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Answer :
Final answer:
An election of Section 338 after P acquires 100% of T's stock will allow P to step up the basis of the assets of T to the FMV of the purchased assets. This can lead to increased depreciation and tax benefits, however, P additionally inherits T's liabilities in this scenario.
Explanation:
If section 338 is elected after the purchase of the T stock by P, particular tax consequences follow. Ordinarily, when a company purchases the stock of another company, no deduction is allowed for the purchase price. This cost becomes the buyer's basis for the stock, similar to X's basis of 80 for the T stock.
However, if s.338 is elected, the purchase is treated for tax purposes as if P had purchased all of T's assets (the equipment) directly instead of T's stock. This deemed asset purchase results in a step-up in basis to fair market value (FMV). Essentially, P will have a new basis equal to the purchase price (90).
Therefore, the depreciation deductions available to P would be increased, providing meaningful tax benefits. But, a drawback is that P also inherits any liabilities or potential liabilities that T might have.
Learn more about Section 338 here:
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