Tax Type
Corporation Income Tax
Description
Reorganizations; IRC § 338 election
Topic
Computation of Income
Date Issued
01-13-1998
January 13, 1998
Dear**********:
This will reply to your letter of October 31, 1997 requesting a ruling on whether ***** (the "Taxpayer') may make an IRC § 338 election for Virginia purposes.
FACTS
The Taxpayer intends to purchase 100% of the stock of an unrelated corporation (the "Target'). It proposes to make an IRC § 338 election to treat the stock purchase as an asset purchase for state purposes only.
Under IRC § 338, when a taxpayer makes a qualified purchase of the stock of a target corporation, the taxpayer may elect to treat the target as having sold all of its assets at fair market value to a new corporation in a taxable transaction. The target recognizes gain or loss equal to the difference between the deemed sales price and the target's basis in the assets. The "new' target then takes a basis in the assets as though it had purchased them in the deemed sale.
The Taxpayer proposes to file a one-day state tax return to report the gain on the deemed sale transaction and pay Virginia state income tax due. The apportionment factor on the target's most recently filed state tax return would be used on this one-day return.
The Taxpayer requests a ruling on whether it may make this IRC § 338 election for Virginia purposes only.
RULING
Federal taxable income is the starting point for calculating Virginia income tax. Therefore, Virginia's treatment of the IRC § 338 election will mirror federal treatment as closely as possible, while insuring that any Virginia tax accurately reflects the business activity in Virginia.
In all cases, if the seller, target, purchaser or any combination thereof are Virginia taxpayers, the IRC § 338 election will be recognized exactly as it is on a federal return for federal purposes. To the extent that any gain or loss is deemed to be recognized for federal purposes by any party it will be similarly recognized by the applicable entity for Virginia purposes. Accordingly, a separate Virginia election with no accompanying federal election is not allowed. See Public Document (P.D.) 91-317 (12/30/91), copy enclosed.
I hope that the above ruling has answered your question. If you have any questions, you may contact ***** at *****.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner