The buyer insists on an asset acquisition structure to avoid legacy liabilities, but this will trigger a double-taxation trap for our corporate structure. How do we negotiate a stock sale with a Section 338(h)(10) election to give them their tax step-up while protecting our net proceeds?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset sales because they can step up the tax basis of your acquired assets and depreciate them immediately, while also leaving behind your historical corporate liabilities. However, an asset sale can trigger massive depreciation recapture and double-taxation for S Corporation owners, destroying your net walk-away proceeds. To bridge this structural gap, negotiate a stock sale with a Section 338(h)(10) election. This tax election allows the transaction to be treated as a stock sale for legal transfer purposes, which simplifies the assignment of your customer and vendor contracts, while being treated as an asset sale for federal income tax purposes. This structure gives the buyer the coveted tax step-up they want. In exchange for granting this election, you must negotiate a tax gross-up provision in the purchase agreement. The buyer must pay you an additional cash amount at closing to fully offset the extra tax liability you incur from the asset-sale treatment compared to a straight stock sale. Use your finance team to run detailed tax models of both scenarios. Presenting this math early in the negotiations ensures the buyer understands that the cost of their tax step-up must be borne by them, not by your net proceeds.