Example. In Year 1, T, a manufacturer, purchases a customized delivery truck from X with purchase money indebtedness having a stated principal amount of $100,000. P acquires all of the stock of T in Year 3 for $700,000 and makes a section 338 election for T. Assume T has no liabilities other than its purchase money indebtedness to X. In Year 4, when T is neither insolvent nor in a title 11 case, T and X agree to reduce the amount of the purchase money indebtedness to $80,000. Assume further that the reduction would be a purchase price reduction under section 108(e)(5). T and X's agreement to reduce the amount of the purchase money indebtedness would not, under general principles of tax law that would apply if the deemed asset sale had actually occurred, change the amount of liabilities of old target taken into account in determining its amount realized. Accordingly, ADSP is not redetermined at the time of the reduction. See § 1.338-5(b)(2)(iii) Example 1 for the effect on AGUB.
Example. T has two classes of stock outstanding, voting common stock and preferred stock described in section 1504(a)(4). On March 1 of Year 1, P purchases 40 percent of the outstanding T stock from S1 for $500, 20 percent of the outstanding T stock from S2 for $225, and 20 percent of the outstanding T stock from S3 for $275. On that date, the fair market value of all the T voting common stock is $1,250 and the preferred stock $750. S1, S2, and S3 incur $40, $35, and $25 respectively of selling costs. S1 continues to own the remaining 20 percent of the outstanding T stock. The grossed-up amount realized on the sale to P of P's recently purchased T stock is calculated as follows: The total amount realized (without regard to selling costs) is $1,000 (500 + 225 + 275). The percentage of T stock by value on the acquisition date attributable to the recently purchased T stock is 50% (1,000/(1,250 + 750)). The selling costs are $100 (40 + 35 + 25). The grossed-up amount realized is $1,900 (1,000/.5 - 100).
ADSP = G + L + TR * (ADSP-B)
ADSP = ($75,000/1) + $0 + .34 * (ADSP - $50,400)
ADSP = $75,000 + .34ADSP - $17,136 .66ADSP = $57,864
ADSP = $87,672.72
Asset | Basis | FMV | Ratio of asset FMV to total Class V FMV |
Land | $5,000 | $35,000 | .14 |
Building | 10,000 | 50,000 | .20 |
Equipment A (Recomputed basis $80,000) | 5,000 | 90,000 | .36 |
Equipment B (Recomputed basis $20,000) | 10,000 | 75,000 | .30 |
Totals | $30,000 | $250,000 | 1.00 |
ADSPV = (G-(I + II)) + L + TR * [(II - BII) + (ADSPV - BV)]
ADSPV = ($140,000 - ($10,000 + $10,000)) + $50,000 + .34 * [($10,000 - $4,000) + (ADSPV - ($5,000 + $10,000 + $5,000 + $10,000))]
ADSPV = $161,840 + .34ADSPV
.66 ADSPV = $161,840
ADSPV = $245,212.12
ADSPV = (G - (I + II)) + L + TR * [(II - BII) + (ADSPV - BV) + (ADSPVII - BVII)]
ADSPV = ($140,000 - ($10,000 + $10,000)) + $50,000 + .34 * [($10,000 - $4,000) + (ADSPV - $30,000) + ($0 - $3,000)]
ADSPV = $160,820 + .34ADSPV
.66 ADSPV = $160,820
ADSPV = $243,666.67
Asset | ADSP | Gain |
Land | $34,113.33 | $29,113.33 (capital gain). |
Building | 48,733.34 | 38,733.34 (capital gain). |
Equipment A | 87,720.00 | 82,720.00 (75,000 ordinary income 7,720 capital gain). |
Equipment B | 73,100.00 | 63,100.00 (10,000 ordinary income 53,100 capital gain). |
Totals | 243,666.67 | 213,666.67. |
ADSP = G + L + TR * [(II - BII) + (V - BV) + (ADSP - (I + II + V + BVII))]
ADSP = $150,000 + $50,000 + .34 * [($10,000 - $4,000) + ($250,000 - $30,000) + (ADSP - ($10,000 + $10,000 + $250,000 + $3,000))]
ADSP = $200,000 + .34ADSP - $15,980
.66ADSP = $184,020
ADSP = $278,818.18
26 C.F.R. §1.338-4