unwanted assets?
A: New York also follows the federal treatment of the distribution if it conforms to IRC § 338(h)(10) and the Treasury regulations.

Q: Can my company rely on this opinion?
A: No. It binds the Department only as to these petitioners and facts, and it is limited to pre-2015 tax years.

Citations and references

• IRC § 338(h)(10) and IRC § 338(a) (deemed asset sale elections); Treas. Reg. § 1.338(h)(10)-1 (mechanics; Example 2)
• Tax Law § 208(9) (entire net income computed from federal taxable income)
• Tax Law § 209(1) (Article 9-A franchise tax); Tax Law § 210(1) (highest of the tax bases)
• TSB-A-02(1)C; TSB-A-11(3)C; TSB-A-99(22)C (prior Department guidance on § 338(h)(10))

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation-ao-2020.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a20-3c.pdf

Original ruling text

New York State Department of Taxation and Finance Office of
Counsel
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE

TSB-A-20(3)C
Corporation Tax
February 11, 2020

ADVISORY OPINION
The Department of Taxation and Finance received Petitions for an Advisory Opinion
from [ REDACTED ] (“CoA”), [ REDACTED ] and [ REDACTED ] (“CoB”) [ REDACTED ]
(collectively, “Petitioners”), which will be treated as a joint petition since each petitioner requests
an opinion regarding the tax effects of the same transactions.
For purposes of Tax Law Article 9-A, Petitioners ask two questions:
(1) If the structure of a sale by CoA of the entirety of the issued and outstanding stock of
CoB to an unrelated third party conforms to the provisions of Internal Revenue Code
(“IRC”) § 338(h)(10), will New York follow the federal tax treatment of said sale?
(2) If a distribution by CoB to CoA of certain assets prior to the sale conforms with IRC §
338(h)(10), will New York follow the federal tax treatment of said distribution?
The Department concludes in the affirmative for both questions. These conclusions are
limited to the Tax Law as it existed for the years beginning before January 1, 2015.
Facts 1
[ REDACTED ] (“CoC”) is a New Jersey corporation. Prior to December 30, 2013, CoC
owned all of the issued and outstanding stock of [ REDACTED ] (“CoD”), a Delaware
corporation, and CoA, a Pennsylvania corporation. CoA owns 100 percent of the issued and
outstanding stock of CoB, a New York corporation. CoB owns the entirety of the issued and
outstanding stock of [ REDACTED ]. (“CoE”), a New Jersey corporation. CoB also whollyowned [ REDACTED ] (“CoF”), a Delaware limited liability company treated as a disregarded
entity for federal income tax purposes.
On December 30, 2013, CoD merged with and into CoF, after which CoF was the sole
surviving entity (“the Merger”). CoF continued to be solely owned by CoB.
During the tax year ending December 31, 2014, CoA sold the stock of CoB to an unrelated buyer
(“Buyer”) for cash (the “Sale”) and both parties intended the structure of the Sale to align with
the provisions of IRC § 338(h)(10). For purposes of the Sale, CoC, CoA, CoB and Buyer agreed
to undertake the following transactions accomplished at about the same time as the Merger: (1)
CoB distributed to CoA all of CoB’s stock in CoE, CoB’s membership interest in CoF and
certain other assets and liabilities (“Unwanted Assets”) pursuant to a formal plan of liquidation
entered into before this distribution (“The Distribution”); (2) Buyer purchased all of the issued
and outstanding stock of CoB for cash; and (3) CoA and Buyer jointly elected to follow the
provisions of IRC § 338(h)(10) with respect to the Sale. After the Sale, CoC continued to own
CoA, CoA continued to own CoE and CoA was the sole member in CoF.

1

The “Facts” include information provided by Petitioners after their filing of their respective petitions.

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TSB-A-20(3)C
Corporation Tax
February 11, 2020

For the tax year ending December 31, 2014, for federal income tax purposes, CoC, CoA,
CoB and CoE filed as part of a federal consolidated group. For that same year, CoB filed a New
York franchise tax return pursuant to Article 9-A, separately from the other members of its
federal consolidated group. 2 CoA did not file a New York franchise tax return for the tax year
ending December 31, 2014. It is assumed that CoC and CoE also did not file New York
franchise tax returns for that same tax year.
Analysis
Since, under the facts presented, CoA did not file a New York franchise tax return, the
analysis herein will concentrate on CoB’s potential tax liability under Article 9-A.
CoB is subject to an annual franchise tax in New York (See Tax Law § 209[1]). That tax
is imposed on the highest of several different bases (See Tax Law § 210[1]), which, as relevant
here, will be CoB’s entire net income base, i.e., its entire net income allocated to New York.
CoB’s starting point for computing its pre-allocation entire net income is presumed to be its
federal taxable income (See Tax Law § 208[9]).
As previously analyzed by the Department (See McDermott, Will & Emery, TSB-A02[1]C [April 2, 2002], TSB-A-11[3]C [February 18, 2011]; see also Roger Cukras, Hutton
Ingram Yuzek Carroll & Bertolotti, LLP, TSB-A-99[22]C [September 14, 1999]), IRC § 338(a)
provides an election to the parties to a qualified sale of stock in a target company by which they
may treat that sale as a sale of assets by the target as of the close of the date of the qualified stock
sale (“old target”). This IRC § 338(a) election also allows the parties to treat the target as a new
corporation (“new target”) that purchased the entirety of those same assets at the beginning of
the following day (see TSB-A-02[1]C, TSB-A-11[3]C). Old target will recognize the difference
between the fair market value of the assets and the adjusted basis of the assets as a gain or loss
(id.) That gain or loss will be reflected in the basis of the assets owned by new target (id.).
Assuming the IRC § 338(a) election is made and, as relevant here, the target company is a
member of a selling federal consolidated group, the parties to the sale of stock in the target can
make yet another election under IRC § 338(h)(10) and Treasury Reg. § 1.338(h)(10)-1(c) (See
TSB-A-02[1]C, TSB-A-11[3]C). With this election, typically, the selling corporation’s sale of
stock in the target corporation can be disregarded (See TSB-A-02[1]C). Instead, old target will
be “treated … as if … it transferred all of its assets to [the selling member] of the selling
consolidated group and ceased to exist … The transfer from [old target] is characterized for
Federal income tax purposes in the same manner as if the parties had actually engaged in the
transactions deemed to occur … and taking into account other transactions that actually occurred
or deemed to occur” (TSB-A-02[1]C quoting Treas. Reg. § 1.338[h][10]-1[d][4][i]).
Example 2 of Treas. Reg. § 1.338(h)(10)-1(e) further provides:
“(i) S [i.e., CoA] and T [i.e., CoB] are solvent corporations. S owns all of the
outstanding stock of T. S and P [i.e., Buyer] agree to undertake the following
transaction: T will distribute half its assets to S, and S will assume half of T's
liabilities. Then, P will purchase the stock of T from S. S and P will jointly make
a section 338(h)(10) election with respect to the sale of T. The corporations then
complete the transaction as agreed.
This opinion does not reach any conclusions regarding the proper filing status in New York of CoB or of any of its
affiliates.
2

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TSB-A-20(3)C
Corporation Tax
February 11, 2020

(ii) Under section 338(a), the assets present in T at the close of the acquisition
date are deemed sold by old T to new T. Under paragraph (d)(4) of this section,
the transactions described in paragraph (d) of this section are treated in the same
manner as if they had actually occurred. Because S and P had agreed that, after
T's actual distribution to S of part of its assets, S would sell T to P pursuant to an
election under section 338(h)(10), and because paragraph (d)(4) of this section
deems T subsequently to have transferred all its assets to its shareholder, T is
deemed to have adopted a plan of complete liquidation under section 332. T's
actual transfer of assets to S is treated as a distribution pursuant to that plan of
complete liquidation” (See TSB-A-02[1]C).
CoA and Buyer appear to have structured the transactions described herein to align with
the facts presented in Example 2. 3 If so, and if CoA and Buyer make the initial IRC § 338(a)
election, Petitioners will be permitted to compute their respective amounts for federal taxable
income pursuant to IRC § 338(h)(10).
The starting point for CoB to compute an amount for its entire net income is presumed to be its
federal taxable income (See Tax Law § 208[9]). There are no statutory directives to modify
entire net income to deviate from the federal tax effects of a valid IRC § 338(h)(10) election (See
Tax Law § 208[9]; see also TSB-A-02[1]C). Therefore, if the Sale and the Distribution of the
Unwanted Assets conform to the provisions of IRC § 338(h)(10) and the Treasury regulations
promulgated thereunder, the federal tax effects of IRC § 338(h)(10) will flow through to CoB’s
computation of its entire net income. 4
DATED: February 11, 2020

/S/
DEBORAH R. LIEBMAN
Deputy Counsel
NOTE:

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. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.

The Department draws no conclusion in this Advisory Opinion as to whether the facts do align with Example 2.
If CoB’s Distribution of the Unwanted Assets to CoA conforms to IRC § 338(h)(10), then for federal income tax
purposes, CoA would not recognize any gain or loss from the Distribution and it would have the same basis in the
Unwanted Assets as CoB had (See TSB-A-02[1]C).
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