Section 336(e) Election Agreement: Understanding Its Significance in M&A Transactions

If you`re involved in mergers and acquisitions (M&A) transactions, it`s essential to understand the importance of Section 336(e) Election Agreement. This provision allows the acquiring company to elect to treat the purchased assets as if it was a purchase of stock for tax purposes. This election can provide significant tax benefits for the acquiring company, making it a crucial factor in M&A transactions.

What is a Section 336(e) Election Agreement?

When a company acquires the stock of another company, they acquire all the assets and liabilities of the target company, including its tax attributes. However, when a company purchases the assets of another company, such as equipment, inventory, and customer lists, the acquiring company doesn`t acquire the target`s tax attributes.

Section 336(e) of the Internal Revenue Code (IRC) provides an election that can be made by the acquiring company in a stock acquisition treated as an asset acquisition. This election allows the acquiring company to treat the transaction as if it was a purchase of stock for tax purposes. This means that the acquiring company can step into the shoes of the target company for tax purposes and inherit its tax attributes, such as net operating losses (NOLs), credits, and avoiding built-in gains tax.

Why is Section 336(e) Election Agreement Important?

The Section 336(e) Election Agreement can provide significant tax benefits to the acquiring company, making it an essential factor in M&A transactions. Here are some of the benefits of this election:

1. Use of Net Operating Losses (NOLs)

When a company suffers losses, it can carry the losses forward to offset future taxable income. These losses are called NOLs. If the acquiring company elects a Section 336(e) Election Agreement, it can inherit the NOLs of the target company. This can help reduce the acquiring company`s taxable income and save on taxes.

2. Avoidance of Built-in Gains Tax

A built-in gains tax is a tax on the appreciation of assets that have been held by the target company for a long time. If the acquiring company elects a Section 336(e) Election Agreement, it can avoid this tax on the appreciation of assets held by the target company since the acquisition date.

3. Avoidance of Double Taxation

When a company sells its assets, there is a potential for double taxation. The target company will pay taxes on the gain from the sale of assets, and the acquiring company will pay taxes on the income earned from the assets. If the acquiring company elects a Section 336(e) Election Agreement, it can avoid double taxation as it will be treated as if it purchased the stock of the target company.

In Conclusion

The Section 336(e) Election Agreement is a crucial provision to consider in M&A transactions. By electing this agreement, the acquiring company can inherit the target company`s tax attributes, such as NOLs and credits, avoid built-in gains tax, and avoid double taxation. Therefore, it`s essential to consult with a tax professional to determine if electing this agreement is right for your M&A transaction.