How did Florida treat a section 338(h)(10) stock sale and the target's pre-sale distribution of unwanted assets?

Plain-English summary

The Florida Department of Revenue followed the federal tax treatment of a stock sale for which the seller and buyer planned a joint section 338(h)(10) election.

The election treated the target subsidiary as selling its assets at fair market value and then liquidating into its parent. The target therefore had to report the gain from the deemed asset sale as business income on its Florida corporate income tax return. The stock sale itself was disregarded under the federal framework Florida followed.

Before closing, the subsidiary also planned to distribute unwanted assets and liabilities to its parent. Where the cited federal regulation treated that distribution as part of the tax-free liquidation, Florida would treat it the same way; if it was nontaxable federally, it was nontaxable for Florida corporate income tax.

What this means for you

Corporate acquisition teams

A section 338(h)(10) election shifts the tax focus from the seller's stock gain to the target's deemed asset sale. Model the Florida business-income effect at the target level.

Restructuring and legal teams

Coordinate pre-closing distributions with the federal liquidation rules. Florida's answer depended on the distribution receiving the stated federal treatment.

Common questions

Q: Did Florida conform to the section 338(h)(10) election?
A: Yes.

Q: Who reported the deemed asset-sale gain?
A: The target subsidiary, as Florida business income.

Q: Was the pre-sale distribution taxable in Florida?
A: It followed federal treatment and was nontaxable if it qualified as part of the federal tax-free liquidation.

Citations and references

• Fla. Stat. §§ 220.02(3), 220.03, and 213.22
• I.R.C. §§ 332 and 338(h)(10)
• Fla. Admin. Code rr. 12C-1.013(1)(c) and 12C-1.0511
• Treas. Reg. § 1.338(h)(10)-1(e), Example (2)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 14C1-005

Original ruling text

Executive
Director
Marshall Stranburg

QUESTIONS:

1. WHETHER THE FLORIDA CORPORATE INCOME TAX TREATMENT OF THE S.
   338(h)(10), I.R.C. ELECTION CONFORM TO THE FEDERAL TREATMENT OF THE S.
   338(h)(10), I.R.C. ELECTION?
2. WHETHER THE DISTRIBUTION WILL BE TREATED AS PART OF THE COMPLETE
   LIQUIDATION OF THE SUBSIDIARY PURSUANT TO S. 338(h)(10), I.R.C. AND S. 332,
   I.R.C. AND THEREFORE TAX-FREE FOR FLORIDA CORPORATE INCOME TAX
   PURPOSES?
   ANSWER:
   FLORIDA FOLLOWS THE FEDERAL TREATMENT OF S. 338(h)(10), I.R.C.,
   TRANSACTIONS AND SUBSIDIARY IS REQUIRED TO REPORT THE GAIN FROM THE
   DEEMED SALE OF ITS ASSETS ON ITS FLORIDA CORPORATE INCOME TAX
   RETURN AS BUSINESS INCOME. ALSO, WHERE TREAS. REG. S. 1.338(h)(10)-1(e),
   EXAMPLE (2), APPLIES, AN ACTUAL DISTRIBUTION OF UNWANTED ASSETS BY
   SUBSIDIARY TO TAXPAYER WILL BE TREATED FOR FLORIDA CORPORATE
   INCOME TAX PURPOSES THE SAME AS IT IS TREATED FOR FEDERAL INCOME TAX
   PURPOSES.
   June 18, 2014
   Re:

Technical Assistance Advisement 14C1-005
Corporate Income Tax – Adjusted Federal Income
Section 220.02(3), F.S.
XXXXXXX (“Taxpayer”)
XXXXXXX (“Parent”)
XXXXXXX (“Subsidiary”)

Dear XXXXXXX:
This is in response to your request dated XXXXXXX, for a Technical Assistance Advisement
(TAA) pursuant to s. 213.22, F.S., and Rule Chapter 12-11, F.A.C., regarding whether or not
Florida follows the federal treatment under s. 332, I.R.C., where the tax free liquidation of a
subsidiary into the parent is made, as part of the election under s. 338(h)(10), I.R.C. An
examination of your letter has established that you have complied with the statutory and
regulatory requirements for issuance of a TAA. Therefore, the Department is hereby granting
your request for a TAA.

Child Support Enforcement – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – James McAdams, Director  Information Services – Damu Kuttikrishnan, Director

www.myflorida.com/dor
Tallahassee, Florida 32399-0100

Technical Assistance Advisement
Page 2
FACTS PROVIDED BY TAXPAYER
Taxpayer is a wholly-owned subsidiary of Parent. Taxpayer provides medicines for an array of
health concerns in several therapeutic areas. Parent is the common parent of an affiliated group
of corporations which file consolidated federal and consolidated Florida corporate income tax
returns. Taxpayer is included in the federal and Florida consolidated filing of Parent. Taxpayer is
negotiating with an unrelated corporation (“Buyer”) to sell the stock of its wholly-owned
subsidiary, Subsidiary, for cash. Taxpayer and Buyer will make a joint election pursuant to s.
338(h)(10), I.R.C., whereby the transaction will be treated for federal income tax purposes as if
Subsidiary had sold its assets to Buyer and distributed the sale proceeds to Seller (the Taxpayer)
in a complete liquidation under s. 332, I.R.C. Prior to the sale of Subsidiary stock, Subsidiary
will distribute all of its XXXXXXX stock, its membership interest in XXXXXXX and certain
other retained assets and liabilities (the “Distribution”) to Taxpayer.
QUESTION

1. Whether the Florida corporate income tax treatment of the s. 338(h)(10), I.R.C. election
   conform to the federal treatment of the s. 338(h)(10), I.R.C. election?
2. Whether the Distribution will be treated as part of the complete liquidation of Subsidiary
   pursuant to s. 338(h)(10), I.R.C. and s. 332, I.R.C. and therefore tax-free for Florida corporate
   income tax purposes?
   LAW
   Section 220.02(3), F.S., states, in part:
   (3) It is the intent of the Legislature that the income tax imposed by this code
   utilize, to the greatest extent possible, concepts of law which have been developed
   in connection with the income tax laws of the United States, in order to:
   (a) Minimize the expenses of the Department of Revenue and difficulties in
   administering this code;
   (b) Minimize the costs and difficulties of taxpayer compliance; and
   (c) Maximize, for both revenue and statistical purposes, the sharing of
   information between the state and the Federal Government.
   ...
   Rule 12C-1.0511, F.A.C., states, in part:
   The Department of Revenue hereby incorporates by reference in this rule ….: …
   (d) s[ection] 338 [of the United States Internal Revenue Code of 1986, as
   amended, and in effect January 1, 1993].

Technical Assistance Advisement
Page 3
Rule 12C-1.013(1)(c), F.A.C., states:
Elections under s. 338(h)(10), I.R.C. For federal tax purposes, an election under s.
338(h)(10), I.R.C., can only be made if a consolidated return is being filed that
includes both the target corporation and the selling consolidated group. The
federal tax treatment of s. 338(h)(10), I.R.C., which is incorporated by
reference in Rule 12C-1.0511, F.A.C., will be piggybacked to the greatest
extent possible even though the taxpayer is not filing a consolidated Florida
return. The target corporation should report the gain attributable to the deemed
asset sale on its separate Florida return, if appropriate. The basis in the assets will
then be stepped-up for Florida tax purposes to the same extent as for federal
income tax purposes. (Emphasis Supplied)
DISCUSSION
Stock Sale
Sometimes, the parties to an acquisition may wish to structure the transaction as a stock sale
rather than an asset sale for nontax reasons, but may wish to have the transaction treated as an
asset sale for tax purposes. In order to achieve this goal, the parties may consider an election
under s. 338(h)(10), I.R.C. Under I.R.C. s. 338(h)(10), the stock sale is treated as if the target had
sold its assets in a taxable transaction and liquidated tax-free into its parent under s. 332, I.R.C.
(or its subchapter S shareholders). The sale of the target’s stock is disregarded for federal income
tax purposes. Thus, the only tax that is imposed is on a deemed sale of assets by the target.
Florida explicitly conforms to the federal treatment of s. 338(h)(10), I.R.C. by incorporating by
reference s. 338, I.R.C. in Rule 12C-1.0511, F.A.C. In addition, Florida conforms simply by
calculating state taxable income based on federal taxable income.
Under the federal tax law, if a corporation purchases the stock of a target corporation, the
acquiring corporation’s basis in the stock is usually the amount paid for the stock. Generally, the
basis of the target’s assets is a carryover basis even if the target distributes them to the acquiring
corporation (new parent) in a complete liquidation. However, if the acquiring corporation elects
under I.R.C. s. 338 to treat the transaction as a purchase of the target’s assets. I.R.C. s. 338
provides, in pertinent part:
For purposes of this subtitle, if a purchasing corporation makes an election under
this section . . . then, in the case of any qualified stock purchase, the target
corporation—
(1) Shall be treated as having sold all of its assets at the close of the acquisition date
at fair market value in a single transaction, and
(2) Shall be treated as a new corporation which purchased all of the assets . . . at the
beginning of the day after the acquisition date. (Emphasis Supplied)

