Section 338(h)(10) Election – Both a Stock and an Asset Purchase (Part 1 of 3)

Purchasers in a business transaction generally prefer an asset purchase in order to step up the basis of acquired assets. Yet, a stock purchase may be preferable for a variety of non tax reasons. Normally in a stock purchase, the consideration paid becomes the tax basis of the stock from the purchaser’s standpoint.

However, in certain circumstances, the Internal Revenue Code gives the purchaser and the seller the ability to make a joint election where the actual transaction is a stock purchase, but for tax purposes it is treated as an asset purchase. This is accomplished by making a Section 338(h)(10) Election (H-10 Election) – the subject of this article.

Darrell V. Arne
CPA, ASA, CM&AA
Investment Banking Representative

H-10 Election – Requirements

Qualified Stock Purchase (QSP)
To qualify for the H-10 Election, the transaction must meet the following QSP requirements:

• The Purchaser (P) of Target’s (T’s) stock must be either a C Corp or an S Corp.
• P Cannot be an individual, partnership, or LLC treated as a partnership.
• P must purchase at least 80% (vote and value) of T’s stock over a 12-month period.

Target (T) Eligibility
To be eligible for the H-10 Election, T must be a domestic corporation under one of the following:

• A member of a consolidated group the files a consolidated return.
• A member of an affiliated group that does not file a consolidated return.
• An S Corp

Tomorrow’s posting (Part 2) will include two exhibits of an S Corp Target purchase: 

1. S Corp Target – Stock Purchase (Actual)
   
2. S Corp Target – Asset Purchase (Tax Purposes)

Thursday’s posting (Part 3) will offer tips and traps regarding H-10 Election.

Darrell Arne began his professional career in public accounting in 1970. In 1983, Darrell formed his own CPA practice, with emphasis on business valuation; by 1992, he had earned the Accredited Senior Appraiser (ASA) designation in business valuation. He then earned the Certified Business Intermediary (CBI) designation in 1995, and Certified Merger & Acquisition Advisor (CM&AA) designation in 2008.

He discontinued practicing in public accounting in 1994 when he formed Arne & Co., specializing in exit strategy planning for business owners, business valuations, business acquisitions & sales, business dispute mediation, part-time CFO services, and developer of business training seminars.