Most buyers want to buy assets and most sellers want to sell stock. However for our buyers, sometimes the internal contracts of customers and vendors and the ease of buying stock is something they prefer. So, how do we get the accelerated tax benefits of an asset purchase? Here’s one option called a 338(h)(10) election:
According to the IRS, Section 338(h)(10) permits the buyer and seller of corporations to elect jointly to treat the target corporation as deemed to sell all of its assets and distribute the proceeds in complete liquidation.
To qualify for the 338(h)(10) election, the seller must be either:
- A US corporate subsidiary of a selling consolidated group or a parent company.
- An S corporation on the acquisition date
When buying a corporation, one of the very first issues that needs to be addressed is whether a section 338(h)(10) election will be made. This election is made to step-up the tax basis in all of the seller’s assets when the benefit of the step-up to the buyer exceeds the tax cost to the seller. When the tax cost to the seller exceeds the tax benefit to the buyer, the election is not made.
So what benefits come from a 338(h)(10) election?
- The taxable gain on the deemed sale of the target subsidiary’s assets may be offset by any losses in or tax attributes of other subsidiaries of the selling group.
- The proceeds from the liquidation of a subsidiary are tax-free to the subsidiary’s shareholders under IRC Section 332, resulting in a single level of tax.
- Advantageous in the acquisition of S Corporations because S-Corps are not subject to corporate level tax.
To learn more about this election and other tax benefits that could assist in an M&A transaction contact us for a no-cost consultation!