Q&A with the Pennsylvania Department of Revenue

Corporate Stock Acquisitions – Post Acquisition Basis in Assets of Target Corp.

Sep 30, 2013
Scenario:

On June 1, 2013, 100% of the issued and outstanding stock of Target Corp (A PA S corporation) was acquired by Parentco which is a PA S Corporation. Parentco made a federal Qsub election for Target Corp effective June 1, 2013. In conjunction with the acquisition of Parentco, a Section 338(h)(10) election was made which, for federal income tax purposes, treated the sale as an asset sale as opposed to a stock sale. Since PA PIT law does not recognize Section 338 elections, no corporate level gain was reported as a result of the sale on Target Corp’s pre-acquisition return.

In preparing its GAAP basis financial statements for 2013, Parentco applied purchase accounting rules for the purchase of the stock of Target Corp. In doing so, Parentco wrote-up the basis of Target Corp’s assets to their fair market values as of the acquisition date and recorded a significant amount of goodwill. Accordingly, as a result of both the 338(h)(10) election and the use of purchase price accounting, as of June 1, 2013, the federal and book basis of Target Corp’s assets were the same.

Q:

In preparing Parentco’s 2013 PA S Corporation return, is Parentco’s initial basis of Target Corp’s assets equal to their federal & GAAP basis or is the historic cost basis of Target Corp’s assets preserved for PIT purposes?

A:

Historical Cost Basis.

Q:

Suppose that a federal 338(h)(10) election was not made for Target but Parentco still used Purchase Price accounting rules and wrote the assets of Target up to their fair market values as of the acquisition date. Would your answer to Question 1 change?

A:

No.

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Disclaimer

These documents provide a summary of the answers provided by the Department of Revenue to the PICPA Committee on State Taxation at its annual question and answer session. These documents are classified as revenue information issued for informational purposes only for the convenience of PICPA members. Pursuant to 61 Pa. Code Section 3.4, these documents should not be relied upon for any purpose or used in tax appeals. Taxpayers requiring a binding opinion on their specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.