336(e) vs. 338(h)(10): Can Your Deal Use the Tax Election You Want?

The parties agree that the buyer should receive asset-sale tax treatment. Then the advisers discover that the planned purchaser does not fit the election named in the LOI.

A desirable result and an available election are different things. Sections 336(e) and 338(h)(10) can reach related tax outcomes, but they do not let every buyer and seller choose freely between two forms.

Start with the actual parties and transfers. Then determine which route, if any, is available.

Change the buyer, change the analysis

Consider a fictional S corporation owned by three individuals. Assume its stock will be sold in an otherwise qualifying, unrelated-party transaction.

In the first version, a corporation purchases all the stock for cash within the applicable period. The parties can investigate Section 338(h)(10), including target eligibility and required shareholder participation. Section 338's qualified-stock-purchase test generally requires a corporate purchaser and at least 80% of voting power and value within twelve months. Internal Revenue Code § 338(d), (h)

In the second version, the purchaser is an LLC taxed as a partnership. That buyer does not satisfy the purchasing-corporation requirement merely because it has an entity name. Section 336(e) may provide a route if the disposition, target, sellers and other requirements qualify. Its rules can accommodate qualifying dispositions to noncorporate purchasers. Treasury Regulation § 1.336-1

The example does not establish that Section 336(e) is always available to a partnership buyer. It shows why the buyer's federal tax classification must be established before anyone promises the election. The letters “LLC” alone do not complete that inquiry.

A comparison that starts with the facts

Question	Section 338(h)(10)	Section 336(e)
What transaction is tested?	A qualified stock purchase by a corporation	A qualified stock disposition under separate rules
What is the general ownership threshold?	At least 80% of voting power and value within twelve months	Qualifying dispositions of at least 80% of voting power and value within twelve months
Which selling arrangements qualify?	Specified consolidated-group, affiliate or S corporation arrangements	Generally qualifying domestic corporate sellers or S corporation shareholders; domestic target required
Can the purchaser be noncorporate?	The QSP requires a corporate purchaser	Potentially; qualifying transactions can involve noncorporate or multiple purchasers

These are orientation points, not a complete eligibility test. Related-party, purchase, nonrecognition, excluded-stock and coordination rules can affect the result. Section 336(e) is not an unrestricted alternative when Section 338 applies. IRC § 338; Treasury Regulation § 1.336-1

A simple percentage calculation can also mislead where some stock is retained or contributed in a rollover. Model the actual transfers rather than applying the headline threshold to an enterprise-value percentage.

The shareholder who keeps stock can still matter

Return to the S corporation. Suppose two shareholders sell and the third retains an interest, while the relevant ownership threshold is otherwise satisfied.

For Section 338(h)(10), all S corporation shareholders must participate in the election, including the shareholder who does not sell. IRS, Form 8023 instructions

For Section 336(e), the S corporation target and all its shareholders, including nonsellers, must enter the required written binding agreement. The target retains it and attaches the election statement to its timely filed return under the applicable rules. Describing this as the seller simply making a unilateral election omits essential participants and mechanics. Treasury Regulation § 1.336-2(h)(3)

The practical problem is coordination. Who has contacted the retaining shareholder? What tax consequences do they face? What cooperation have they actually agreed to provide?

A required signature is not a clerical detail if the person has not agreed to the underlying bargain.

Put each deadline on the correct workstream

Section 338(h)(10) uses Form 8023, generally due by the fifteenth day of the ninth month after acquisition. Section 336(e) instead requires the applicable agreement and return statement, with timing tied to the relevant return deadlines, including extensions. The specific seller and target configuration matters. IRS, Form 8023 instructions; Treasury Regulation § 1.336-2(h)

Do not put one form number and one generic “tax election” date on the closing list. Assign preparation, review, required signatures, filing and retention separately. Confirm state treatment rather than assuming the federal analysis completes the work.

Availability is the beginning of the decision

An available election can still produce economics the parties reject. The buyer's expected benefit, seller's incremental cost, allocation and compensation need their own analysis. That bargain is addressed in the 338(h)(10) pricing article.

Before choosing the route, establish the tax classification of each party, map every relevant transfer, identify every required participant, and confirm the correct agreement and filing process. Then negotiate the consequences.

The useful answer is not which election sounds more flexible. It is which election this transaction can support and whether the people needed to deliver it have agreed.

For a proposed transaction, discuss structure and tax-adviser coordination with Tolbert Legal.

Educational information only; not legal, tax, accounting or investment advice. Scenarios are fictional and simplified. Eligibility, ownership tests, agreements, reporting and state treatment require transaction-specific review.