Practical Law Glossary Item 9-382-3203 (Approx. 3 pages)
Section 338(h)(10) Election
An election to treat a stock acquisition of the target corporation generally as an asset acquisition for US federal income tax purposes. A buyer may want to make this election if it would receive a stepped-up basis in the target corporation's assets (i.e., if the buyer's cost basis in target's assets would exceed the carryover basis it would otherwise take in a stock acquisition).
A Section 338(h)(10) election may be made for a target corporation if a purchasing corporation has made a qualified stock purchase (QSP) of a target corporation from a selling consolidated group, a selling affiliate (as defined in Treasury Regulations § 1.338(h)(10)-1(b)(3)), or S-corporation shareholders.
A QSP is the purchase (as defined in IRC § 338(h)(3)) of at least 80% of the total voting power and value of the stock of a corporation by another corporation in a transaction (or series of transactions) during a 12-month acquisition period. Certain preferred stock (as described in IRC § 1504(a)(4)) is not included in computing voting power or value.
A Section 338(h)(10) election is jointly made by the purchasing corporation and the common parent of the selling consolidated group (or the selling affiliate or S-corporation shareholder(s)). If the target is an S-corporation, all of the target's shareholders (including shareholders who do not sell target stock in the QSP) must make the election.
If a Section 338(h)(10) election is made, the stock purchase is ignored for tax purposes; instead the target corporation generally is treated as making a deemed sale of its assets and then liquidating. The tax treatment to the target shareholders generally is consistent with sale and liquidation treatment.