IRC Section 338: Stock Purchase as Asset Acquisition Election

A Section 338 election lets a corporation that buys another company’s stock treat the purchase as if it had bought the target’s assets directly. The payoff is a stepped-up tax basis in those assets, which produces larger depreciation and amortization deductions for the buyer going forward. It comes in two versions with very different economics, requires a qualifying stock purchase, and has to be filed on a tight deadline or it’s gone.

What Counts as a Qualified Stock Purchase

The election is only available after a qualified stock purchase. A corporate buyer must acquire, by purchase, at least 80% of the target’s total voting power and at least 80% of the total value of its stock within a 12-month acquisition period that starts on the date the buyer first picks up stock counting toward the threshold.¹

Two constraints matter here. The buyer must be a corporation; individuals, partnerships, and LLCs are shut out of Section 338. And the stock has to be acquired in a taxable deal from an unrelated seller. Stock received in tax-free exchanges, gifts, inheritances, or transactions with related parties doesn’t count as a “purchase” for this rule, even if the buyer ends up well over 80%.

Section 338(g): The Standard Election

The 338(g) election is the default form. The buying corporation can make it on its own, without seller consent, and once filed it’s irrevocable.¹

Tax-wise, the target is split into two entities. The “old” target is deemed to sell all its assets at fair market value at the close of the acquisition date. The “new” target is treated as a newly created corporation that buys those assets at the start of the next day, taking a stepped-up basis.¹

The problem is double tax. The old target pays corporate-level tax on the deemed asset sale, and that liability sits with the buyer (who now owns the target). Separately, the selling shareholders recognize gain or loss on the actual stock sale. Two layers on one economic transaction. For most domestic deals, the future depreciation savings don’t come close to covering the immediate corporate tax hit, so a straight 338(g) is off the table.

When 338(g) Still Makes Sense

Two situations flip the math. First, a target with large net operating losses can absorb the deemed-sale gain, wiping out the corporate-level tax while the buyer still walks away with stepped-up basis.

Second — and more common — is a foreign target. The deemed sale is a U.S. tax construct, and gain on a foreign target’s assets often isn’t subject to U.S. tax at all. The election also resets the foreign target’s historical earnings and profits and tax pools, which can be worth the filing on administrative grounds alone.

Section 338(h)(10): The Joint Election

The 338(h)(10) election is the version that shows up in most domestic deals where Section 338 is used at all. It solves the double-tax problem by collapsing everything into a single level of tax.

Two things distinguish it from 338(g). It’s a joint election — buyer and seller both have to sign — and the target must be either an S corporation or a subsidiary member of a selling consolidated group.² A standalone C corporation held by individuals doesn’t qualify.

The mechanics are similar to 338(g) with one critical change. The old target is deemed to sell its assets at fair market value, then it’s deemed to liquidate into its parent or shareholders immediately after.³ The actual stock sale is ignored for tax purposes, so the sellers don’t recognize separate stock gain on top of the asset gain.

Where the target is a consolidated subsidiary, the deemed asset sale gain hits the selling group and the deemed liquidation is tax-free. Where the target is an S corporation, the gain flows through to the shareholders on their individual returns. Either way: one level of tax, and the buyer gets the step-up.

Because the seller now bears tax on ordinary-income assets it wouldn’t have touched in a pure stock sale, sellers usually demand a higher price to make the election worthwhile. The election creates value only when the buyer’s future tax savings exceed that premium, so running the numbers before signing matters.

How the Purchase Price Gets Allocated

Two figures drive the tax outcome. The Aggregate Deemed Sales Price (ADSP) is what the old target is treated as receiving for its assets and determines the seller’s gain. The Adjusted Grossed-Up Basis (AGUB) is the total basis the new target takes in the acquired assets. AGUB equals the buyer’s grossed-up basis in recently purchased target stock, plus basis in any previously owned target stock, plus the new target’s liabilities including the tax liability triggered by the deemed sale itself.⁴

Both figures are allocated across the target’s assets using the residual method, working through seven classes in order. Each class is filled to fair market value before anything flows to the next.⁵

Class I: cash and general deposit accounts, allocated dollar-for-dollar first.
Class II: actively traded personal property, certificates of deposit, and foreign currency.
Class III: debt instruments and mark-to-market assets, including accounts receivable.
Class IV: inventory and property held for sale to customers.
Class V: all other assets not falling into another class, including equipment and furniture.
Class VI: Section 197 intangibles other than goodwill and going concern value, such as patents, licenses, and customer lists.
Class VII: goodwill and going concern value.

