Merger Structure Rundown: 338 Elections

March 21, 2023

As if the M&A world could not get any more complicated, I am going to blow your mind again.  There are situations where an acquisition could be treated as both and Asset and a Stock purchase at the same time.  I know, you are probably saying that this has to be a mistake that was missed on some 10,000+ page unrelated bill passed by Congress.   However, it is not.  Yes, the structure I am talking about is a 338 election.

Section 338 of the Internal Revenue Code allows for a corporate buyer and the selling entity to jointly elect to treat a stock purchase as an asset purchase for federal tax purposes (FYI, Section 336 is the applicable code provision for non-corporate buyers like LLCs).  The selling entity is treated as selling its assets to the corporate buyer for the agreed upon stock purchase amount.  In simpler terms, the Buyer gets a tax basis step-up advantage and the underlying selling entity remains in existence.

A regular 338 election is not typically used because there is a double taxation issue.  The Seller would be taxed at the entity level for the gains on its asset sale and the seller’s shareholders would then be taxed on the sale of their equity.  So, what do you do?

If you read Section 338 a little more (good cure for insomnia), you will see that there is a special 338(h)(10) election that can be made to alleviate this double taxation issue.  Essentially, the stock sale is ignored for tax purposes if the requirements below are met:

  • The Selling Company is an S Corporation; or
  • The Buyer buys the stock of the Seller from one or more of the “corporate” shareholders of the Seller (i.e., you can’t buy stock from individual shareholders).

If your transaction looks like the above, then a 338(h)(10) might be right for you.  However, keep in mind that the underlying entity remains along with its liabilities.

Your professional business advisors (accountants, attorneys, financial advisors, etc.) are the best place to go and discuss this structure.

Below are some good overviews of the different transaction structures (repeat from last week):

Here are some other items of interest:

Additional Merger Structure Rundowns

This blog post is part of a series on different types of merger structures. You can find the other structure rundowns at the links below:

As always, please don’t hesitate to email myself (, Andy Miller (, Christian Miller (, Erik Spurlin (, Brad Leber ( or anyone in our office with questions or comments.  

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