From what I understand the primary benefit of the 338(h)(10) election for an S-corporation seller is that it avoids the double taxation that would occur in a standard asset sale of a C-corporation. While the transaction is treated as a deemed asset sale for tax purposes, the stock sale is effectively ignored. The S-corporation recognizes the gain on the deemed sale of its assets, which then flows through to the shareholders. The shareholders' tax basis in their stock is then adjusted for this gain, allowing them to receive the liquidation proceeds without additional tax. While the seller may face a higher overall tax bill on the sale due to the character of the gain (some of the gain may be ordinary income from depreciation recapture, etc.) the ability to negotiate a higher purchase price to offset that cost, combined with the non-tax benefits of a clean stock sale, makes it a very attractive option.

Sellers prefer to have a pure stock deal with no 338(h)(10) election. This is simply due to the concession being made in the form of tax benefits being enjoyed by the buyer rather than the seller. As a result, the 338(h)(10) election is often a compromise on behalf of a seller in order to close the deal. Having said that, as part of the negotiation, sellers will frequently demand a higher purchase price in response to a 338(h)(10) election, as additional compensation to offset the additional tax burden they will incur. If the cost (to the seller) outweighs the benefit (to the buyer), a 338(h)(10) election may not make sense.