How Section 338 Elections Work: 338(g), 338(h)(10), and 336(e)

A Section 338 election lets a corporate buyer treat a stock acquisition as if it were an asset purchase for federal tax purposes, resetting the target company’s asset basis to reflect the price actually paid.¹ That reset almost always produces a stepped-up basis, which then flows through as larger depreciation and amortization deductions for years after closing. The election comes in two versions with very different tax consequences, and choosing between them is the central decision.

What the Election Actually Does

Without an election, a stock purchase leaves the target’s asset basis untouched. If the target bought a factory decades ago for $2 million and the buyer now pays $50 million for the stock, the factory keeps its old depreciable basis. The buyer gets no fresh cost recovery on the premium it paid.

Section 338 solves this through a legal fiction. Once the buyer completes a qualifying stock purchase and files the election, the target is treated as having sold every one of its assets to a hypothetical “new” version of itself at fair market value on the acquisition date.¹ The old target’s tax life closes that day. The new target opens the next morning holding the same assets at a fresh basis tied to what the buyer paid. Nothing physically changes hands.

The payoff is the step-up. Higher basis on tangible assets means larger annual depreciation deductions. Higher basis on intangibles — patents, customer lists, non-competes, goodwill — means larger amortization deductions, generally over 15 years.² Both reduce taxable income, so the buyer recovers part of the purchase price through smaller tax bills over the life of the assets.

When the Election Is Available

The election requires a “qualified stock purchase.” A single corporation must acquire at least 80 percent of the target’s stock — measured by both voting power and total value — through taxable purchases within a 12-month window.³ The clock starts on the first purchase that counts toward the threshold. The “acquisition date” is the day the 80 percent mark is reached.

Stock acquired through tax-free reorganizations, gifts, or inheritances does not count. Only acquisitions in which the buyer takes a cost basis in the shares qualify.⁴ Miss any part of this definition and no election is available; the buyer inherits the target’s historical carryover basis.

Note the corporate-buyer requirement. Individuals, partnerships, and other non-corporate buyers cannot make a Section 338 election at all. For them, Section 336(e) is the parallel route, covered near the end of this article.

338(g) Versus 338(h)(10)

The Code offers two versions of the election, and the wrong choice can mean paying two layers of tax where one would do.

Section 338(g): Unilateral, but Double-Taxed

A 338(g) election is available on any qualified stock purchase, and the buyer can make it without the seller’s cooperation. The catch is double taxation. The deemed asset sale triggers corporate-level tax on the gain inside the target, calculated as if every asset had been sold at fair market value. The seller still owes capital gains tax on the actual stock sale. Because the buyer now owns the target that carries the corporate-level tax bill, the buyer effectively absorbs both layers.

For domestic acquisitions, the math almost never works unless the target has substantial net operating losses or other tax attributes that can absorb the gain from the deemed sale. Where those losses exist, they offset the corporate-level hit and the step-up comes at a manageable price. The 338(g) election’s real use case is cross-border deals, discussed below.

Section 338(h)(10): Joint, and Single-Taxed

The 338(h)(10) election collapses the two taxable events into one, which is why it dominates domestic deals where it is available. It can be used only when the target is an S corporation, a member of a consolidated group, or an affiliated domestic corporation whose parent owns at least 80 percent of its stock. Both buyer and seller must jointly sign Form 8023, and for an S corporation target, any shareholders who did not sell their stock must also consent.⁵

Under this version, the target is treated as selling its assets and then immediately liquidating into the seller. The stock sale itself is disregarded. The seller recognizes gain or loss based on the deemed asset sale, and only one level of tax applies. For S corporation targets, that tax passes through to the shareholders. For consolidated group targets, the gain lands on the group’s consolidated return.

Sellers often prefer this structure because a single tax event beats two. That cooperation frequently lets the buyer negotiate a lower purchase price, splitting the tax benefit between the two sides.

How the New Basis Is Calculated

Two formulas do the work. Aggregate Deemed Sales Price (ADSP) sets the amount the old target is treated as receiving on the fictional sale, and it drives the seller’s gain calculation. Adjusted Grossed-Up Basis (AGUB) sets the buyer’s new basis in the assets. They start from different reference points and often produce different numbers.

ADSP equals the grossed-up amount the buyer paid for recently purchased target stock, plus the target’s liabilities.⁶ “Grossed-up” means the price paid for the shares actually purchased is scaled to represent 100 percent of the target. Ninety million dollars for 90 percent of the stock grosses up to $100 million. Add liabilities (including tax triggered by the deemed sale itself) and you have ADSP.

AGUB equals the grossed-up basis in recently purchased stock, plus the buyer’s basis in any nonrecently purchased stock it already held, plus target liabilities, plus certain other adjustments.⁷ AGUB is initially calculated as of the beginning of the day after the acquisition date. When the buyer already held some target stock before the 12-month acquisition period, that older stock may have a basis that doesn’t line up with a proportional share of the new purchase price, which is why AGUB and ADSP can diverge.

Allocating Basis Across the Seven Asset Classes

AGUB doesn’t sit on the balance sheet as a lump. It must be divided among the target’s individual assets using the residual method required by Section 1060.⁸ The regulations sort every asset into one of seven classes, and AGUB fills them in order, each class funded up to the fair market value of the assets it contains before any remainder moves down.⁹

Class I: Cash, checking accounts, and savings accounts.
Class II: Actively traded property such as government securities, publicly traded stock, and certificates of deposit.
Class III: Debt instruments, accounts receivable, and assets marked to market annually.
Class IV: Inventory and property held for sale to customers.
Class V: All other assets, including equipment, furniture, vehicles, and real property.
Class VI: Section 197 intangibles other than goodwill and going concern value (patents, customer lists, non-competes, and the like).
Class VII: Goodwill and going concern value.

