CORPORATE FRANCHISE TAX INFORMATION RELEASE – The franchise
tax effects of the IRC section 338(h)(10) election - Issued
The purpose of this information release is to explain how
making the Internal Revenue Code (IRC) section 338(h)(10)
election impacts the Ohio corporation franchise tax,
including certain tax credits. This information release does
not change any portion of the Department of Taxation’s
previously established policy regarding the franchise tax
effects of the IRC section 338(h)(10) election.
Federal Income Tax Effects of the IRC 338(h)(10)
- The IRC 338(h)(10) election permits the seller (S) of a
controlled subsidiary (here referred to as the target (old
T)), and the purchasing corporation (P) to treat S’s sale of
T stock as if T sold its assets to itself as a newly-formed
entity (new T) while T was still a member of S’s consolidated
group. Old T is then deemed to liquidate tax free into S
under IRC section 332.
- Old T files its final federal return in consolidation
with S for old T’s taxable year ending on the date of the
sale. Old T must include in that return the income from the
deemed sale of assets to new T. That is, T recognizes gain on
the deemed sale of assets to itself while still a member of
the S’s consolidated group.
- New T begins a new federal taxable year on the day
following the deemed asset sale.
- New T is the same legal entity as old T and carries on
the business with the same federal employer identification
- S recognizes no gain on its sale of T stock to P.
- Following the deemed asset sale, new T takes a stepped-up
basis in the assets. The stepped-up basis reflects the
purchase price of the stock along with the liabilities
assumed. Following the election, new T depreciates the
- Following old T’s deemed liquidation into S, the tax
attributes of old T carry over to S pursuant to IRC section
381. Thus, for federal income tax purposes, S generally can
claim T’s unused NOLs, capital loss carryovers, credit
carryovers, and other federal income tax attributes.
Franchise Tax Effects of the IRC section 338(h)(10)
Note: A taxpayer is not required (nor can it elect) to make
a separate 338(h)(10) election for Ohio franchise tax
purposes. If the taxpayer makes the federal election, then
that election applies for purposes of the Ohio corporation
franchise tax to the extent set out below.
- For franchise tax purposes T is not considered a new
taxpayer following the federal 338(h)(10) election because
old T and new T are the same legal entity.
- Pursuant to Ohio Revised Code section (R.C.) 5733.031 and
Administrative Rules 5703-5-01 through 5703-5-04, T must
combine the federal taxable incomes for the two short period
federal taxable years and include that income on one
franchise tax report.
- T must recognize gain from the deemed sale of assets, and
T can depreciate the stepped-up basis of the assets resulting
from that deemed sale.
- S recognizes no gain from its sale of T stock.
- T is not subject to the R.C. 5733.06(H) “exit tax,” and
neither T nor S is subject to the R.C. 5733.053 transferor
- All of T’s franchise tax attributes (such as Ohio NOL
carryforwards and credit carryforwards) remain with T.
- For purposes of the R.C. 5733.33 manufacturer’s credit,
the 338(h)(10) deemed sale of assets is ignored. Therefore,
following the deemed sale any remaining 1/7 manufacturer’s
credit amounts that were generated from T’s purchases of
qualifying equipment in a purchase year prior to the date of
the 338(h)(10) election are not disallowed under R.C.
5733.33(C)(4). (However, if T subsequently sells the assets,
or if T moves the assets from the county for which the credit
is computed before the end of the seven year period over
which the credit is claimed, and if those assets are not
fully depreciated at the time the assets are sold or moved
from the county, then any remaining 1/7 credit amounts are
- For all purchases of qualifying equipment on or after
January 1, 2001, corporations that are related by more than a
50% ownership interest must compute the R.C. 5733.33
manufacturer’s credit on a consolidated basis. For purposes
of computing the consolidated credit the members of a
qualifying controlled group are determined on January 1 of
the tax year immediately following the purchase year
regardless of whether those same corporations were members of
that qualifying controlled group prior to that date.
Because T is a member of P’s qualifying controlled group on
January 1 following the date of the 338(h)(10) election, T
and P (along with all the other members of P’s qualifying
controlled group on that date) must determine the R.C.
5733.33 manufacturer’s credit on a consolidated basis for
the purchase year that includes the date of the 338(h)(10)
election. So, in computing the consolidated credit for each
Ohio county for the purchase year that includes the date of
the 338(h)(10) election the sum of T’s purchases of
qualifying equipment for the county prior to and after the
338(h)(10) election are consolidated with those of P (and
with the qualifying purchases of all the other members of
P’s qualifying controlled group on January 1 following the
date of the 338(h)(10) election), and T’s purchases of new
manufacturing equipment for each Ohio county during the
related baseline years are consolidated with those of P
(and with those of all the other members of P’s qualifying
controlled group on January 1 following the date of the
- For the purchase year that includes the date of the
338(h)(10) election, S may not determine the R.C. 5733.33
manufacturer’s credit in consolidation with T because T is
not a member of S’s qualifying controlled group on January 1
following the 338(h)(10) election.
1. The term “qualifying equipment” as used in this
information release means “new manufacturing machinery and
equipment,” (R.C. 5733.33(A)(2)), which is purchased during
the “qualifying period” (R.C. 5733.33(A)(4)) beginning July
1, 1995 and ending December 31, 2015.
2. The term “purchase year” as used in this information
release means the period July 1, 1995 to December 31, 1995
and each of the calendar years 1996 through 2015 in which the
taxpayer purchased qualifying equipment for which the credit
3. R.C. 5733.33(C)(4) provides in relevant part as follows:
“Except for carried-forward amounts, the taxpayer is not
allowed any credit amount remaining if the new manufacturing
machinery and equipment is sold by the taxpayer or
partnership or is transferred by the taxpayer or partnership
out of the county before the end of the seven-year period
unless, at the time of the sale or transfer, the new
manufacturing machinery and equipment has been fully
depreciated for federal income tax purposes.”
4. R.C. 5733.33(I) provides that a “qualifying controlled
group” must compute the manufacturers’ credit on a
consolidated basis “as if as if all corporations in the group
were a single corporation. . .”
5. R.C. 5733.04(M) defines a qualifying controlled group as
“two or more corporations that satisfy the ownership and
control requirements of division (A) of section 5733.052 of
the Revised Code.”
S – Seller and old parent corporation that
sold its stock in T
P – Purchaser and new parent corporation
that purchased T stock.
T – Target corporation whose stock was sold
by S and purchased by P.
Old T and new T are the same legal entity and the
same franchise taxpayer.