Not all business acquisitions need to follow a strict “asset vs stock” split in practice. U.S. tax law provides mechanisms that allow certain transactions to be recharacterized for tax purposes.
One of the most important is the Section 338(h)(10) election.
What This Election Does
This election allows a transaction that is legally structured as a stock purchase to be treated as an asset purchase for tax purposes.
In simple terms:
- Legal structure: stock purchase
- Tax treatment: asset purchase
Why This Is Useful
This election can potentially allow:
- Step-up in asset basis
- Depreciation benefits similar to asset purchases
- More efficient tax outcomes for buyers
- Cleaner separation of economic vs tax treatment
When It Must Be Done
Timing is critical. The election must be:
- Agreed upon before or during the transaction
- Included in purchase documentation
- Properly coordinated between buyer and seller
- Filed according to IRS requirements
It cannot be added casually after closing.
Why It Is Often Overlooked
Many buyers miss this option because:
- It is not part of standard deal discussions
- It requires tax planning, not just legal drafting
- It involves coordination between both parties
- It is rarely explained in simplified transaction summaries
The Key Insight
The structure of a deal is not always fixed.
In some cases, tax elections can materially change how the transaction is treated—and that can significantly impact long-term tax outcomes.
Watch the video: https://www.youtube.com/watch?v=N3EZH9fsTn4
