The buyer is insisting on an asset sale to get a step-up in tax basis, but our tax advisor says this will trigger massive double taxation for our C-corp. How do we negotiate a tax gross-up or structure a Section 338(h)(10) election to protect our net proceeds?

Question

Tyler Smith · Accepted Answer

This is a classic transaction conflict. Buyers almost always prefer an asset sale because it allows them to step up the tax basis of the acquired assets and write off depreciation, while also shielding them from historical liabilities. As a C-corp owner, however, an asset sale can trigger double taxation: first at the corporate level, and then at the individual level when the proceeds are distributed.

To protect your hard-earned wealth, you must calculate the exact tax delta between a stock sale and an asset sale. This is a critical metric for your structured Thinking Time. Once you quantify the difference, you must negotiate a tax gross-up, meaning the buyer increases the purchase price to ensure your net, after-tax proceeds are identical to what you would have received in a stock sale.

Alternatively, if you are an S-corp, you can explore a Section 338(h)(10) or Section 336(e) election. This allows the transaction to be treated as an asset sale for tax purposes while remaining a stock sale for legal purposes. The buyer gets their step-up, and you avoid the double taxation of a C-corp structure.

Never sign an LOI that specifies an asset sale without a clause stating the purchase price will be adjusted to compensate for the tax impact. Use your V/TO to align your advisors early so you do not pay a massive tax penalty at close.