Sec. 338(h)(10) Elections in Business Acquisitions
In business acquisitions, the buyer and seller often find themselves with differing tax objectives: the buyer usually prefers an asset purchase for a stepped-up basis, while the seller might want a stock sale to avoid double taxation. The Sec. 338(h)(10) election steps in to resolve this conflict by enabling both parties to treat a statutory stock purchase as a deemed asset sale for federal tax purposes, under certain conditions.
The Mechanics: Deemed Sale and Deemed Liquidation
This election permits the buyer and seller to jointly elect, on Form 8023, to characterize a qualified stock purchase as a deemed asset sale. This means both parties can benefit from the advantages of an asset purchase while avoiding potential pitfalls associated with double taxation.
Eligibility Rules
To be eligible for the Sec. 338(h)(10) election:
- The buyer and seller must jointly elect to apply it on Form 8023 within a specified timeframe.
- The acquisition must involve qualified stock purchases, typically in the range of $2 million to $10 million.
- Specified entity and timing requirements must be met.
Tax Consequences
The election can have significant tax implications for both parties:
- Buyer Benefits: Stepped-up basis on acquired assets, potentially lowering future tax liabilities.
- Seller Advantages: Avoiding double taxation by treating the transaction as a deemed liquidation of shares.
Practical Deal Considerations
When structuring a deal with this election in mind, consider:
- Timing: Ensure the election is made within the required timeframe.
- Documentation: Properly complete and file Form 8023 jointly.
- Tax Planning: Understand the potential tax benefits and liabilities for both buyer and seller.