IRC Section 338(h)(10) Election Strategies for Tax Counsel

The Section 338(h)(10) election, long available under prior tax law, allows the parties to treat the purchase and sale of the stock of a target corporation as a deemed asset sale. While the acquisition is structured as a stock sale, the buyer obtains a basis step-up in the acquired assets held by the target corporation. That basis step-up is then available for expensing or depreciation. The seller is treated as if the assets were sold and the stock sale is ignored.

Tax reform enacted in 2017 (the “Act”) benefits asset buyers by making "used" property acquired in an actual or deemed asset acquisition qualified for immediate bonus depreciation expensing. Further, the Act increased the immediate bonus depreciation expensing percentage to 100 percent of the asset cost (up from 50 percent under prior law).

For the C corporation seller, any gain upon the deemed asset sale will be subject to the new maximum corporate tax rate of 21 percent, also a feature of the Act.

Together, these asset-expensing and tax-rate changes will significantly and favorably impact pricing and deal valuation, particularly in an actual or deemed asset purchase. While the Act has generally triggered increased economic activity and corresponding merger and acquisition activity, these tax law changes should further accelerate M&A transactions. There will be great interest in structuring acquisition transactions as deemed or actual asset purchases where at all possible.

Savvy tax counsel must be aware of both the opportunities and potential pitfalls in determining when the Section 338(h)(10) election is appropriate for a particular transaction, especially in light of passage of the Act. Further, fairly recent regulatory changes make the Section 338(h)(10) election available in a much broader class of stock acquisitions under Section 336(e).

Listen as our authoritative panel of tax practitioners guides you through the mechanisms of the IRC Section 338(h)(10) election and the various tax strategies counsel must consider in leveraging the election in light of the Act and regulatory changes.

1. Overview of Section 338(h)(10) and tax reform considerations
2. Typical acquisitions in which the 338(h)(10) election is made
3. Operation of the election
4. Avoiding pitfalls

The panel will review these and other key issues:

• When is a Section 338(h)(10) election appropriate?
• What opportunities does the election offer and what potential tax pitfalls must counsel consider in making the election?
• What is the impact of Section 338(h)(10) election on Section 197 anti-churning rules?
• How does the Act impact the viability of the election?
• How does the election operate in the case of non-corporate buyers and S corporations?
• How do the regulations under Code Section 336(e) operate to broaden the scope of Section 338(h)(10) election?
• How do state tax laws interact with the election?

Learning Objectives

After completing this course, you will be able to:

• Ascertain an understanding of the application, operation, and impact of Section 338(h)(10) election in deemed asset sales
• Identify tax planning strategies to optimize tax benefits and minimize pitfalls in making the election
• Recognize opportunities for M&A transactions leveraging Section 338(h)(1) elections

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules; supervisory authority over other preparers/accountants. Working knowledge of partnership or corporate structure, operating agreements, and shareholder agreements.

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IRS Approved Provider

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