The buyer is insisting on an asset purchase to write up our asset base under Section 197, but the double taxation will destroy our net proceeds. How do we negotiate a structural compromise like a Section 338(h)(10) election to bridge this gap?

Question

Tyler Smith · Accepted Answer

This is a classic transactional conflict. Buyers want an asset sale to secure a tax step-up, allowing them to depreciate your assets and goodwill over fifteen years under Section 197. As an S-corporation or LLC owner, however, an asset sale can trigger significant tax liabilities compared to a stock sale.

To resolve this, you can negotiate a Section 338(h)(10) election. This legal structure allows the transaction to be treated as a stock sale for corporate law purposes, meaning the buyer assumes the entity, but as an asset sale for federal income tax purposes. This gives the buyer their coveted tax step-up while keeping the transaction simple.

The key to this compromise is the purchase price allocation. Since an asset sale can trigger ordinary income tax rates on certain assets instead of capital gains, you must calculate the exact tax differential. Insist that the buyer pays a gross-up premium to cover your additional tax burden.

We recommend calculating your net after-tax proceeds for both structures before signing the LOI. Present the buyer with the exact dollar amount of their tax benefit from the step-up. Demanding a portion of that benefit as a purchase price adjustment ensures you are fully compensated for agreeing to their preferred tax structure.