Best of both worlds

When it comes to purchasing a business, many critical decisions must be made concerning the ideal tax structure for the taxpayer or entity making the acquisition. The most important decision is whether the acquiring entity wants to purchase the business assets or whether they want to buy stock in the business and forgo the tax basis advantage that comes with asset acquisition. 

Some buyers can take advantage of something called a Section 338 election, which can give buyers the benefits of both approaches. A Section 338 election is advantageous when a buyer has a strategic motivation to acquire stock rather than assets while still also seeking the tax benefits of an asset acquisition.

What’s a Section 338 election? Enacted by Congress in the early 1980s, it’s a part of the Internal Revenue Service’s code that allows the buyers and sellers of stock in an S corporation to make a qualified election so that a qualified stock purchase can be treated as an asset purchase for federal income tax purposes.

In effect, the parties are treated as if the buying corporation is establishing a new corporation, as if that new corporation is purchasing the assets of the target corporation and assuming its liabilities, and as if the old target corporation is being liquidated in the hands of the seller. 

Section 338(h)(10) elections can be complex and confusing! But one thing that is clear for both parties in these types of agreements is that fair market value needs to be established for the assets being acquired – including tangible assets like property and equipment.

Working with an experienced, competent appraiser helps ensure those assets are receiving fair market valuation. The bottom line? The more complex the deal (like a Section 338 election), the more an experienced appraiser is needed to ensure a fair and smooth process for everyone involved.