A section 338 election lets a buyer treat a stock purchase as an asset purchase for tax purposes. The buyer gets what it wanted from an asset deal, a stepped-up basis in the target's assets, while the lawyers close the simpler stock transaction.
The catch is who pays for the step-up. Somebody recognizes gain on a deemed sale of every asset the target owns, and the choice between the two available elections decides whether that cost lands once or twice.
TL;DR
- A section 338 election converts the tax treatment. The deal remains a stock purchase in law, while the tax code treats it as an asset sale.
- It requires a qualified stock purchase: at least 80% of voting power and value, acquired by another corporation within a 12-month period.
- The target's NOLs are capped by section 382 on an 80% acquisition, whether or not you elect.
- The step-up is worth real money: $10 million of goodwill in the deemed sale produces roughly $667,000 a year of amortization for 15 years.
- 338(g) is filed by the buyer alone and the target pays tax on the deemed asset sale, which usually means two levels of tax on a domestic target.
- 338(h)(10) is filed jointly and is limited to targets bought from a consolidated group, a selling affiliate, or S corporation shareholders.
- Section 336(e) covers the gap where the buyer is not a corporation, which is where 338(h)(10) is unavailable.
- Form 8023 is due by the 15th day of the 9th month after the acquisition date, and the deadline is not extendable in the ordinary course.
- Form 8883 allocates the price across seven asset classes using the residual method, with goodwill absorbing whatever is left.
- ADSP and AGUB are different numbers. The seller models tax from one and the buyer models depreciation from the other.
What a Section 338 Election Does
Buyers and sellers want different deal structures. A buyer prefers an asset purchase, for the stepped-up basis and the fresh depreciation and amortization deductions. A seller prefers a stock sale, which is simpler and often produces one level of tax.
Section 338 is the bridge. The parties sign a stock purchase agreement, and the election makes the tax law treat the transaction as though the target sold all of its assets at fair market value and a new corporation bought them the following day.
Three things follow from that fiction, and they are the whole of the election's effect:
- Old target is treated as selling every asset at fair market value on the acquisition date, and recognizes gain or loss accordingly
- New target is treated as buying those assets the next day, taking a cost basis equal to the deemed purchase price
- Old target files a final tax return reporting the deemed sale
The step-up is the prize. Assets depreciated down to a low basis in the seller's hands come back up to fair market value, and the buyer depreciates or amortizes them again from there.
Goodwill created in the deemed sale becomes amortizable over 15 years. In an ordinary stock purchase it is locked inside the share basis and produces no deductions at all.
What the Step-Up Is Worth
The value of an election is the present value of the extra deductions it creates. A target with $10 million of goodwill in the deemed sale generates roughly $667,000 a year of amortization for 15 years that an ordinary stock purchase would not produce.
Against that sits the tax on the deemed sale. The election pays when the buyer's benefit exceeds the seller's cost, and the purchase price is where the two get reconciled. Most stock purchases proceed without an election for exactly this reason.
Qualified Stock Purchase: The 80% Test
The election is only available after a qualified stock purchase, and the definition is narrow in three ways at once.
A QSP is the acquisition of at least 80% of the total voting power and value of a corporation's stock, by another corporation, within a 12-month acquisition period beginning with the first purchase counted toward the total.
Each element excludes a common transaction:
- The 80% test applies to voting power and value together, so a buyer taking 85% of the votes but 70% of the value has not made a QSP
- The purchaser must be a corporation, which puts individuals, partnerships and most funds outside section 338 entirely
- The stock must be acquired by purchase within 12 months, which excludes shares received by gift, in a tax-free reorganization, or from a related party
A buyer creeping to 80% over two years has no QSP and no election, however clearly the commercial intent points one way. The 12-month clock makes this a structuring question with a deadline attached.
Who Pays the Deemed-Sale Tax: 338(g) vs 338(h)(10)
The single most important distinction on this topic is which of the two elections is in play, and the live consequence is who pays the tax on the deemed sale.
| Section 338(g) | Section 338(h)(10) | |
|---|---|---|
| Who elects | The purchasing corporation, alone | Purchaser and seller, jointly |
| Which targets qualify | Any target corporation | Only a target bought from a consolidated group, a selling affiliate, or S corporation shareholders |
| Who bears the deemed-sale tax | The target | The selling group or S corporation shareholders |
| Stock sale treatment for sellers | Taxed separately on the stock sale | Treated as if no stock sale occurred |
| Typical use | Foreign targets | Domestic S corporations and subsidiaries |
Why 338(g) Usually Produces Two Levels of Tax
Under a 338(g) election the buyer acts alone, and the seller's stock sale is taxed exactly as it would have been anyway. The target then recognizes gain on the deemed asset sale on top of that.
