Anyone experienced Section 338 election in an acquisition?

January 12, 2020

by a searcher from University of Virginia-Darden - Darden School of Business in Richmond, VA, USA

If you form a c-corp to buy another c-corp for less than the book value of the target's assets then I'd think there would be no gain and it's then worth it to do a "g" unilaterally so that you can depreciate the purchase price for the next 15 years (at least that's my understanding). I'm curious to hear the story of others whether they used g or h 10 election and what the end result was.

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

I am not a tax expert. However, few of my transaction have used 338 (h###-###-#### I hear so many people saying that this selection saves taxes. It really does not ….unless the target is a C Corp. and has NOL###-###-#### h###-###-#### is used when buyer wants the security of getting all the IP and contract but also wants to step up the assets for depreciation. Such step-up of assets however creates recapture of depreciation which is ordinary income to the target. Hence,, target has to pay taxes on the recapture amount. If target had NOL then such recapture income can be offset by NOL, thus saving or eliminating taxes related to step-up.
I have had many CPA firms take the seller into an extensive tax analysis at huge cost just to point out at the end that someone has to pick up the tax burden.
As I said, I am not a tax expert. Would welcome corrections to my answer.

Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA

Bruce, different fact patterns will drive whether you can use a section 338(g) or 338(h)(10) election. The analysis that is done based on the difference between taxable value of the assets and FMV, not book value (unless in your fact pattern book and tax basis are the same). Let's assume tax basis is greater than FMV, then you may want to forgo the 338 election and step into the shoes of the target since there is a built-in loss you can recognize an potentially use to offset future taxable income. Now, there is a limitation on utilizing these types of losses under section 382, so you need to do an analysis to determine whether to make the section 338 election vs not making it. I have seen these types of analysis go both ways, so there is no rule of thumb.

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