Revenue Administrative Bulletin 1994-12Approved: October 21, 1994 Single Business Tax and Individual Income Tax Treatment Of An Election
Under Internal Revenue Code Section 338
RAB-94-12. This bulletin describes the effect that an election under Internal Revenue Code section 338 will have on the single business tax returns as well as individual income tax (S Corp) returns of Michigan taxpayers.
General Provisions of IRC Section 338
Section 338 permits a corporation that has purchased a controlling interest in another corporation ("old target" before the acquisition and "new target" thereafter) through a qualified stock purchase to elect to have the acquisition of the target's stock treated as a purchase of assets rather than stock. For federal tax purposes, the old target corporation recognizes a gain upon the deemed asset sale and assumes a fair market value basis in its assets as the new target after the acquisition. The new target corporation is considered a continuation of the old target for purposes of federal tax procedures and administration, but the federal tax attributes of the old target are extinguished.
Elections under section 338 are made either solely by the purchasing corporation under section 338(g) or jointly by the purchasing corporation and a selling consolidated group under section 338(h)(10). In an election under section 338(g) the purchaser must recognize the gain or loss from the deemed sale of the old target's assets, and the seller must recognize the gain or loss on the sale of the old target's stock. In a 338 (h)(10) election (available only where the old target is a member of a consolidated group) the selling group must recognize the gain or loss on the deemed sale of assets. Gain or loss on the sale of the old target's stock is not recognized.
SBT Treatment of Section 338 Elections
Michigan imposes a single business tax on the adjusted tax base of corporations with business activity in Michigan allocated or apportioned to Michigan MCL 208.31; MSA 7.558 (31). The tax base includes business income which is defined as federal taxable income for corporations MCL 208.3; MSA 7.558 (3).
Michigan will recognize all section 338 elections by corporations subject to the single business tax. No separate state election is required, nor will a corporation be allowed to disregard a section 338 election for state purposes. The election under section 338 (h)(10) will be recognized regardless whether the selling group files on a consolidated basis with Michigan or has the same members in its consolidated return for federal and state purposes.
Revenue Administrative Bulletin 1992-3 specifies that property acquired by a purchasing corporation as a result of an election under section 338 will be eligible for a capital acquisition deduction (CAD) and CAD recapture will apply to the deemed asset sale resulting from the election.
Michigan Reporting Requirements For Gain or Loss Recognition and CAD/CAD Recapture Resulting From Section 338 Elections
For section 338 (g) elections where the old target was a member of an affiliated group before the acquisition, the "one transaction return" required for federal purposes solely to report the gain or loss on the deemed sale of assets will not be required for state purposes. The new target corporation will be required to report the gain or loss and the associated CAD recapture on its first single business tax return following the acquisition. Allowable CAD on qualified assets acquired in the deemed purchase will also be claimed on the first single business tax return following the acquisition.
For section 338 (g) elections where the target was not part of an affiliated group, and for all section 338 (h)(10) elections, the gain or loss on the deemed sale of assets and the associated CAD recapture will be reported on the final single business tax return of the old target. Allowable CAD on qualified assets acquired in the deemed purchase will be claimed on the first single business tax return of the new target following the acquisition.
Federal tax attributes of the old target company are extinguished after the acquisition date. Similarly, any state tax attributes, such as single business tax loss carry forwards of the old target, will be extinguished after the acquisition date.
Individual Income Tax Treatment of Section 338 Elections
Michigan imposes an income tax on an individual's taxable income under MCL 206.30; MSA 7.557(130) and MCL 206.51; MSA 7.557 (151). A shareholder who recognizes income for federal tax purposes as the result of a corporation's section 338 election shall allocate and apportion such income to Michigan as provided for in MCL 206.110; MSA 7.557(1110) and MCL 206.115; MSA 7.557 (1115).