Sales Transactions of Controlled Foreign Corporation Stock: Avoiding Tax Impact For Buyers and Sellers

Sales transactions of CFC stock shares can create unforeseen and costly tax consequences for both purchasers and sellers of CFC shares. Tax counsel structuring purchase transactions must be aware of available tax benefits and possible tax costs in exchanges of CFC stock.

Buyers of CFC shares generally may make an election under IRC Section 338(g) to treat the purchase as a formation of a new foreign corporation that has acquired all assets and assumes all liabilities of the foreign target.

This allows the purchaser to take a step-up of the assets to fair market value, avoiding any U.S. tax costs with the election and boosting the value of foreign tax credits due to the basis differential between the U.S. and the country where the CFC is located. However, Section 901(m) serves to limit those credits, and tax counsel must grasp the impact of the foreign tax credit limitation.

For sellers of CFC shares, Section 1248 can have a dramatic tax impact on the U.S. treatment of sale gains. The Section 1248 rules require a seller to treat gain recognized on the sale or exchange as a dividend under certain conditions.

However, Section 1248(b) limits the impact of the dividend recharacterization on a covered sale. But, this provision applies only to sales of stock in a CFC located in a country that does not have a bilateral income tax treaty with the United States.

Where CFC shares are owned in a partnership interest, the sale of that partnership share can create still further complexities for the taxpayer in determining treatment of the sale gain. Tax counsel must have a thorough understanding of the tax treatment of CFC sale gains to avoid costly tax consequences.

Listen as our experienced panel provides a thorough and practical guide to structuring tax-efficient purchases and sales of CFC shares.

1. Structuring purchase transactions when making a Section 338(g) election
2. Section 901(m) limitations on 338(g) benefits
3. Post-acquisition restructuring
4. Scenarios where a 338(g) election is not optimal tax strategy
5. Section 1248 dividend recharacterization rules
6. Section 1248(b) relief
7. Partnership interests owning CFC shares

The panel will discuss these and other important topics:

• When should a buyer of a CFC target not make a Section 338(g) election?
• What are the mechanics of making a Section 338(g) election in a purchase transaction?
• How does Section 901(m) operate to limit the tax benefits of a 338(g) election?
• When does Section 1248 dividend re-characterization apply?
• How does Section 1248(b) operate to limit the tax impact of dividend recharacterization?
• Special considerations for sales of partnership interests where the partnership owns stock in a CFC

Learning Objectives

After completing this course, you will be able to:

• Identify the tax mechanics of a 338(g) election when CFC stock shares are purchased
• Decide when a purchaser should not make a Section 338(g) election
• Discern the impact of the Section 901(m) limitations on the basis adjustment of a 338(g) election
• Recognize the dividend recharacterization rules of Section 1248
• Determine when the Section 1248 rules do and do not apply

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business, law or public firm experience at mid-level within the organization, advising clients on complex tax situations; supervisory authority over associates/preparers/accountants. Knowledge of Subpart F and IRC Section 957 determinations of controlled foreign corporations (CFC); familiarity with IRS rules governing sales transactions involving controlled foreign corporation (CFC) stock; familiarity with IRC 901(m), Section 338(g) elections and recharacterization under Section 1248(b).

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).