Section 338(H)(10)

searcher profile

April 28, 2021

by a searcher in Florida, USA

We are engaged to acquire an LLC and the owner insists on a stock transaction.

We want to elect Section 338(H)(10) to treat the deal as an asset purchase.

Seller says fine but if there is any tax impact on the seller for an 338 (H)(10) election, they are going to want an adjustment in price to offset the their tax impact.

Some folks are saying this is standard. Can I get a second (and 3rd, and 4th, and 5th, etc.) opinion?

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commentor profile
Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
First, is this an LLC taxed as an S? If not, it won't be eligible for 338(h)(10) or 336(e). Second, in addition to the tax considerations, as buyer, you will want to be comfortable with the legal considerations. Third, from a tax perspective, being taxed as stock or asset sale may or may not be a material difference to the seller. If they are a heavy FF&E company, and will have a high depreciation recapture tax, then it could make a material difference to their tax bill if taxed as an asset sale. Other ways to address that are through changing the asset allocation. If they are light on FF&E, and would have minimal depreciation recapture tax, then it may not make much difference in the tax bill at all. As far as "is this standard", many sellers will ask. Whether it fits with the value offered depends on how you came up with your value and do you have room to maneuver. If your DCF value included the tax benefit of depreciation, then you will need to recalculate. If you also used market multiples, you'll need to determine whether or not those were for asset sales or stock sales (you can't mix and match without an adjustment).
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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
I am with Ron Buck and Robert Shefferly.
I am assuming LLC taxed as S, and that you are OK with Asset purchase.
Almost all seller's advisors (I don't know why but typically it is the attorney, not the accountant) advise on Stock sale for tax reasons and legal reason. You need to find out who is advising him/her.
In most cases tax delta is small between Asset and Stock in S Corp relative to the purchase price. As mentioned by above Ron and Robert, depreciation recapture is the main reason for tax delta. That can be mitigated if you have flexibility to purchase price allocation. Just like seller, you are probably getting the advise of BIG benefits of step-up, which is not true.
If you overcome tax argument and seller still insists on Stock, then you have different problem.
I can help you do quick math (no strings) before engaging top guns like Robert. Feel free to contact redacted ###-###-#### .
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