Section 336(e) vs. 338(h)(10): Which Election Works for Your Deal?
- Langston Tolbert
- Jan 17
- 3 min read
Updated: Jan 20
In the intricate landscape of corporate acquisitions, the tax implications of a transaction's structure are paramount. Two provisions in the Internal Revenue Code—Sections 336(e) and 338(h)(10)—offer mechanisms to treat stock sales as asset sales for tax purposes, providing potential benefits to both buyers and sellers. Understanding the distinctions between these elections is crucial in determining which aligns best with your transaction objectives.
Section 338(h)(10) Election
Overview: This election allows certain stock purchases to be treated as asset acquisitions for tax purposes, enabling the buyer to step up the basis of the target corporation's assets to their fair market value.
Key Requirements:
Eligible Sellers: The seller must be either a U.S. corporate subsidiary of a parent company or an S corporation.
Eligible Buyers: The purchaser must be a corporation that acquires at least 80% of the target's stock in a qualified stock purchase (QSP).
Joint Election: Both the buyer and all shareholders of the target corporation must jointly make the election; it cannot be unilaterally made by one party.
Considerations:
Tax Implications for Sellers: The deemed asset sale can result in corporate-level gain recognition, which then flows through to shareholders, potentially leading to higher tax liabilities.
Legal Continuity: Legally, the transaction remains a stock sale, meaning the buyer inherits all known and unknown liabilities of the target corporation.
Section 336(e) Election
Overview: Enacted to provide similar benefits as Section 338(h)(10), the Section 336(e) election allows certain stock dispositions to be treated as asset sales for tax purposes, even when the purchaser is not a corporation.
Key Requirements:
Eligible Sellers: The election can be made by domestic corporations, consolidated groups, or S corporation shareholders.
Qualified Stock Disposition (QSD): The seller must dispose of at least 80% of the vote and value of the target corporation's stock within a 12-month period through sale, exchange, or distribution.
Unilateral Election: The seller can unilaterally make the election without the buyer's consent by attaching a statement to its federal tax return for the year of the acquisition.
Considerations:
Flexibility in Buyers: Unlike Section 338(h)(10), the purchaser does not need to be a corporation; individuals, partnerships, or other noncorporate entities can be buyers.
Post-Transaction Structuring: The target corporation can be converted into a flow-through entity after the acquisition, providing flexibility in tax planning.
Choosing the Appropriate Election
When determining which election suits your transaction, consider the following factors:
Nature of the Buyer: If the purchaser is a corporation acquiring stock in a QSP, a Section 338(h)(10) election may be appropriate. Conversely, if the buyer is a noncorporate entity, Section 336(e) offers a viable path to achieve similar tax outcomes.
Control Over Election: If unilateral control over the election is desired, Section 336(e) allows the seller to make the election independently, whereas Section 338(h)(10) requires mutual agreement.
Transaction Structure: For dispositions involving distributions or sales to multiple buyers, Section 336(e) provides greater flexibility, as it does not necessitate a single corporate purchaser.
Tax Impact on Seller: Both elections result in the seller recognizing gain as if an asset sale occurred. However, the specific tax consequences may vary based on the seller's structure and the nature of the assets involved.
Conclusion
Both Section 336(e) and 338(h)(10) elections serve as strategic tools to achieve favorable tax treatment in stock dispositions by treating them as asset sales. The choice between them hinges on the specifics of the transaction, including the nature of the buyer, the desired control over the election process, and the overall tax objectives of the parties involved. Engaging with experienced tax professionals is essential to navigate these options effectively and align the election with your strategic goals.
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