A Section 338(h)(10) election lets a buyer acquire corporate stock while treating the transaction, for tax purposes, as an asset purchase. That single structural choice can shift hundreds of thousands of dollars between buyer and seller. The directional flow depends entirely on the target’s tax profile, the buyer’s basis appetite, and how the purchase price gets allocated across asset classes.

When the Seller Absorbs the Pain

In a standard stock sale, the seller pays capital gains rates on the spread between basis and proceeds. A 338(h)(10) election converts that gain into ordinary income at the corporate level, because the target is now deemed to have sold its assets. For a C-corp target with significant depreciated assets or goodwill accumulated at low basis, that reclassification is expensive. The seller is effectively swapping a lower capital gains rate for higher ordinary income exposure on the deemed asset sale, which is why most sellers in a 338(h)(10) context demand a tax gross-up or an adjusted purchase price to compensate.

The structural irony: the buyer benefits from stepped-up asset basis and future depreciation, while the seller absorbs near-term tax cost. The negotiation, then, is whether the buyer’s present-value benefit from the step-up exceeds the seller’s incremental tax liability. If the buyer’s marginal rate advantage is thin, or if the target has mostly short-lived assets already near end of depreciable life, the math rarely supports a seller concession.

When the Structure Favors the Seller

S-corp targets are the context where 338(h)(10) most clearly shifts the advantage. An S-corp seller’s gain on a deemed asset sale flows through to shareholders as pass-through income, taxed at individual rates. But those shareholders were already carrying basis in their stock, and in many cases the pass-through income from the deemed sale partially offsets what would have been a larger gain on the stock itself. The net tax cost to S-corp shareholders under 338(h)(10) frequently lands lower than a straight stock transaction. Buyers in S-corp deals often see the election as a prerequisite for closing, not a negotiated concession.

The wrinkle worth modeling: state-level conformity is not uniform. Several states do not recognize 338(h)(10) elections or impose their own treatment of the deemed asset sale. A target with operations in non-conforming states requires a blended effective rate calculation before any gross-up negotiation begins.

The Allocation Layer Most Buyers Undermodel

The election is only the first decision. How the purchase price is allocated across the seven asset classes under IRC 1060 determines the actual depreciation and amortization schedule the buyer captures. Class V assets (equipment) offer accelerated recovery under current bonus depreciation rules. Class VII (goodwill and going-concern value) amortizes over 15 years straight-line. A deal that loads allocation into goodwill rather than tangible assets produces a materially different NPV for the buyer, even with an identical headline price. Sellers, conversely, often prefer goodwill characterization because it attracts capital gains treatment on their side.

• Class V allocation favors buyers seeking near-term deductions on depreciable equipment
• Class VII allocation favors sellers through capital gains characterization
• Covenants not to compete fall into Class VI and are ordinary income to the seller, a detail often papered over in LOI-stage negotiations

The Operator Read

Sophisticated buyers in corporate acquisitions are running the 338(h)(10) NPV model before the LOI, not during diligence. The election structurally favors S-corp deals and targets with significant depreciable or amortizable assets. C-corp targets with low-basis appreciated assets present a more contested negotiation. The allocation schedule is a second instrument entirely, and the two decisions compound. Operators treating them as one decision are almost certainly leaving structure on the table.