Why would a buyer want a 338(h)(10) election?

Step-up in tax basis on the target's assets allows the buyer to take depreciation and amortization deductions going forward as if it bought the assets directly. This typically improves the buyer's post-acquisition tax position substantially. The buyer typically pays the seller for the tax benefit in the form of a higher purchase price (a 'gross-up').

Does the 338(h)(10) election cost the seller more tax?

Generally yes — but not always significantly. The seller is taxed on the deemed asset sale, which often results in ordinary income on some asset classes (depreciation recapture, accounts receivable) that would otherwise be capital gain. The buyer typically grosses up the purchase price to compensate, but the math varies by deal.

When is the election filed?

Form 8023, filed with the IRS by the 15th day of the ninth month after the acquisition date. Most practitioners file it well before that deadline as part of closing administration. Both the buyer and seller must sign.

Can a C corp target make a 338(h)(10) election?

No, not directly. C corp targets cannot make a standalone 338(h)(10) election unless they are subsidiaries in a consolidated group with the acquirer. Section 336(e) provides a similar but distinct election available to selling shareholders directly, without buyer participation.

Compliance & tax

Section 338(h)(10) election

Joint buyer/seller election that treats a stock purchase as a deemed asset purchase for US tax purposes. Common in PE M&A.

Definition

A Section 338(h)(10) election is a joint election made by the buyer and seller in a qualifying stock purchase of a US corporation. The election treats the stock purchase as a deemed asset purchase for tax purposes, while the legal transaction remains a stock purchase. The buyer receives a step-up in tax basis on the underlying assets; the seller is taxed as if it sold those assets. The election requires the seller to be an S corporation or a member of a consolidated group whose stock is acquired by another corporation.

Same concept, different references

US (IRC)	Section 338(h)(10) — Election in certain stock purchases
US (Treas. Reg.)	Treas. Reg. § 1.338(h)(10)-1 — Election requirements
Related provision	Section 338(g) — broader election available to acquirer only
Filing	Form 8023 — joint election by buyer and seller

How the 338(h)(10) election works

The election bridges a fundamental M&A trade-off: buyers want step-up in basis (to depreciate/amortize the higher basis going forward), but sellers want stock-sale tax treatment (often eligible for QSBS exclusion or simply easier procedural treatment). The 338(h)(10) election lets both sides have what they want in a tax-equivalent transaction:

Legal form: stock purchase (simple closing mechanics, contracts and licenses transfer automatically)
Tax treatment: deemed asset purchase (buyer gets step-up basis; seller pays asset-sale tax)
Election: filed by both buyer and seller on Form 8023, due within 15 months of the closing date
Result: buyer's depreciation deductions accelerate; seller pays similar overall tax (but with state-tax and timing differences)

When 338(h)(10) is available

The election is restricted to specific transaction types:

S corp target: the target must be an S corporation. C corp targets generally cannot make the 338(h)(10) election (but see Section 336(e) for an analog)
Consolidated group target: alternatively, the target can be a subsidiary in a consolidated group, with the parent and acquirer jointly electing
Qualifying stock purchase (QSP): the buyer must acquire at least 80% of vote and value of the target's stock within 12 months
Both parties must elect: the seller and buyer must jointly elect. A unilateral election by either side is invalid

338(h)(10) vs F reorg

Both achieve similar outcomes (buyer step-up + tax-efficient seller exit), but with different mechanics:

338(h)(10): applies to legal stock purchase + tax-deemed asset purchase. Seller must be S corp or consolidated subsidiary
F reorg: pre-restructures the S corp into an LLC before the sale. Sale is then literally an asset (or LLC interest) purchase. Broader applicability
Choice depends on: state tax implications (each treats stock vs asset differently), regulatory considerations (state licenses don't always transfer with assets), and seller's prior basis structure
Combination: some deals use both — F reorg first, then 338(h)(10) on the resulting structure

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US tax structuring

Track every US tax structure at the share level.

Section 351, F reorganization, 338(h)(10), S corp election, AAA, 199A, 1244, BIG tax. Recorded against the corporation, surfaced when relevant.

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Section 338(h)(10) election

How the 338(h)(10) election works

When 338(h)(10) is available

338(h)(10) vs F reorg

Related terms