What is a Section 338(h)(10) election?
Available in qualifying deals with a corporate buyer
A §338(h)(10) election, under IRC §338(h)(10) and Treas. Reg. §1.338(h)(10)-1, treats a qualifying stock purchase as a sale of the target's assets. The buyer gets a basis step-up while legally buying stock. It requires a corporate buyer, a qualified stock purchase of at least 80% of the target's stock by vote and value within 12 months, and an eligible target: an S corporation or a member of a selling consolidated or affiliated group.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- The buyer must be a corporation; individuals and partnerships cannot make a qualified stock purchase.
- The stock acquired must meet the §1504(a)(2) test: at least 80% of voting power and 80% of value, bought within a 12-month period.
- Eligible targets are S corporations and subsidiaries sold out of a consolidated or affiliated group; C corporations owned by individuals are not eligible.
- The election is made jointly on Form 8023, all S corporation shareholders must consent, and the election is irrevocable.
- Non-corporate buyers may be able to use a §336(e) election or a pre-sale restructuring instead.
What it is
Buyers and sellers often want opposite structures. The buyer wants the basis step-up of an asset purchase; the seller wants the simplicity of selling stock. Transferring assets one by one can also be impractical, because every title, permit, and contract has to move.
A §338(h)(10) election bridges that gap. Legally, the buyer purchases stock and the company stays intact. For federal income tax purposes, the target is treated as selling all of its assets at fair market value and then liquidating, so the buyer takes a stepped-up basis in the assets.
What the law says
IRC §338(d)(3) defines a qualified stock purchase as an acquisition, by another corporation, of stock meeting the §1504(a)(2) requirements during a 12-month acquisition period. IRC §338(h)(10) authorizes a joint election when the target was a member of a selling consolidated group, and the regulations extend it to targets that are members of a selling affiliated group and to S corporation targets.
Under Treas. Reg. §1.338(h)(10)-1, the target is treated as selling its assets in a single transaction while owned by the seller and then as distributing the proceeds in a complete liquidation. The election is made jointly on Form 8023, S corporation shareholders who do not sell their stock must also consent, and the election is irrevocable.
IRC §336(e) provides a similar deemed asset sale election for certain sales, exchanges, and distributions of stock by a corporate seller. The regulations under §336(e) also cover S corporation shareholders, which can help when the buyer is not a corporation.
Requirements and tests
Each of these must be satisfied:
- The buyer is a corporation (or a member of an affiliated group of corporations).
- The buyer acquires, by purchase, stock with at least 80% of total voting power and at least 80% of total value within a 12-month acquisition period.
- The target is an S corporation, or a member of a selling consolidated group or selling affiliated group.
- The buyer and the seller (for an S corporation target, all of its shareholders) sign and file Form 8023 by the 15th day of the 9th month after the month in which the acquisition date occurs.
- The deemed asset sale price and the buyer's basis are allocated among the assets under the residual method of Treas. Reg. §1.338-6.
How it works
For an S corporation target, the deemed asset sale gain flows through to the shareholders on their Schedules K-1 and raises their stock basis, and the deemed liquidation then generally produces little or no additional gain. The result is generally one level of federal tax, but the character of that tax changes: depreciation recapture and other ordinary income items are taxed at ordinary rates, while a stock sale would usually have been all capital gain.
For a subsidiary sold by a consolidated group, the deemed liquidation is generally tax-free to the parent under §332, so the group reports the asset gain instead of the stock gain. The election tends to help when the parent's stock basis and the subsidiary's asset basis are close.
The buyer's adjusted grossed-up basis is allocated across the assets. Equipment may qualify for 100% bonus depreciation under §168(k) as restored by the One Big Beautiful Bill Act for property acquired after January 19, 2025, and goodwill is amortized over 15 years under §197.
Because the election can raise the seller's tax cost, buyers commonly agree to a gross-up payment. That payment should be modeled, because it is itself additional purchase price.
Assumptions: Tax year 2026; the sole shareholder is married filing jointly, lives in Texas, and materially participates, so the net investment income tax is assumed not to apply.; Price $10,000,000; the S corporation's asset basis and the shareholder's stock basis are each $3,000,000; the company has always been an S corporation (no §1374 tax); no liabilities.; With the election, the $7,000,000 deemed asset sale gain is $2,000,000 of §1245 depreciation recapture (ordinary) and $5,000,000 of goodwill gain (capital).; The shareholder's other income already exceeds $768,700 of joint taxable income (the 2026 start of the 37% bracket) and $613,700 (the top of the 15% capital gain band), so ordinary income is taxed at 37% and capital gain at 20%. Any §199A deduction on the ordinary gain is ignored.
| No election: capital gain on stock ($10,000,000 − $3,000,000) | $7,000,000 |
|---|---|
| No election: federal tax at 20% | $1,400,000 |
| Election: ordinary recapture tax ($2,000,000 × 37%) | $740,000 |
| Election: capital gain tax ($5,000,000 × 20%) | $1,000,000 |
| Election: total federal tax | $1,740,000 |
| Added seller tax caused by the election | $340,000 |
| Buyer's asset basis: without election / with election | $3,000,000 / $10,000,000 |
The election gives the buyer $7,000,000 of additional asset basis but costs this seller about $340,000 more in federal tax, which is the minimum the seller would want to negotiate as a gross-up.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
Common failure points are a non-corporate buyer, a stock purchase that misses the 80% vote-and-value test, a late or incomplete Form 8023, a missing S corporation shareholder consent, and an invalid S election, which would make the target a C corporation that is not eligible. An S corporation that converted from a C corporation may also owe built-in gains tax under §1374 on the deemed sale. State tax results can differ from the federal result.
Who it is not for
This election is not for a buyer that is an individual, a partnership, or a private-equity fund acquiring stock directly, unless a corporate acquisition vehicle is used. It is not for a C corporation target owned by individuals, which is not eligible. It is not for a deal where either side will not sign, or where fewer than 80% of the shares are bought. And because the election cannot be revoked, it is not for anyone who has not modeled the seller's added tax and the buyer's benefit first.
How ebotCPA helps
We test eligibility against the statute and regulations, model the seller's added cost and the buyer's benefit, and prepare Form 8023 and the related Form 8883 reporting. We coordinate with your attorney, who drafts the legal documents.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
We coordinate with your attorney, who drafts the legal documents.
Frequently asked questions
Can an individual or a private-equity fund make a 338(h)(10) election?
Not when buying stock directly. A qualified stock purchase under IRC §338(d)(3) must be made by a corporation. Non-corporate buyers sometimes use a corporate acquisition vehicle, a §336(e) election, or a pre-closing restructuring of the target.
When is Form 8023 due?
By the 15th day of the 9th month after the month in which the acquisition date occurs, signed by the buyer and the seller (for an S corporation target, all of its shareholders).
Does a 338(h)(10) election create double tax for an S corporation?
Generally no. The deemed asset gain flows through to the shareholders once. But more of the gain can be ordinary income, and a former C corporation may owe built-in gains tax under §1374.
Can the election be revoked?
No. Treas. Reg. §1.338(h)(10)-1(c) makes the election irrevocable, so model it before signing.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.