336e election for C corps?

September 07, 2023

by a searcher from University of Pennsylvania - The Wharton School in San Mateo, CA, USA

I'm looking at a deal now involving a target that's a C corp. Seller is pushing for a stock purchase/a stock purchase would be easier given the company's contracts and licenses.

From my understanding the 336e and 338h10 elections are only for the acquisition of S corp. Can anyone confirm is this is true and speak to if there is something like the 336e election for the acquisition of a C corp?

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Reply by a searcher
from University of Texas at Austin in Dallas, TX, USA

As always, consult your tax advisor. 336(e) is available for a C Corporation seller, assuming it satisfies all the other requirements. You may want to consider whether it’s worth it - does the company have significant assets? A step up is good because of increased basis and thus higher depreciation expense which can shield taxable income for you but it will almost certainly result in the seller paying more taxes since there might be some ordinary income recapture that is taxed at a higher rate than selling stock. So if I put myself in the sellers shoes, I would probably want a higher purchase price to offset some of that.

Again, consult your tax advisor and talk through it, but also maybe talk through it with someone who has more of a holistic business view. Don’t let the tax tail wag the dog.

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

1. Both options are available. You will most likely have 338(h)(10).
2. With the selection, you, and the seller, have an Asset purchase for tax purposes with the benefit of Stock for contracts, IP etc.
3. Stock purchase price is usually lower than Asset purchase price.
4. Asset sale for a C Corp could be very expensive. Seller will be faced with double taxation. This could be much higher than the ordinary income resulting from step-up of fixed assets.

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