338(h)(10) Election

March 11, 2025

by a searcher from Boston University in Albuquerque, NM, USA

Hello search funder! I have a business under LOI and we are pursuing a stock sale. The owner is hesitant about performing a 338h10 election because he feels that this would add complexity to the deal and generally there is a fear of the unknown. That being said I have never performed a 338h10 election and would love to speak with anyone who has used this election. Specifically, I am looking to understand how the process works (assigning asset values etc.) and any tools you used to "true up" the seller for any added tax liabilities.

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Reply by a searcher
from Boston University in Boston, MA, USA

We previously did 338(h)10 and it did not add any complexity apart from making sure right language was in SPA to account for 338(h)10 (essentially just an extra clause). Apart from that, it did not take 1% of our mental energy. That being said, it was an almost full goodwill deal with no substantial assets.

Reply by a professional
from Boston College in Baltimore, MD, USA

A 338(h)(10) election is simply a joint election to treat a stock purchase as an asset purchase for tax purposes. There are limitations that apply (though at least one of those limitations -- the form of the buyer r -- can be overcome with a 336(e) election). Many of the above comments reference a Type F-Reorg (which is just a reorganization that is ignored for tax purposes) for shorthand. A Type F Reorg involving an S Corporation followed by a conversion of the legacy S Corporation into a disregarded entity and subsequent sale of the equity securities of the disregarded entity obtains the same tax treatment (asset treatment) without the limitations of 338(h)(10) or 336(e). It also has some additional benefits (e.g. mitigates risk on the S election), which is why its a more popular choice to obtain asset treatment when buying S Corporations. Your question about complexity and grossing up a seller involves a number of moving parts (sourcing purchase price proceeds, tax drag resulting from some ordinary income (AR on a cash basis, recapture on depreciated FF&E, etc.), potential benefits from a PTE election, mitigation strategies, etc.). Rather than grossing-up, many price the benefit into the deal (i.e. a gross-up is often not on the table). Where you've agreed to a gross-up, as it sounds like you've proposed, rough justice is better than the headaches associated with precision in my experience. All-in-all a good transactional accountant can review your seller's financial statements and help compare the after-tax proceeds from an equity deal versus an asset deal taking all factors into consideration. That generally is sufficient to allow for rough justice. Hope this helps!

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