For a domestic C corporation target the result is corporate tax on the deemed sale plus shareholder tax on the stock sale. A unilateral 338(g) is rarely attractive on a domestic deal for that reason, since the buyer is paying for the step-up with somebody's tax bill.
The election earns its place on foreign targets, where two benefits arrive without the corporate-level cost:
- A US basis step-up in the target's assets, where the deemed sale attracts no US corporate tax
- A reset of the target's earnings and profits, which matters for a buyer inheriting a controlled foreign corporation with accumulated E&P
338(h)(10) Collapses Two Levels of Tax Into One
A 338(h)(10) election is made jointly, and it recharacterizes the transaction for the seller too. The selling group or S corporation shareholders are treated as if the target sold its assets and then liquidated, and the stock sale is disregarded. That collapses the two levels of tax into one.
Whether the seller agrees turns on character. Asset-sale treatment can convert what would have been capital gain into ordinary income on depreciation recapture, and the purchase price is where that difference gets settled.
Eligibility is the binding constraint. The election is available only where the target was acquired from one of three sellers:
- A selling consolidated group, meaning a parent and its subsidiaries filing one consolidated federal return
- A selling affiliate, a corporation connected to the target through the required ownership but outside a consolidated return
- S corporation shareholders
A standalone C corporation held by individuals falls outside all three, which rules out a large share of privately held targets.
Every S Corporation Shareholder Has to Sign
For an S corporation target, Form 8023 must be signed by each S corporation shareholder, whether or not that shareholder is selling any stock.
One minority holder who will not sign defeats the election for everyone. Where the election is worth real money to the buyer, that shareholder's consent becomes a negotiating position, better identified in diligence than at signing.
Section 336(e) Is the Route When the Buyer Is Not a Corporation
A corporate purchaser is required. A great many acquirers are not corporations: private equity funds and individual buyers sit outside it.
Section 336(e) provides similar treatment for a qualified stock disposition and does not require a single corporate purchaser. Where a 338(h)(10) election is unavailable because of who is buying, 336(e) is usually the provision to look at instead.
The mechanics differ commercially. A 336(e) election is made by the seller side, so it does not depend on the buyer joining in the way a 338(h)(10) election does, though the economics are still negotiated in the price.
Filing It: Form 8023 and Form 8883
Two forms carry a section 338 election. Form 8023 makes it, and Form 8883 reports how the price is allocated across the target's assets. They have different filers, different deadlines and different destinations.
Form 8023 Makes the Election
Section 338 elections are made on Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases.
Each element of the filing has a party attached to it:
- Deadline: the 15th day of the 9th month after the acquisition date, which is the date the 80% threshold was crossed
- A 338(g) election is filed by the purchasing corporation; a 338(h)(10) election is filed jointly with the selling group, selling affiliate or S corporation shareholders
- Signatures are required from the authorized officers of each electing party, and from every S corporation shareholder where the target is an S corporation
- The form is submitted to the IRS separately from the tax returns, and it carries the election itself rather than merely reporting it
The deadline is generous by tax standards and it is fixed, so put it in the closing checklist.
Form 8883 Allocates the Purchase Price
Form 8883, the Asset Allocation Statement, reports how the deemed purchase price is spread across the target's assets. Both old target and new target file it, attached to the return reflecting the transaction.
The class order is prescribed by regulation. The valuations within each class are where the parties negotiate, and that is what the purchase agreement settles.
The Seven Form 8883 Asset Classes
| Class | What it contains |
|---|---|
| I | Cash and general deposit accounts, including savings and checking, other than certificates of deposit |
| II | Actively traded personal property, certificates of deposit and foreign currency |
| III | Assets marked to market annually, and debt instruments, excluding related-party, contingent and convertible debt |
| IV | Stock in trade and other property properly included in inventory |
| V | All remaining assets, typically furniture and fixtures, buildings, land, vehicles and equipment |
| VI | All section 197 intangibles except goodwill and going concern value |
| VII | Goodwill and going concern value |
The Residual Method Puts Goodwill Last
Consideration is allocated in class order. It reduces first against Class I, then flows through Classes II to VI by relative fair market value, and whatever remains lands in Class VII.
Goodwill is therefore a residual figure rather than an independently valued one. Two consequences follow for the parties:
- Overstating the value of Class V and VI assets reduces goodwill, which shifts basis toward shorter recovery periods and accelerates the buyer's deductions
- The allocation is binding on both sides, so a position taken to help the buyer shows up on the seller's return as well
That mutual binding is why allocation is negotiated in the purchase agreement and settled before either party files.
