A 338(h)(10) election changes the federal stock acquisition tax treatment of a qualifying stock purchase. Legally, the buyer acquires the existing company. Legally, the buyer acquires the target company’s stock. However, for federal income tax purposes, the target corporation is treated as though it sold all of its assets at fair market value and then liquidated. This is known as a deemed asset sale.
Because the transaction is deemed rather than actual, the company generally does not have to transfer each asset individually or reassign contracts and employees solely because of the election. The result is a transaction that preserves the legal continuity of a stock acquisition while producing many of the federal income tax consequences of an asset purchase.
The buyer must be a corporation and generally must acquire at least 80% of the target’s voting power and value during a 12-month period. The target must be an S corporation or an eligible corporate subsidiary acquired from a qualifying corporate seller.
Under section 338 h 10, the parties make a joint election on Form 8023. For an S corporation, every shareholder must consent, including any shareholder who keeps stock. Neither side can make the election alone.
An F Reorganization is a separate planning technique sometimes used before an S corporation transaction. It does not, by itself, make a purchase eligible for this election.
The buyer receives a new basis in the acquired assets based generally on the transaction value and assumed liabilities. That basis may generate depreciation for equipment and amortization for goodwill and other qualifying intangible assets.
The seller’s result can be less favorable. Instead of recognizing only stock-sale gain, the target recognizes gain asset by asset. Amounts allocated to inventory, receivables, depreciation recapture, or similar items may create ordinary income rather than capital gain. Sellers may request a higher purchase price to cover the added tax.
The old target reports gain or loss from the deemed sale. For an S corporation, those items generally pass through to shareholders and affect their stock basis. The deemed liquidation then completes the seller-side treatment.
The buyer is treated as owning a new target with newly purchased assets. Form 8023 makes the election. Both the old target and the new target generally file IRS Form 8883, Asset Allocation Statement, to report the allocation of the purchase price among the transferred assets.
The allocation matters because it determines the seller’s character of income and the buyer’s future deductions. It should be negotiated before closing, not reconstructed later from competing memories and an increasingly mysterious spreadsheet.
The asset vs stock sale decision involves legal and operational issues as well as tax. A direct asset purchase may let the buyer select assets and liabilities, but contracts, licenses, permits, and employees may require transfers. A regular stock purchase preserves the entity but usually provides no inside basis step-up.
The election can work when the buyer values future deductions and both parties want stock-sale continuity. It may not work when the seller’s added tax exceeds the buyer’s benefit or liability concerns favor a direct asset purchase.
For Business Carve-Outs, a direct asset transaction may be cleaner when the buyer wants only one operation, product line, or asset group rather than the entire company.
Can a 338(h)(10) election be made for the acquisition of a C corporation?
Yes, but not every C corporation qualifies. The target generally must be an eligible subsidiary acquired from a consolidated group or qualifying corporate affiliate. A standalone C corporation owned by individuals generally cannot use this election for its stock sale.
What is the deadline for making a 338(h)(10) election after a deal closes?
Form 8023 generally must be filed by the 15th day of the 9th month following the acquisition date. Because signatures and transaction details take time to assemble, the parties should clearly assign filing responsibility in the purchase agreement before closing.
Can a 338(h)(10) election be revoked once it has been filed?
No. Treasury regulations state that a valid 338(h)(10) election is irrevocable. Buyers and sellers should model the tax consequences, confirm eligibility, finalize the asset allocation approach, and obtain every required signature before filing Form 8023 with the Internal Revenue Service.
How does a 338(h)(10) election interact with state tax rules?
State treatment varies. Some states follow the federal election, while others impose separate filing requirements, sourcing rules, or modifications. Deemed asset gain may be apportioned among operating states, so both parties should model state consequences before agreeing to the election.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Vijay Vaswani, partner in charge of Bennett Thrasher’s Mergers & Acquisitions Transaction Advisory practice, or call us at 770.396.2200.
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