Bulletin #29

Taxpayers' Information Service
March 26, 1986
Corporation Business Tax

The question has been posed as to the Department's position on "338 Liquidations".

In response to the question, the Department has cited three situations and the tax treatment which will be applicable:

Background

A corporation acquiring the stock of another company can elect to use section 338 of the Internal Revenue Code. If a section 338 election is made, the company purchased (target) is treated as if it sold all of its assets to a new company (new target). The assets are then stepped-up to fair market value and the new target is allowed to take the investment tax credit and depreciate the stepped-up basis. The old target is subject to recapture tax liability on the deemed sale of assets. None of the tax attributes can be carried forward from the old target to the new target, i.e., NOL and capital loss carryovers, contribution carryovers, etc.

The following three situations are possible:

1. A target corporation which was not filing on a consolidated basis with other companies must file a final return for operations through the acquisition date. This return will include any tax applicable to the deemed asset sale.
2. A target corporation which was the parent of a group of companies being acquired can file a consolidated final return for the group's operations through the acquisition date including any recapture items caused by the deemed sale.
3. A target corporation which is being acquired from a group of companies filing on a consolidated basis must include results of operations through the acquisition date on the consolidated return of the selling group. A separate one transaction return must be filed which includes recapture of depreciation resulting from the deemed sale of assets. If the target corporation had its own NOL carryover, it may use this to offset any income reported on this one transaction return.

Connecticut Tax Return Treatment

Situations 1 and 2 above should present no problem for Connecticut tax purposes. In both cases, a final Connecticut return will be filed and any tax due through the acquisition date will be paid. The new target companies can choose a new year end and file separately or file consolidated with the new parent company for future years.

In Situation 3, there will be two returns filed by the old target corporation. The first return will be for operations through the acquisition date and will be handled as any final return. The second return will be a one transaction return dealing only with any recapture caused by the deemed sale of assets. Any income reported on this return will be apportioned using the same apportionment factor as determined on the preceding return for income through the acquisition date. The new target company may then, as for Situations 1 and 2, choose a new year end and file separately or file consolidated with the new parent.

As with the federal returns, no tax attributes of the old target company will pass through to the new target company for Connecticut tax purposes. Net operating loss carryovers, capital loss carryovers, contributions carryovers, etc., of the old target company will not be allowed to be deducted on Connecticut Corporation Business Tax returns of the new target company.

As the one transaction return on which only the deemed sale of assets is recognized is merely a technical return, neither the minimum tax of $100.00 nor the tax on the additional tax base will be required to be paid on that return. The final return for the old target's operations through the date of acquisition and all returns filed by the new target return will be subject to tax on each of the three Connecticut tax bases.