Form 8023 at 9 Months, the Final Return at 3
| Item | Deadline |
|---|---|
| Form 8023, making the election | 15th day of the 9th month after the acquisition date |
| Old target's final return, C corporation | Generally the 15th day of the 4th month, under section 6072(a) |
| Old target's final return, S corporation | Generally the 15th day of the 3rd month, under section 6072(b) |
| Form 8883 | Attached to the return reflecting the transaction, by both old and new target |
The final return falls due before the election deadline, which is the sequencing trap. A target filing that return without anticipating the election may have to amend, so the decision belongs ahead of the filing.
The month depends on what the target is, and this matters here because 338(h)(10) elections so often involve S corporation targets.
The regulation refers to a third calendar month, but it cross-references section 6072. Section 6072(a) was amended to move the general corporate due date to the 15th day of the 4th month, and the carve-out preserving the older date for June 30 year-ends has expired.
Section 6072(b), which governs S corporations and partnerships, still sets the 15th day of the 3rd month and was not changed.
The Target's Tax Attributes Generally Do Not Survive
Because new target is treated as a different corporation acquiring assets, the old target's tax attributes generally do not carry forward.
The attributes that die with old target decide whether the election pays:
- Net operating losses, though preserving them is worth less than it looks. A qualified stock purchase is almost always also a section 382 ownership change, which caps the annual use of pre-change losses whether or not an election is made
- Tax credit carryforwards, which follow the same logic
- Accounting method elections, which new target may need to make afresh
The trade is a stepped-up basis against whatever survives of the attributes. A loss-making target with a large NOL balance and few depreciable assets is the case for looking hard at leaving the election alone, with the section 382 limitation modelled rather than assumed.
The Two Prices: ADSP and AGUB
The deemed sale has two sides, and the regulations give each its own defined amount. They are rarely identical, because the tax on the deemed sale feeds into one and not the other.
| What it measures | Whose number it is | |
|---|---|---|
| ADSP Aggregate deemed sale price | The amount old target is treated as receiving for its assets | The seller's side, driving the gain on the deemed sale |
| AGUB Adjusted grossed-up basis | The amount new target is treated as paying | The buyer's side, driving the stepped-up basis |
Both start from the price paid for the stock, grossed up where less than 100% was acquired, and both add the target's liabilities. The divergence comes from the adjustments each side makes, including the tax on the deemed sale itself, which affects ADSP.
A buyer modelling its future depreciation works from AGUB. A seller modelling its tax works from ADSP. Neither calculation starts from the headline equity price.
Mistakes That Lose the Election
Most elections that fail do so on eligibility, not on the merits:
- Missing the 80% test on value. Voting power and value are tested together, and a capital structure with preferred stock or options can put value below the line while votes clear it
- A non-corporate buyer. Section 338 requires a corporate purchaser, and a fund or individual acquirer needs section 336(e) instead
- An unsigned S corporation shareholder. Every shareholder signs, selling or not, and one refusal ends the election
- Letting the 12-month period lapse. Acquisitions creeping past twelve months do not form a qualified stock purchase, whatever the total reaches
- Buying assets on the side to get a step-up. The consistency rules can force carryover basis on assets bought from a target's group where the gain would be reflected in the target's stock basis, so a stock deal and nearby asset purchases need planning together
How FinStackk Helps After the Transaction
FinStackk is an accounting and tax compliance platform for US businesses. The election itself is a transaction tax matter for your deal advisers, and the compliance that follows it is ongoing work.
Fin-Tax handles federal and state filings, including a target's final return and the new entity's returns afterwards, with a consolidated deadline calendar. Fin-Books covers the bookkeeping that has to be rebuilt on the stepped-up basis once the allocation is settled.
Get in touch to talk through post-transaction compliance.
Frequently Asked Questions
What is a section 338 election?
An election that treats a qualified stock purchase as an asset acquisition for tax purposes. The target is deemed to sell all its assets at fair market value and a new corporation is deemed to buy them the next day, giving the buyer a stepped-up basis.
What is the difference between a 338(g) and a 338(h)(10) election?
A 338(g) election is made by the buyer alone and leaves the target bearing tax on the deemed asset sale, usually producing two levels of tax domestically.
A 338(h)(10) election is made jointly and disregards the stock sale. It is limited to targets acquired from a consolidated group, a selling affiliate or S corporation shareholders.
When is Form 8023 due?
By the 15th day of the 9th month after the acquisition date, which is the date the 80% threshold was crossed.
What are the Form 8883 asset classes?
Seven classes, running from Class I cash through to Class VII goodwill and going concern value, with consideration allocated in that order under the residual method.
This article is general information on US federal tax rules and is not tax or legal advice. Section 338 elections turn closely on deal facts and entity structure, so take any live transaction to a qualified transaction tax adviser before electing.