ELECTIONS
§ 153.81. Elections under 26 U.S.C.A. § 338.
(a) General. Under section 338 of the IRC (26 U.S.C.A. § 338), a corporation which acquires at least 80% of the stock of another corporation—the target—within a 12 month period may elect, or, under certain circumstances, may be treated as having elected to treat the stock purchase as a purchase of assets. Where the target corporation is not includable in a consolidated Federal return for a period that includes the acquisition date, the tax liability, if any, resulting from a deemed sale of assets by a target corporation shall be reported in the Federal return filed for the target corporation’s taxable year that ends at the close of the acquisition date. If the target corporation is a member of an affiliated group for the taxable year that includes the acquisition date and the target corporation would be includable in a consolidated Federal return by the selling group for this period, the deemed sale of assets is treated as the target corporation’s last transaction occurring at the close of the acquisition date in a separate taxable year. The tax liability resulting from the deemed sale shall be reported by the target corporation in a final, separate deemed sale Federal return. This section sets forth special rules which shall be followed by a target corporation subject to Pennsylvania corporate taxation.
(b) Reports required. Target corporations shall file Corporate Net Income and Capital Stock or Foreign Franchise Tax reports for periods for which a Federal return is required to be filed, including a Federal 1-day deemed sale return. An election made with the Federal government is binding for Commonwealth purposes, as is a failure to elect.
(c) Due date for reports. Reports are due 30 days after the return to the Federal government is due, or would be due in the case of a corporation participating in the filing of a consolidated Federal return.
(d) Effect of election on tax liability.
(1) Corporate Net Income Tax. Taxable income generated as a result of a section 338 election is subject to Pennsylvania Corporate Net Income Tax and treated as business income subject to apportionment, if the taxpayer was entitled to apportionment for the taxable year ending immediately prior to the acquisition date. The income consequences of a Section 338 election shall be reflected on a separate company basis and not as part of a combined or consolidated report.
(2) Capital Stock or Foreign Franchise Tax. In computing the capital stock value of a target corporation on a deemed sale report, actual net worth as of the close of that day shall be used. In computing averge net income on a 1-day deemed sale report, the averge net income for the period ending immediately prior to the acquisition date shall be used.
(e) Apportionment. Where the effects of a Section 338 election are shown on a 1-day deemed sale Federal return, the apportionment factors or the taxable assets fraction, as the case may be, for the period ending immediately prior to the acquisition date shall be used.
(f) Bulk sales requirements. If only shares of stock are transferred a deemed sale of assets does not constitute a sale or transfer within the meaning of section 1403 of the FC (72 P. S. § 1403). If there is also a sale or transfer of assets in addition to the stock transfer, a bulk sale or transfer will have occurred if 51% of a stock of goods, wares or merchandise of any kind, fixtures, machinery, equipment, building or real estate is sold or transferred.
Authority The provisions of this § 153.81 issued under section 408 of the Tax Reform Code of 1971 (72 P. S. § 7408).
Source The provisions of this § 153.81 adopted January 16, 1987, effective January 17, 1987, 17 Pa.B. 273.
Notes of Decisions Treatment
Taxpayer’s gain from the financial liquidation of assets deemed to occur under a Federal tax election under 26 U.S.C.A. § 338(h)(10) is taxable as nonbusiness income. Canteen Corp. v. Commonwealth, 818 A.2d 594 (Pa. Cmwlth. 2003); affirmed 854 A.2d 440 (Pa. 2004).
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