Creative Structuring around 338(h)10 Election Tax Impacts

October 01, 2025

by a searcher from Rensselaer Polytechnic Institute in Jersey City, NJ, USA

I'm post LOI on a deal involving a stock transaction to keep two owners in an equity position for licenses and customer concentration. I'm looking to utilize a step up basis for tax purposes however, F-reorg seems to be out due to SBA SOP rules. The second best option is a 338 (h) 10 election. The challenge to my understanding is that the owners rolling equity would be responsible for taxes on the full transaction amount. One of the owners is not benefitting from the sale since he is not reducing ownership percentage. Has anyone done creative deal structuring to solve for this tax liability? Would appreciate any creative solutions in an effort to bridge the buyer and seller gap here.

Reply by a searcher
in San Diego, CA, USA

I don’t have direct experience with this exact setup, so take this as perspective, not tax advice. But let’s cut the fluff: a 338(h)(10) blows up because the guy who’s not selling gets stuck with a tax bill on money he never saw. That’s a deal-killer. IMO you may only have three real plays: 1. Buyer gross-up – you write a bigger check to cover his phantom tax. 2. Seller-to-seller fix – the guy cashing out takes on more of the tax burden. He’s the one walking away with liquidity, so let him pay. 3. Restructure the rollover – turn it into preferred equity or a note so the non-exiting owner isn’t forced into recognizing full gain upfront. Bottom line is someone has to pay the tax bill. Either you as the buyer eat it, or the selling partners duke it out. If nobody steps up, the deal will likely die.

Reply by an admin
from Massachusetts Institute of Technology in Portland, OR, USA

^redacted might be able to help here.

Join the discussion