Does anyone know how much equity a seller can roll over in a transaction that is treated as an asset sale for tax purposes via an 338(H)(10) election. I understand it is 20%, but I’m not sure how the 20% is calculated.
Example: Assume $10M purchase price financed with $6M of Debt and $4M of preferred equity. In this example, the preferred equity has a 60% participation in common (preferred equity investors own 60%).
How do you calculate the 20% rollover limit for 338(H)(10) purposes?
- Is it 20% of the purchase price = $2M, or
- Is it 20% of the preferred equity value = $0.8M, or
- Is it the value of the preferred stock that corresponds to a 20% stake on a fully diluted basis (e.. 20% of fully diluted target equity = $1.33M
Will this work for purposes of the 20% limitation related to the 338 election? Asking because the $ amount is more than 20% but the ownership in newco meets the 20% threshold. Also, is there a way to structure the transaction for the seller to get a tax deferral on the $3M rollover? If not, what if he rolls into debt and we give him 20% of common as part of a consulting agreement?