If the Host purchases the Target's assets for cash, debt, and/or stock, the tax treatment depends, in large part, on whether the Target then liquidates. In either event, a tax is imposed on the gain at the Target level, with installment sale treatment potentially available for notes. Assuming the Target liquidates, the shareholders also pay tax on their gain, meaning the transaction engenders two levels of federal tax. The Target's tax attributes, e.g., NOL carryovers, remain with the Target; if the Target liquidates (and not into its parent), then the attributes are forever lost (although such attributes are available to offset any gain on the liquidation). The Host's basis in the assets purchased equals the purchase price plus liabilities assumed and acquisition costs.
Prior to what is commonly referred to as the repeal of General Utilities in the Tax Reform Act of 1986, if the Target had sold its assets in a taxable transaction and liquidated within a year, then the operation of (old) §§ 336 and 337 resulted in no gain at the corporate level except for recapture items. A single level of tax was imposed on the shareholders on liquidation. However, the assets purchased were marked to market, so to speak, meaning that the basis of the assets was increased, or stepped up, to reflect the price paid therefor. In short, under pre-1987 law, the tax results of a taxable stock sale and a taxable asset sale followed by liquidation were roughly the same.
Repeal of General Utilities
Subsequent to January 1, 1987, the tax effects of the two generic types of transactions-a sale of stock versus an asset sale (or an asset sale followed by liquidation)-are quite different. With certain narrow exceptions, it is impossible to achieve a step-up in the basis of the assets purchased (regardless of the form of the transaction) unless the sellers are willing to bear two levels of gain recognition-one at the corporate level, measured by the difference between the price paid and the basis of the assets being sold, and one at the shareholder level, measured by the difference between the consideration received by the selling proprietors and the tax basis for their shares.
 Ordinary income, as opposed to capital gain, will be recognized with respect to such items as depreciation recapture, LIFO inventory recapture and matters involving tax benefit recapture (although currently the classification makes little difference to a corporation). The judicially created "tax benefit rule" gives the Service a weapon to combat anomalies such as double counting in favor of the taxpayer, e.g., an asset already fully expensed somehow acquires tax basis and is expensed again (or credited against gain on sale).
 If the Target liquidates, the Target recognizes any gain (or loss) on any unsold assets, as well as any gain or notes received in the asset sale. The gain on the notes is based on the fair market value of the notes-not the face amount-providing some valuation flexibility.
 § 381(a) (specifying the instances in which attributes do carry over, not including taxable sales).
 General Utilities & Operating Co. v. Helvering, 296 U.S. 200, 56 S.Ct. 185, 80 L.Ed. 154 (1935) is accepted as standing for the proposition that a distribution by a corporation of appreciated property to its shareholders other than in liquidation is not taxable, a result actually reversed in 1984. See § 311(b)(1). The General Utilities label was, however, broadened to attach to the notion that a corporation recognizes no income on a sale of substantially all its assets pursuant to a liquidation.
 Under old § 336, a corporation could liquidate and the shareholders could sell the distributed assets with only one gain and one tax imposed on the sales price minus the shareholders' basis; under old § 337, if the Corporation sold assets and then liquidated, the result was the same (assuming compliance with certain technical requirements). Section 336(a) was amended and § 337 repealed by the Tax Reform Act of 1986 (except that new § 337 applies to subsidiaries of parent corporations).
 Section 336 is now the "flip side" of old § 336.
Joseph W. Bartlett, Special Counsel, JBartlett@McCarter.com
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