Academic journal article Journal of Accountancy

Buying an S Corporation? Use a 338(h)(10) Election

Academic journal article Journal of Accountancy

Buying an S Corporation? Use a 338(h)(10) Election

Article excerpt

In subsidiary acquisitions, stock transactions can be treated as asset deals for tax purposes by using the Internal Revenue Code section 338(h)(10) election. A seller will agree to this election only if the tax on an asset deal does not differ materially from the tax-imposed on a stock sale or if the buyer agrees to increase the purchase price to reflect any difference. Typically, a buyer will agree to increase the purchase price only when the tax savings from the basis step-up at least equals the amount it pays to the seller.

The section 338(h)(10) election historically has been available to buyers of subsidiaries only. Now, a regulation (regulations section 1.338-l(h)(10)-1) generously makes it available to a larger group of targets. Section 338(h)(10) elections are permitted in acquisitions of S corporations even though, by definition, S corporations do not fulfill the statute's requirement that the target be a subsidiary. Thus, an S corporation acquisition can be set up as a stock purchase, but it can be treated as an asset purchase followed by a liquidation of the S corporation for-tax purposes.

Using a section 338(h)(10) election is a very attractive way to acquire an S corporation because of the e&se with which a stock purchase is consummated from a nontax point of view--acquiring an S corporation's assets creates complicated legal issues. …

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