Section 338 Election

September 28, 2022

by a searcher in Florida, USA

Does a 338 election result in an accelerated tax result for the seller in the same way a pure stock sale would?

Working on a 100% seller financing deal now and am hearing that a pure stock sale results in an immediate tax consequence for the seller however with an asset deal the tax burden is incurred "over time". Trying to understand if we elect 338 can we still get the same tax treatment as if it were an asset deal?

1 Like

3 Replies

183 Views

Replies

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

There are cases where a stock purchase makes sense and YOU CAN USE THE INSTALLMENT SALE METHOD to purchase stock that is not traded on exchanges which is beneficial in deferring taxes for the seller and can be a great source of financing for the buyer. As the buyer you don't get the step up in basis on the assets held by the company whose stock you're buying. For amounts of the gross installment sale over $5MM the benefit is much less because the IRS charges interest on the deferred capital gains proportionally associated with amounts over $5MM. Stock sales usually make sense if there are LOTS of employees and lots of contracts that would have to be re-written. This can be a massive challenge in the transition if that is the case and make a stock purchase sensible. The F-reorg followed by conversion to LLC is the best option for S-corps if you don't need to do a stock purchase and this becomes most beneficial for the buyer and seller.

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

I will assume the Target is an S-Corp and you're forming a corporation to buy at least 80% of the Target so that you're eligible to make the section 338(h)(10) election. A seller in a section 338(h)(10) transaction does pay tax on the deemed asset sale gain in the year of sale and the deferral is only on the deemed liquidation portion if there is a gain on liquidation. This is the reason I rarely, if ever structure into a section 338 election. Instead, I use the F-reorg followed by a conversion to a LLC and purchase the SMLLC. This allows the Seller to elect into installment sale reporting and defer the gain until the year cash is paid. Note however that any ordinary gain is not deferred and will be taxed in the year of the sale.

+1 more reply.

Join the discussion