Experience with Stock purchase under section 338(h)(10) election?

June 02, 2022

by a searcher from Campbell University in Jacksonville, NC, USA

Hi everyone,

My business partner and I are currently on the verge of submitting a LOI to a company which would be a great fit for us. The company is a C-Corp and they want to do a stock sale of the business because it would benefit the owner with the amount of taxes he would have to pay. I've completed some basic research and from my understanding the buyer company (New Co.) would not be able to amortize any goodwill which would increase the companies tax burden unless the seller (target) and buyers agree to a stock purchase under section 338(h###-###-#### From my understanding, this allows a buyer to complete a stock purchase of a company but it's basically treated as an asset sale, which would benefit the buyers greatly because goodwill then be able to be amortized.

Does anyone have any sources, contacts, experience, and/or insights with this type of purchase? Any type of help would be tremendously appreciated.

Thank you!

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

I am an M&A Intermediary. Have been involved with few 338(h###-###-#### of S-corp. I have had many C-corp seller wanting Stock sale for tax but have been able to ovrcome that. In addition to what Robert Shefferly said, here are few comments:
1) Tax is due in 338 (h###-###-#### There is no free lunch. One exception: If C-Seller has NOL that can shelter the gain from 338 (h###-###-#### as pointed out by Matt Foremen.
2) Most C-seller advisors exagerate the tax impact of C Asset sale. Though I am not an accountant, I do high-level tax delta of various options. Most of the time I have been able to overcome seller's (and their advisor's) tax concerns. My analysis also includes price impact of Stock vs Asset. In one case, I had a C-seller and had an accepted Asset LOI. I convinced both sides to convert to Stock. All parties benefited including the bank. Also, there are few way to minimize the tax w/o NOL.
Happy to talk.

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

Hi Jason, these are very common, but if your seller's concern is tax driven then this may not solve his problem. A 338(h)(10) is a stock sale treated like an asset sale for tax purposes. The seller still gets to shed liabilities and it prevents the need to assign the assets to a new company (the other benefits of a stock sale), but again it may not solve for your seller's tax preference. Typically any law firm that does M&A will have a tax lawyer who is very familiar with this structure, but it is recommended to have a tax lawyer involved, or at a minimum an accountant who is familiar with the structure to make sure it's an option in your case since there are some boxes to check.

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