Anti-churning rules applied to goodwill in deemed asset sale

Distribution of section 197 intangibles pursuant to 336(e) election

Oct 04, 2021
Oct 04, 2021
0 min. read
M&A tax services Mergers & acquisition

Key takeaway

The IRS recently ruled that as part of planned taxable stock sale to an unrelated purchaser, in which a section 336(e) election has been made to treat the internal stock distributions as asset sales, the intangible property (including goodwill, going concern value or other section 197 intangible) deemed transferred, will be subject to the anti-churning rules of section 197(f)(9).

Therefore, taxpayers making a section 336(e) election need to carefully consider the application of the anti-churning rules if the section 336(e) election is made in connection with a distribution and/or disposition.

Anti-churning rules generally

In general, certain intangibles are amortizable under section 197(a) (amortizable section 197 intangibles). However, the anti-churning rules exclude intangibles from the application of section 197(a) to the extent that the intangible asset was acquired after Aug. 10, 1993 (the effective date), and was held by the taxpayer or a related party within the meaning of section 197(f)(9)(C) between July 25, 1991, and the effective date (collectively, the transition period). 

By definition, intangible assets, which were created after the effective date are not subject to the anti-churning rules, regardless of the relationship between the transferring parties. Thus, while the application of the anti-churning rules narrows as time goes on, taxpayers need to be aware of the circumstances in which the anti-churning rules apply, i.e., if assets are transferred to related parties and the businesses were created prior to the effective date.

Section 336(e) deemed asset sale

Section 336(e) is available to certain transactions, thereby permitting a domestic corporation or S corporation shareholder that makes a ‘qualified stock disposition’ of another domestic corporation to elect to treat the qualified stock disposition as a deemed asset sale.1 The section 336(e) election is available to transactions that had a disposition date on or after May 15, 2013.

Generally, a ‘qualified stock disposition’ (QSD) is a transaction, or series of transactions, in which target stock meeting the requirements of section 1504(a)(2) (i.e., 80% vote and value) is sold, exchanged, distributed or any combination thereof, by the seller during the 12-month disposition period, in a disposition that does not result in a carryover or substituted basis.2

The mechanics of section 336(e) generally operate to treat the sale or distribution of stock of the target as a sale by the target (old target) of its assets to an unrelated person, followed by a liquidation of the old target into the seller. Mechanically, old target is treated as selling its assets to an unrelated person in a single transaction.3

Private Letter Ruling 202120005

In a PLR released on May 21, 2021, the IRS ruled that where a section 336(e) election is made with respect to distributions, the anti-churning rules of section 197(f)(9) will apply to any section 197 intangible deemed transferred pursuant to such election. Said differently, this PLR held that the anti-churning rules apply to a QSD when there was a distribution as part of the overall transaction, even if done pursuant to an integrated third-party sale.

The steps of the transactions were as follows:

  • Qualified stock disposition with a section 336(e) election (distribution)
  • Taxable stock sale
  • Post-transaction structure


In the case of the PLR discussed herein, all of the intangible assets transferred pursuant to the QSD (and ultimate sale) remained within the consolidated group to which the old targets were (and continued to be) members. While section 336 provides that the deemed asset sale is treated as being made to an unrelated person; the IRS, in the context of the transaction to which the PLR was issued, applied the anti-churning rules nonetheless. The ruling appears consistent with the purpose of the anti-churning rules in that, prior to the distribution and election, the consolidated group held the intangible assets; and after the distribution and election, the consolidated group still held the intangible assets. 

This PLR would seem to suggest that a taxpayer cannot escape the anti-churning rules by using deemed asset sales, even if they are deemed to be made to an unrelated party when you have the intangible assets remaining within the same consolidated group. As such, taxpayers should take into consideration the anti-churning rules, when using section 336(e) elections on distributions made in pursuance of a third-party sale.

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