A Section 338(h)(10) election is a specific tax provision under the Internal Revenue Code (IRC) in the United States that allows for a special type of asset purchase treatment in the context of a stock purchase transaction. This election can offer several benefits to both the buyer and seller in certain situations. Here are some of the key benefits of a Section 338(h)(10) election.
- Step-Up in Asset Basis: One of the primary benefits of a Section 338(h)(10) election is that it provides a "step-up" in the tax basis of the target corporation's assets to their fair market value at the time of the purchase. This can result in significant tax advantages for the buyer.
- Amortization and Depreciation Deductions: With the stepped-up basis, the buyer can generally claim higher amortization and depreciation deductions on the acquired assets, especially the IP, which is likely not on the balance sheet. This can lead to reduced taxable income and lower income tax liability in future years.
- Elimination of Built-In Gains Tax: For the seller, a Section 338(h)(10) election can eliminate or reduce the built-in gains tax that would typically be imposed on the sale of appreciated assets within a C corporation. This can be especially advantageous if the target corporation holds assets with substantial unrealized gains.
- Avoidance of Double Taxation: In a stock purchase, both the buyer and the seller are generally subject to taxation on the gain realized from the transaction. With a Section 338(h)(10) election, the seller is taxed only once, as if they had sold the assets directly, which is more tax-efficient.
- Flexibility in Allocating Purchase Price: The buyer and seller have greater flexibility in allocating the purchase price among the acquired assets. This can be beneficial for both parties, as it allows them to structure the transaction in a way that maximizes their respective tax benefits.
- Preservation of Net Operating Losses (NOLs): If the target corporation has net operating losses, these NOLs can generally be preserved and carried froward by the buyer. This can offset future taxable income.
- Continuity of Contracts and Permits: Contracts, licenses, and permits held by the target corporation are generally not affected by the change in ownership that occurs with a Section 338(h)(10) election, which can be advantageous for the buyer.
- Reduced Administrative Complexity: Compared to an asset purchase followed by a liquidation of the target corporation, a Section 338(h)(10) election can be administratively simpler and more streamlined.
It is important to note that a Section 338(h)(10) election is not available for all types of stock purchase transactions, and there are specific eligibility requirements and procedural steps that must be followed. Additionally, the benefits and consequences of such an election can vary based on the unique circumstances of each transaction and the applicable tax at the time.