The buyer is proposing a stock sale but wants to make a Section 338(h)(10) election to treat it as an asset sale for tax purposes. How do we calculate and negotiate the necessary purchase price gross-up to ensure we do not lose our tax advantages?

Question

Tyler Smith · Accepted Answer

A Section 338(h)(10) election allows a buyer to purchase your corporate stock but treat the transaction as an asset purchase for federal income tax purposes. This is highly advantageous for the buyer because they get a step-up in tax basis on your assets, allowing them to claim substantial depreciation and amortization write-offs post-close. However, it can trigger massive ordinary income tax rates and depreciation recapture for you. If you agree to this election, you must demand a purchase price gross-up. This means the buyer pays you an additional cash amount to cover the extra taxes you will owe compared to a standard stock sale. To calculate this, your accounting team must perform a run-the-numbers tax simulation. They must model the exact tax liability of a stock sale at capital gains rates versus an asset sale with ordinary income recapture. Present this model to the buyer during early negotiations. Show them the exact dollar-for-dollar difference in your net after-tax proceeds. Make it clear that you will only agree to the Section 338(h)(10) election if they fully neutralize your tax hit. Keep this issue at the forefront of your leadership team's transaction prep. Use your quarterly planning sessions to align with your tax advisors, ensuring you do not sign a letter of intent without explicit language protecting your net after-tax proceeds.