Technical Assistance Advisement
Page 4
If an election is made under s. 338(h)(10), I.R.C., the target corporation recognizes the gain or
loss on the deemed sale of assets, but the Seller (the Taxpayer) does not recognize any gain or
loss with respect to the actual sale of the target’s stock for federal income tax purposes. One
effect of a s. 338(h)(10), I.R.C. election is to increase the basis of certain depreciable assets such
as property, plant and equipment to reflect current fair market value at the close of the
acquisition date of the assets. The increase in tax basis also affects the Buyer’s federal taxable
income in future years, in that depreciation deductions are increased and federal adjusted income
is accordingly decreased.
Like many states, Florida uses federal taxable income as the starting point for determining the
Florida corporate income tax. In other words, the computation of Florida net income starts with
its federal taxable income as defined under the Internal Revenue Code, as in effect for the
taxable year, with some exceptions not relevant to this protest. In this case, Taxpayer is
proposing to sell its stock in Subsidiary to Buyer and the parties will make a joint s. 338 (h)(10),
I.R.C. election. As a result of the s. 338(h)(10), I.RC. rules and for purposes of computing
federal taxable income, Subsidiary (the target corporation) will be treated as if it had sold its
assets for fair market value at the close of the acquisition. The resulting gain will then be
included in Subsidiary’s federal taxable income and correspondingly Subsidiary’s Florida net
income (tax base). In other words, Subsidiary will report the gain from the deemed sale of its
assets on its Florida corporate income tax return as business income.
Distribution
The Florida Corporate Income Tax Code adopts the Internal Revenue Code. See s. 220.03, F.S.
In addition, s. 220.02(3), F.S., provides that federal income tax concepts are adopted as a guide
in interpreting and administering the Florida Income Tax Code. Thus, Treas. Reg. s.
1.338(h)(10)-1(e), Example (2), applies in determining (for Florida purposes) whether the
Distribution will be treated as part of the complete liquidation of Subsidiary pursuant to s.
338(h)(10) and s. 332, I.R.C. In this case, in connection with the s. 338(h)(10), I.R.C. transaction
(i.e., stock sale), Buyer and Taxpayer agreed that Subsidiary will distribute unwanted assets to
Taxpayer. If the Distribution is treated as a non-taxable transaction for Federal income tax
purposes, the Distribution will also be treated as a non-taxable transaction for Florida corporate
income tax purposes.
CONCLUSION
Florida will follow the federal treatment of s. 338(h)(10), I.R.C. transaction and Subsidiary will
report the gain from the deemed sale of its assets on its Florida corporate income tax return as
business income. Also, where Treas. Reg. s. 1.338(h)(10)-1(e), Example (2), applies, an actual
distribution of unwanted assets by Subsidiary to Taxpayer will be treated for Florida corporate
income tax purposes the same as it is treated for federal income tax purposes.
This response constitutes a Technical Assistance Advisement under section 213.22, F.S., which
is binding on the Department only under the facts and circumstances described in the request for
this advice as specified in section 213.22, F.S. Our response is predicated on those facts and the

Technical Assistance Advisement
Page 5
specific situation summarized above. You are advised that subsequent statutory or administrative
rule changes, or judicial interpretations of the statutes or rules, upon which this advice is based,
may subject similar future transactions to a different treatment than expressed in this response.
You are further advised that this response, your request and related documents are public records
under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s.
213.22, F.S. Your name, address, and any other details, which might lead to identification of the
taxpayer, must be deleted before disclosure. In an effort to protect the confidentiality of such
information, we request you provide the undersigned with an edited copy of your request for
Technical Assistance Advisement, backup material and response within fifteen days of the date
of this advisement.
Sincerely,

Jermane L. Wright
Senior Attorney
Technical Assistance and
Dispute Resolution

JLW/
Control No.: 161468