A prospective buyer is insisting on an asset sale to get a stepped-up tax basis, but this will trigger massive depreciation recapture and double taxation for our C-corp structure. How do we negotiate a structural compromise like a Section 338(h)(10) election or demand a gross-up payment to offset our increased tax bill?

Question

Tyler Smith · Accepted Answer

The battle between an asset sale and a stock sale is a classic M&A conflict. Buyers prefer asset sales because they can step up the tax basis of the acquired assets and write off depreciation, while avoiding your legacy liabilities. As the seller, you prefer a stock sale because it triggers long-term capital gains tax rates and provides a clean break.

If you own a C-corp, an asset sale is particularly painful because it triggers double taxation: first at the corporate level, and then at the personal level when you distribute the cash. To resolve this, you can negotiate a structural compromise.

One option is a Section 338(h)(10) election, which treats a stock sale as an asset sale for tax purposes. This gives the buyer their tax step-up, but it requires their cooperation. Because this election increases your tax burden, you must negotiate a gross-up clause. This clause forces the buyer to pay an additional cash amount at close to offset your extra tax liability, ensuring your net after-tax cash is identical to a pure stock sale.

Use your documented compliance processes and clean operational history to assure the buyer that your legacy liabilities are minimal, making a stock sale or a structured compromise highly feasible.