The following examples illustrate this difference in treatment, depending on whether the S corporation remains in existence or is liquidated (or deemed liquidated).A simple example demonstrates the divergent treatment afforded depending on whether the S corporation remains in existence or liquidates.Assume the existence of an S corporation with assets having a value of $1,000 and an adjusted basis of $400.

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338(h)(10) or was an actual sale of the S corporation's assets.

This article explains why this is so and how the one-day note is used to produce the same tax consequences where the S corporation does not liquidate.

The one-day note strategy arose in response to the difference in treatment depending on whether the S corporation liquidated or stayed in existence, collected the proceeds of the installment note, and distributed those proceeds to its shareholders.

Wechter August 23, 2012 AICPA Corporate Taxation Insider The "one-day note" is a popular planning technique for a Sec.

338(h)(10) installment sale of the stock of an S corporation where the S corporation is deemed to have liquidated.

Under this technique, the deemed distribution of a one-day note from the S corporation to its shareholders mirrors the favorable tax treatment of an S corporation's selling its assets in exchange for an installment note and remaining in existence, distributing the payments on the note to its shareholders. 453, 453B, and 338(h)(10) were issued, practitioners hoped that the same treatment would result whether or not the S corporation remained in existence.

However, the regulations provide otherwise where the S corporation receives and distributes an installment note plus other property or cash as part of the sale of its assets.

The significance of the one-day note is that amounts under the one-day note are payable after the S corporation liquidates, eliminating entity-level gain in the year of sale. 338(h)(10) replicate, in many respects, the tax consequences of an asset sale. The rules relating to installment notes received by shareholders from the purchaser in exchange for stock under a Sec.

This is explicitly true with respect to the receipt of installment notes in exchange for stock under Regs. 338(h)(10) election are the same as the rules governing installment notes received by S corporations in exchange for assets, and subsequently distributed to shareholders in liquidation.