What is 338(h)(10) Election?

Definition

A 338(h)(10) Election is a U.S. federal tax election that allows certain qualifying stock acquisitions to be treated, for tax purposes, as a deemed sale of the target corporation's assets followed by a liquidation. The election can align the tax treatment of a stock acquisition more closely with an asset acquisition while the legal transaction remains a stock purchase.

The election is available in specific circumstances, including acquisitions of eligible targets from a selling consolidated group, selling affiliate, or S corporation shareholders. A qualified stock purchase generally requires a corporation to acquire at least 80% of the target corporation's voting power and value during a 12-month acquisition period. :contentReference[oaicite:0]{index=0}

Table of Contents

How Does a 338(h)(10) Election Work?

When the election applies, the target is generally treated as selling its assets on the acquisition date and then liquidating. The deemed asset sale can create taxable gains or losses at the target level, while the purchaser receives tax treatment associated with acquiring the underlying assets rather than simply holding the historical tax basis of purchased stock. :contentReference[oaicite:1]{index=1}

The transaction therefore requires coordination between the legal purchase agreement, purchase price allocation, tax calculations, shareholder reporting, and federal tax filings. The parties should determine the intended tax treatment before closing because the election affects both buyer and seller tax positions.

Who Can Make the Election?

A 338(h)(10) Election is not available for every stock acquisition. The target generally must be acquired from an eligible selling group, affiliate, or S corporation shareholder or shareholders. The purchaser must also complete a qualified stock purchase under the applicable rules. :contentReference[oaicite:2]{index=2}

For an S corporation target, all S corporation shareholders must consent to the election, including shareholders who do not sell their target stock in the qualified stock purchase. The election is made jointly through Form 8023 by the purchasing corporation and the applicable selling parties. :contentReference[oaicite:3]{index=3}

Because eligibility depends on the structure of the target, seller, purchaser, and acquisition, transaction-specific tax analysis is important before relying on the election.

What Are the Tax Effects?

The deemed asset sale requires the target to determine the tax consequences of selling its assets. The calculation can involve the allocation of the deemed sales price among different classes of assets, existing tax basis, depreciation or amortization history, and applicable tax attributes.

For example, assume a qualifying transaction produces a deemed sales price of $10 million and the target's aggregate tax basis in the relevant assets is $6 million. Before considering other transaction-specific adjustments, the simplified deemed gain would be calculated as:

$10 million − $6 million = $4 million deemed gain

The actual tax consequences can differ because the transaction may involve liabilities, asset-level allocation rules, shareholder considerations, and other provisions of the Internal Revenue Code. Form 8883 is used to report information concerning transactions involving deemed sales of corporate assets under section 338. :contentReference[oaicite:4]{index=4}

Why Is Purchase Price Allocation Important?

Purchase price allocation is a central part of the tax analysis because the deemed purchase of assets requires the transaction value to be allocated among the target's assets under applicable section 338 rules. Different asset categories can have different tax characteristics, affecting depreciation, amortization, gain recognition, and future deductions.

The buyer and seller therefore need reliable information about the target's assets, liabilities, tax basis, and transaction value. Finance and tax teams typically coordinate this information with legal documentation and the acquisition accounting process.

How Is the Election Filed?

Form 8023 is used to make elections under section 338 when a purchasing corporation has made a qualified stock purchase. For a 338(h)(10) Election, the form is generally filed jointly by the purchaser and the applicable selling party. The IRS instructions state that Form 8023 generally must be filed by the 15th day of the ninth month after the acquisition date. :contentReference[oaicite:5]{index=5}

Form 8883 is also relevant because it reports information about the deemed sale and purchase of assets. The appropriate tax returns and attachments depend on whether the target is an S corporation, part of a selling consolidated group, or another eligible structure. :contentReference[oaicite:6]{index=6}

Other tax elections can address different transaction structures and tax objectives. A 501h Election Finance is a distinct election concept and should not be confused with the section 338(h)(10) rules governing qualifying corporate stock acquisitions.

A Section 754 Election is another separate tax election involving partnerships and basis adjustments following certain partnership transactions. Its purpose and eligibility requirements differ substantially from those of a 338(h)(10) Election.

Practical Considerations

Companies evaluating a 338(h)(10) Election should analyze eligibility, purchase price allocation, asset-level tax consequences, shareholder effects, filing requirements, and the interaction between the transaction agreement and tax reporting. The buyer and seller may have different economic objectives because the election can affect the timing and character of taxable income and the buyer's future tax basis.

Transaction teams should also establish responsibility for preparing Form 8023, Form 8883, supporting schedules, tax calculations, and required signatures. Maintaining consistent acquisition-date records helps finance and tax teams reconcile the transaction across legal, accounting, and tax documentation.

Summary

A 338(h)(10) Election allows certain qualifying stock acquisitions to receive deemed asset-sale and liquidation treatment for federal tax purposes. Eligibility, shareholder consent, purchase price allocation, tax basis, and timely filing all play important roles. Because the election can materially affect the tax results for both parties, buyers and sellers should evaluate its consequences as part of the acquisition's overall tax and financial planning.