A Section 338(h)(10) election is a joint U.S. tax election that lets the parties treat what is legally a stock purchase as a deemed asset purchase for tax purposes. It resolves the classic tension between buyers (who want a step-up) and sellers (who want the simplicity of selling stock): the deal is documented as a stock sale, but the tax consequences are those of an asset sale.
What it does
When a §338(h)(10) election is made, for tax purposes the target is deemed to sell all its assets to a new version of itself and then liquidate. The practical effects:
- The buyer takes a stepped-up tax basis in the target's assets equal to the purchase price, generating future depreciation and amortization deductions (including 15-year amortization of goodwill and intangibles under §197) — the prize a plain stock deal would forfeit.
- The buyer still legally acquires the stock, so it preserves the contract/license continuity of a stock deal (no asset-by-asset transfer or consents).
So the buyer gets the tax benefits of an asset deal with the legal ease of a stock deal.
Who is eligible
The election is available only for specific targets — it is not a general tool:
- An S-corporation, where the selling shareholders join the election; or
- A corporate subsidiary sold out of a consolidated group (or affiliated group).
The acquisition must be a "qualified stock purchase" — generally the buyer (a corporation) acquiring ≥80% of the target's stock within a 12-month period. It is not available for a freestanding C-corporation owned by individuals (a §338(g) election exists but is rarely beneficial there).
The seller side: the gross-up
The election usually creates extra tax for the seller, because asset-sale treatment can convert some gain that would have been favorable capital gain (on a stock sale) into ordinary income (e.g., depreciation recapture). Sellers will not agree to the election unless they are made whole — so deals include a "gross-up," an increase in the purchase price calculated to leave the seller in the same after-tax position as a plain stock sale. The election makes economic sense only when the present value of the buyer's step-up exceeds the gross-up the buyer must pay the seller.
The §336(e) cousin
A related provision, §336(e), achieves a similar deemed-asset-sale result but is a unilateral election (made by the seller/target without a corporate buyer) and is useful where §338(h)(10) is unavailable — for example, where the buyer is not a corporation (such as a partnership or a PE fund) or in certain dispositions. For S-corporation sellers, the alternative F-reorganization structure is often used instead to deliver step-up plus rollover flexibility.
Why it matters
§338(h)(10) is one of the most important structuring tools in middle-market M&A: it lets a buyer get a step-up from an S-corp or subsidiary target while keeping a clean stock acquisition, and turns the asset-vs-stock fight into a negotiable price question (the gross-up). It is a staple consideration whenever the target is an S-corp — which describes a large share of privately held U.S. companies.
See also
- Stock purchase — A deal structure in which the buyer acquires the equity of the target entity, taking it whole — assets, liabilities, contracts and history. Generally favoured by sellers.
- Asset purchase — A deal structure in which the buyer acquires specific assets (and assumes specific liabilities) of the target, rather than buying its equity. Generally favoured by buyers for liability and tax reasons.
- Basis step-up — An increase in the tax basis of acquired assets to fair market value, allowing the buyer to depreciate or amortise the higher basis going forward. Available in asset deals and 338-elected stock deals.
- F-reorganization — A tax-free 'mere change in form' reorganization under Section 368(a)(1)(F), commonly used to restructure an S-corporation prior to a sale to enable a stock deal that gets asset-deal tax treatment.
- Purchase price allocation — The process of assigning an acquisition’s price to the assets and liabilities acquired.
- Deal structure — How an acquisition is legally and economically assembled — chiefly the choice between an asset purchase and a stock purchase, and the tax, liability and consent consequences that flow from it.