Within Classes II through VI the allocation is proportional to fair market value. Anything left after Classes I through VI are full drops into Class VII as goodwill and going concern value,⁵ which is amortized over 15 years under Section 197.⁶

The class each dollar lands in changes the seller’s tax character (ordinary vs. capital) and the buyer’s recovery period (immediate deduction, cost recovery over a few years, or 15-year amortization). Expect valuations to be negotiated inside this framework, not just at the top-line price.

How to Make the Election: Forms and Deadline

The election is made on Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases.⁷ For a 338(g), the buyer files alone. For a 338(h)(10), the buyer and the selling consolidated group or S corporation shareholders sign and file jointly.

The deadline is the 15th day of the ninth month after the acquisition date.² Miss it and the election is generally lost. Once filed, it can’t be revoked.¹

Form 8883, Asset Allocation Statement Under Section 338, is also required. It reports how ADSP and AGUB were allocated across the seven classes. Both the old and new target file their own copies: the old target attaches its Form 8883 to its final return to report gain or loss on the deemed sale, and the new target attaches its Form 8883 to its first return to lock in the stepped-up basis.⁸⁹

Relief if You Miss the Deadline

A missed deadline isn’t always fatal. Revenue Procedure 2003-33 offers an automatic 12-month extension measured from the date the failure to file is discovered. If the requirements are met, the extension is granted without IRS discretion.

Every party who would have signed Form 8023 must file it within that 12-month window along with a statement, signed under penalties of perjury, that identifies the filers and the target, states when the failure was discovered, represents that no tax return has been filed treating the deal in a way inconsistent with the election, and represents that the filer reasonably relied on a qualified tax professional who then failed to make the election.

If any filer can’t make all of those representations — for instance, because someone already filed a return treating the deal as a plain stock purchase — the automatic route closes. What remains is a private letter ruling, which is slower, more expensive, and far from guaranteed.

When the Buyer Isn’t a Corporation: Section 336(e)

Section 338 requires a corporate buyer, full stop. When the acquirer is a partnership, LLC, individual, or private equity fund structured as a partnership, Section 336(e) is the parallel path. It allows a corporation owning at least 80% of another corporation to elect asset-sale treatment when it sells, exchanges, or distributes all of that stock.¹⁰

The target still needs to be an S corporation or a consolidated group member, and the election is irrevocable. The tax mechanics track 338(h)(10): a deemed asset sale followed by a deemed liquidation, with a single level of tax and stepped-up basis on the other side. What 336(e) adds is flexibility on who the buyer can be and on the kinds of dispositions that qualify, including certain distributions.

State Tax Doesn’t Automatically Follow

A federal Section 338 election doesn’t carry uniformly into state corporate income tax. Some states conform fully, some accept the election but adjust apportionment or basis, and some don’t recognize it. Because a 338 election changes how gain is characterized and sourced, a target with multi-state operations needs a state-by-state review before the election is filed. Skipping that step can produce state tax bills large enough to erase the federal benefit.

1
Office of the Law Revision Counsel. 26 U.S.C. 338 – Certain Stock Purchases Treated as Asset Acquisitions
2
Internal Revenue Service. Instructions for Form 8023 – Elections Under Section 338 for Corporations Making Qualified Stock Purchases
3
eCFR. 26 CFR 1.338-1 – General Principles; Status of Old Target and New Target
4
GovInfo. 26 CFR 1.338-5 – Adjusted Grossed-Up Basis
5
eCFR. 26 CFR 1.338-6 – Allocation of ADSP and AGUB Among Target Assets
6
eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles
7
Internal Revenue Service. About Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases
8
Internal Revenue Service. Instructions for Form 8883 – Asset Allocation Statement Under Section 338
9
Internal Revenue Service. About Form 8883, Asset Allocation Statement Under Section 338
10
Office of the Law Revision Counsel. 26 U.S.C. 336 – Gain or Loss Recognized on Property Distributed in Complete Liquidation