Backing-Into Internal Revenue Code Section 338

In recent years there has been an increasing incidence of corporate takeovers. Typically, the takeover begins with a purchasing corporation acquiring a controlling but less than 100% interest in the target corporation. Often, the partial ownership is merely a transitory step toward complete ownership, shortly after which the target is liquidated or merged into what is now the parent corporation. In other instances, the target retains its separate corporate existence within a parent/subsidiary relationship. The choice between termination and continued corporate existence is made only after a careful appraisal of the economic and tax consequences to the parent and the target. This growing trend revealed fundamental and far reaching loopholes in the operation of pre-TEFRA law. It also inspired the "Corporate Takeover Tax Act of 1982," which was introduced in the House of Representatives in May of 1982 by Fortney (Pete) Stark, Chairman of the Subcommittee on Select Revenue Measures and member of the Ways and Means Committee. The basic purpose of the Stark legislation was twofold. First, it was intended to further the concept of achieving parity in the tax treatment of similarly situated corporate taxpayers. Second, it was designed to discourage the use of scarce investment capital to finance tax motivated corporate takeovers. One of the most significant provisions of the proposed legislation was "Title II" which empowered a purchasing corporation to elect to treat its controlling stock purchase as an asset purchase for the purpose of determining the purchasing corporation's or target's basis in the target's assets. Title II has since been enacted as present section 338 of the Internal Revenue Code.