The sequential filling matters. Whatever AGUB remains after Classes I through VI are funded at fair market value gets dumped into Class VII as goodwill, amortizable over 15 years.² In most acquisitions the purchase price exceeds identifiable asset value, so a substantial share of AGUB lands in goodwill. Buyers naturally prefer to push value into Class V, where shorter depreciable lives improve the present value of the deductions, but the residual method caps each class at fair market value. The same ADSP allocation applies on the seller’s side, and buyer and seller must use consistent valuations. Mismatched Forms 8883 are an easy audit flag.

Forms and Deadlines

Two forms govern the election, and they do different jobs.

Form 8023 makes the election. The buyer files it directly with the IRS rather than attaching it to a tax return.¹⁰ For a 338(h)(10) election, the selling shareholders or selling consolidated group must also sign. The IRS accepts Form 8023 by fax.¹¹ The deadline is the 15th day of the 9th month beginning after the acquisition date. For an April 10 acquisition, that’s January 15 of the following year. Miss it and the election is generally lost.

Form 8883 reports the asset allocation. Both the old target and the new target attach it to the relevant income tax return. The old target uses its final return (or the selling group’s consolidated return for a 338(h)(10) election). The new target uses its first return after the acquisition date. Filing a late or incorrect Form 8883 can trigger information-reporting penalties under Sections 6721 through 6724 absent reasonable cause.¹²

Why 338(g) Works for Foreign Targets

Rarely worth the double-tax cost domestically, the 338(g) election becomes genuinely useful when the target is a foreign corporation. A U.S. buyer acquiring a controlled foreign corporation can make a unilateral 338(g) election to wipe out the target’s accumulated earnings and profits, which in turn eliminates future exposure to deemed dividend inclusions under Subpart F and GILTI.¹³

The mechanics: the deemed sale triggers gain inside the foreign target and closes its tax year on the acquisition date. Any Subpart F and GILTI generated by the deemed sale are attributed to the seller, who owned the stock during that final year. The buyer starts fresh with a target that has no accumulated E&P and a stepped-up basis in the foreign assets. In a jurisdiction with low or no corporate income tax, the deemed-sale tax can be minimal, making the election nearly free.

For foreign targets, the buyer or its U.S. shareholder attaches Form 8883 to the first Form 5471 filed for the new foreign target, and the seller attaches its copy to the last Form 5471 for the old target.¹²

When Section 338 Doesn’t Fit: Section 336(e)

Section 336(e) offers a parallel deemed-asset-sale election for situations Section 338 cannot reach.¹⁴ The key difference: the buyer does not have to be a corporation. A 336(e) election requires a “qualified stock disposition,” meaning the seller (a domestic corporation or S corporation shareholders) disposes of at least 80 percent of the target’s stock through sales, exchanges, or distributions within 12 months.¹⁵ It’s jointly made, produces a single level of tax, and also covers stock distributions like spinoffs that would never qualify as a “purchase” under Section 338. A private equity fund structured as a partnership buying an S corporation, for example, cannot use Section 338 at all; Section 336(e) fills that gap.

Valuation Risk and the Anti-Churning Trap

Every dollar of the step-up depends on the fair market values assigned during allocation. Inflating the total or shifting value toward assets with short depreciable lives invites IRS scrutiny. A substantial valuation misstatement triggers an accuracy-related penalty of 20 percent of the resulting tax underpayment.¹⁶ A third-party appraisal is not legally required, but it’s the strongest defense if the numbers are challenged. Consistency between the buyer’s and seller’s Forms 8883 is essential; a mismatch is a quick way to draw an audit.

One more trap for related-party deals: the Section 197 anti-churning rules can block amortization of goodwill and certain other intangibles when buyer and seller are related and the intangibles were held before Section 197 took effect.¹⁷ A stepped-up basis on goodwill you can’t amortize is worth nothing, so this needs to be checked before the election is filed rather than after.

1
Office of the Law Revision Counsel. 26 U.S. Code 338 – Certain Stock Purchases Treated as Asset Acquisitions
2
Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles
3
GovInfo. 26 U.S. Code 338 – Certain Stock Purchases Treated as Asset Acquisitions
4
GovInfo. 26 CFR 1.338-3 – Qualification for the Section 338 Election
5
GovInfo. 26 CFR 1.338(h)(10)-1 – Deemed Asset Sale and Liquidation
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GovInfo. 26 CFR 1.338-4 – Aggregate Deemed Sales Price
7
GovInfo. 26 CFR 1.338(b)-1 – Adjusted Grossed-Up Basis
8
Office of the Law Revision Counsel. 26 U.S. Code 1060 – Special Allocation Rules for Certain Asset Acquisitions
9
eCFR. 26 CFR 1.338-6 – Allocation of ADSP and AGUB Among Target Assets
10
Internal Revenue Service. Instructions for Form 8023 – Elections Under Section 338 for Corporations Making Qualified Stock Purchases
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Internal Revenue Service. Taxpayers Can Now Fax Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases
12
Internal Revenue Service. Instructions for Form 8883 – Asset Allocation Statement Under Section 338
13
The Tax Adviser. Sec. 338(g) Elections for Foreign Corporations and Creeping Acquisitions
14
Office of the Law Revision Counsel. 26 U.S. Code 336 – Gain or Loss Recognized on Property Distributed in Complete Liquidation
15
eCFR. 26 CFR 1.336-1 – General Principles, Nomenclature, and Definitions for a Section 336(e) Election
16
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
17
eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles