Installment Reporting for Sales of S Corporation Stock with a 338(h)(10) Election

In January 5, 2000, the Treasury Department made a rule that says when people sell stocks in a certain way, they can spread out when they report the money they get for the stocks. This rule is helpful for people selling certain types of stocks, especially S corporation stocks. But a new rule from 1999 says this doesn’t work if the company uses a certain way of keeping track of money. This article talks about these rules and how they affect people selling S corporation stocks. Section 338(h)(10) is a special rule in the tax law that allows the purchaser of a specific type of stock to treat the transaction as if they bought the corporation’s assets instead. This can provide tax benefits for the purchaser, especially in the case of S corporations. It’s a useful tool for tax advisors in certain stock transactions. A 338(h)(10) election allows a purchaser to buy 80% or more of an S corporation’s stock in a single transaction without the selling shareholders recognizing gain or loss. However, the S corporation must recognize gain or loss as if it had sold all its assets to the purchaser at a hypothetical price. This is called a deemed sale, and the S corporation is treated as both the seller and the purchaser in this transaction. Old T is selling its assets as if it were a regular sale, and the gains or losses from the sale are passed on to its shareholders. The shareholders’ stock values are adjusted afterwards. Then, Old T distributes the sale price to its shareholders, but they don’t have to pay additional taxes because their stock values have been adjusted. New T is treated as a new company, and it’s like they bought all of Old T’s assets in a regular sale. The amount they paid for Old T’s stock is added to their basis. The temporary regulation clears up confusion about how to report these types of sales for S corporations, which makes it easier for them to sell their stock. There was confusion about whether a certain tax rule could be used together with another rule. The first rule says that if a certain election is made, a company has to recognize gain or loss as if it sold all of its assets in a single transaction. But it wasn’t clear if this meant the company had to recognize immediate gain as if it had sold everything for cash, or if it could use a method where it only recognizes the gain as it receives payments. Also, the way the election worked didn’t match the requirements for using the payment method, because the company that had to make the payments was a different one from the company that had to recognize the gain. Most tax experts think that the installment method of reporting should be allowed with a 338(h)(10) election. This is because it aligns with the policy of §338(h)(10), even though it contradicts some technical rules. When an S corporation sells its assets and then liquidates, the installment method of reporting is usually allowed. This criticism and widespread support for clarification led to the Treasury Department adopting a temporary regulation to address the issue. The temporary regulation allows S corporations to use the installment method when selling their stock in a certain way. However, new legislation has limited this opportunity for S corporations that use accrual accounting. This means that S corporations and their shareholders may have to recognize all of the gain from the sale immediately, instead of over time. Critics believe that this new law should be changed to provide more flexibility for S corporations and their shareholders. The Florida Bar wants to teach its members to do their job well and serve the public. They also want to make sure that the legal system works better and to improve the study of law.

Source: https://www.floridabar.org/the-florida-bar-journal/installment-reporting-for-sales-of-s-corporation-stock-with-a-338h10-election/