The buyer wants an asset purchase for tax depreciation benefits, but dozens of our enterprise client contracts contain strict anti-assignment clauses that would require client approval. How can we use an F-reorganization or a Section 338(h)(10) election to provide the tax benefits of an asset deal while closing as a stock purchase?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset sales because Section 197 allows them to write up acquired asset basis and amortize goodwill over fifteen years, creating substantial tax deductions. Sellers prefer stock sales because client contracts, operating licenses, and vendor relationships remain intact without requiring formal assignment consent.

If you operate an S-corporation or partnership, you do not have to pick between customer disruption and the buyer's tax benefits. A pre-closing F-reorganization bridges this divide.

Under Internal Revenue Code Section 368(a)(1)(F), you create a new holding entity above your existing business and convert the operating company into a single-member LLC. The buyer then purchases 100 percent of the LLC units from your holding company. Legally, the operating company remains the exact same entity, so commercial contracts, MSAs, and permits never transfer, avoiding anti-assignment clauses entirely.

For tax purposes, the transaction is treated under Revenue Ruling 99-6 as a deemed asset purchase. The buyer receives their desired tax basis step-up, while you avoid the customer friction and consent delays of an asset transfer.

If you are an S-corporation selling to a corporate entity without using an F-reorganization, a joint Section 338(h)(10) election provides a similar result, letting you close a legal stock purchase that is treated as an asset sale for federal tax purposes. Align your deal counsel on this structure at the LOI stage to remove anti-assignment roadblocks before due diligence begins.