Using IRC 338(h)(10)?

September 10, 2021

by a searcher from University of Pennsylvania - The Wharton School in New York, NY, USA

Am wondering if anyone has successfully structured an acquisition using 338(h)(10) to treat a stock purchase as an asset purchase for tax purposes and any negotiating dynamics with sellers to increase the purchase price as a result. To the extent that anybody has and has modeled out the differences economic outcomes to buyers and sellers that they would be willing to share would be much appreciated.

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Reply by a professional
from New York University in New York, NY, USA

I've done a bunch of h10 elections (and 336(e) elections, which are the same but the purchaser can be an LLC). The tax implications are the same as if you purchased the assets, except generally no transfer taxes on real estate or sales/use taxes. As opposed to a stock purchase, you just add the corporate level taxes (federal plus state, and state can be wonky as ^redacted‌ says), then tax the final distribution based on the net amount (purchase price less corporate-level taxes). It depends on states, but in general it will add 25-30% in tax (assuming basically zero basis).

Reply by an investor
from Northwestern University in Annapolis, MD, USA

A partner and I completed a Stock Purchase with an IRS 338 election in###-###-#### He chose a stock purchase route, because it is simply less disruptive for the company. Said differently, an asset purchase requires that you change everything about the company over to the new entity, bank accounts, benefits, etc. If you pursue a stock purchase with the 338 election, then yes, you get a better tax structure (as the Buyer). It does cost the Buyer a little more, because he/she is now paying ordinary income on the portion of the assets that are stepped up. In our transaction, we negotiated that the Seller pay this (minor) increase.

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