The buyer is insisting on a stock purchase but wants to make a Section 338(h)(10) election to treat the transaction as an asset sale for tax purposes, giving them a major depreciation step-up. How do we structure the purchase price gross-up to compensate us for our increased tax liability?

Question

Tyler Smith · Accepted Answer

A Section 338(h)(10) election allows a buyer to purchase your corporate stock but treat the deal as an asset sale for tax purposes. This gives the buyer a massive benefit because they can step up the tax basis of your assets and write them off through depreciation. However, this creates a major tax hit for you, because you will face ordinary income tax rates on depreciation recapture instead of lower capital gains rates. Never agree to a Section 338(h)(10) election without requiring a full purchase price gross-up. You must calculate the exact difference between the taxes you would pay under a standard stock sale and the taxes you will pay under the asset sale treatment. The buyer must agree to increase the total purchase price to cover this difference, ensuring your net after-tax proceeds remain identical. To win this negotiation, use your balance sheet and operational records to establish the tax basis of your assets early. Have your CPA run a detailed tax simulation during your sell-side preparation. If you wait until the definitive agreement is being drafted, the buyer will use the complexity of the calculation to delay closing or retrade the deal. By presenting a clear, mathematical calculation of the required gross-up alongside your clean operating records, you show the buyer that you understand the value of their step-up and will not subsidize their tax benefits at your own expense.