S-Corp Stock Sale treated as an asset sale for tax 338(h)(10) vs 336(e)

searcher profile

February 03, 2024

by a searcher from The University of Chicago - Booth School of Business in Woodinville, WA, USA

Looking for input on Stock Purchase treated as an asset sale.

Currently two weeks from close on a logistics company and trying to understand how to efficiently execute the transaction. After close I need the company to maintain the same name, EIN number, corporate status with state,...
If I forgo the asset sale treatment I lose out on not only the step up in basis, but also goodwill depreciation, which will cost me $2M in depreciation opportunity.
If I change the name of the company being acquired or any detail around it, I will need to get new DOT/MC number from FMCSA, reinstate a bunch of contracts, do a bunch of business set up work that I get to avoid with a stock sale.

My naive understanding of the two:
338(h)(10):
- Buyer must be US C-Corp or an S-Corp
- Buyer and seller must jointly elect
- Buyer must be a Corp making QSP of at least 80%
- Fill out form 8023
336(e):
- Buyer can be individual or trust
- Seller elects
- Buyer must be making QSP of at least 90%
- No designated form to fill out, just need to include a letter.

If I do 338(h)(10) election I would need to
1) Create an LLC w/ S-crop election to use it to purchase the S-Corp
2) Get agreement with seller on purchasing price allocation
3) Purchase company and both submit IRS forms
4) Treat originally LLC as disregarded entity except for when I file taxes

If I do 336e election I would need to:
1) Get agreement with seller on purchase allocation
2) Purchase company and create letter stating we will elect 336(e)
3) Run business as the old seller

In my situation, it feels like 336(e) election is the cleanest and easiest to execute. It also avoids the complication of disregarded entities and just replaces my name with the seller going forward.
Is that right? What am I missing?

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commentor profile
Reply by an intermediary
from Spalding University in Prospect, KY 40059, USA
I went through this same experience in March and we admittedly fumbled it. It is a motor carrier and the depreciation was our interest. This looks to be the same for you. The DOT, UCR, MC-150 are all influenced by the shares and appear to be easily understood by others but they are anything but fluid. Should you go APA then your insurance costs, eMod and all the things that likely make your purchase attractive become irrelevant. I do hope you get this correct before closing. Feel free to connect with me. Learn from my mistake. The 336(e) struck me to be the logical choice after attempting the 330(h)10.
commentor profile
Reply by a professional
in Richland, WA, USA
You're right that most of the time 336(e) is cleanest BUT you may want to consider an F reorg for a number of reasons: 1) provides you clean tax history to protect you against prior S corp violations that you could end up holding the bag for 2) allows you to actually purchase with a holding company (as opposed to directly as an individual or through a single-owner disregarded LLC). Downside of F reorg is that it requires seller to do quite a bit of work and it adds to the total bill for everyone (often $10-15K or so that seller needs to incur to have F reorg done by tax pros before close).
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