Qualified Stock Purchase: Section 338(g) vs 338(h)(10)

A qualified stock purchase under Section 338 is a transaction in which one corporation acquires at least 80% of another corporation’s stock “by purchase” within a 12-month window, giving the buyer the option to elect to treat the deal as an asset acquisition for federal tax purposes.¹ The legal form stays as a stock deal, but the election creates a fictional sale of the target’s assets that resets their tax basis to fair market value, producing larger depreciation and amortization deductions going forward.

The 80% Threshold and the 12-Month Window

Two numbers define what “qualified” means. The buyer must end up holding at least 80% of the target’s total voting power and at least 80% of the total value of the target’s stock, using the affiliation thresholds in Section 1504(a)(2). Certain nonvoting, nonparticipating preferred stock described in Section 1504(a)(4) is treated as debt-like and drops out of the ownership math entirely.

Every share counted toward the 80% threshold has to be acquired within a single 12-month window. That window starts the day the buyer first acquires stock that counts. The day the buyer crosses the 80% line becomes the “acquisition date,” and it drives nearly every downstream deadline and calculation the election requires.

Stock That Doesn’t Count as Purchased

Section 338 uses a narrow definition of “purchase.” Shares that changed hands in real economic terms can still fail to count toward the 80% threshold. Stock is excluded when:¹

The buyer’s basis is determined by reference to the seller’s basis, which knocks out gifts and other carryover-basis transfers.
The basis is set under Section 1014(a), which covers property acquired from a decedent.
The stock came through a tax-free exchange under Sections 351, 354, 355, or 356.
The seller is a related party whose ownership would be attributed to the buyer under the Section 318(a) constructive ownership rules.

The related-party exclusion is the one that catches people off guard. If the buyer and seller are connected through family or overlapping entity ownership, those shares are not “purchased” for Section 338 purposes even when real money moves. A limited exception applies when the buyer first acquired at least 50% of the related corporation’s stock by genuine purchase.

Only Corporations Can Be the Buyer

The purchasing entity has to be a corporation. Partnerships, LLCs taxed as partnerships, and individuals cannot directly make a qualified stock purchase. Non-corporate buyers who want asset-sale treatment have to look at the Section 336(e) alternative described further down.

How to Make the Election

The buyer files IRS Form 8023 to make the election. The deadline is the 15th day of the 9th month after the acquisition date.² An acquisition that closes on March 15 gives you until December 15 to file. That window is meant to let the buyer model the tax consequences before locking in.

Once filed, the election is permanent. There is no revocation mechanism after the deadline. If you miss the window, the only path forward is discretionary relief under Treasury Regulation 301.9100, and the taxpayer has to show they acted reasonably and in good faith.³ The IRS is not obligated to grant it.

Who signs depends on the flavor of the election. A standard 338(g) election is filed by the buyer alone. A 338(h)(10) election is a joint filing: both the purchasing corporation and the selling consolidated group’s common parent (or the selling affiliate, or all S corporation shareholders) must sign.⁴ For an S corporation target, even shareholders who did not sell their stock have to consent.

The buyer also files Form 8883, which reports how the purchase price is allocated among the target’s assets.⁵ Form 8883 attaches to the income tax return rather than to Form 8023, and both buyer and seller file their own copies.

What the Election Does to Basis

The election’s whole purpose is a tax fiction. The target corporation is treated as if it sold all its assets on the acquisition date and then repurchased them the next day as a new corporation. Two figures drive the math.

Aggregate Deemed Sale Price (ADSP) is the price at which the “old” target is treated as selling its assets. It determines the gain or loss the old target recognizes on the deemed sale, and it drives the seller’s tax bill. Adjusted Grossed-Up Basis (AGUB) is the buyer’s new tax basis in the target’s assets. It equals the grossed-up basis in the recently purchased stock, plus the basis of any stock the buyer already held before the 12-month window, plus the target’s liabilities, plus acquisition costs like legal and advisory fees.⁶ AGUB is almost always higher than the target’s historical asset basis. That gap is the reason buyers pursue the election.

How AGUB Is Spread Across the Assets

AGUB is not distributed evenly. The regulations require a residual method that fills a seven-class hierarchy in order:⁵

Class I is cash and bank deposits.
Class II is actively traded securities and certificates of deposit.
Class III is debt instruments and accounts receivable.
Class IV is inventory.
Class V is everything else, including equipment, real estate, and subsidiary stock.
Class VI is Section 197 intangibles other than goodwill: patents, customer lists, non-competes.
Class VII is goodwill and going concern value.

Each class is filled up to fair market value before anything spills into the next. Whatever remains after Class VI lands in Class VII. In most deals, a substantial portion of AGUB ends up in goodwill because the purchase price exceeds the fair market value of all identifiable assets combined.

The goodwill piece then amortizes over 15 years under Section 197.⁷ Before the election, self-created goodwill usually carries zero tax basis. After the election, the buyer collects 15 years of deductions against it. The same logic runs through the tangible assets: higher depreciable basis means bigger annual deductions.

338(g) or 338(h)(10)?

Both elections generate a deemed asset sale, but the tax consequences hit differently.

338(g) and the Double-Tax Problem

A 338(g) election is the default. The buyer files unilaterally without needing seller cooperation. It works for freestanding C corporations and foreign targets.

In a domestic deal, 338(g) triggers two layers of tax. The old target recognizes gain on the deemed asset sale, and because the buyer now owns the target, the buyer effectively bears that corporate-level tax. Meanwhile, the selling shareholders separately recognize gain or loss on the actual stock sale. The double hit usually wipes out any benefit from the basis step-up, which is why 338(g) is rarely used for domestic targets. It sees more use with foreign targets, where the tax dynamics differ.

338(h)(10) Collapses It to One Tax

The 338(h)(10) election eliminates the double tax by treating everything as one transaction. The target is deemed to sell its assets while still inside the selling group (or still an S corporation) and then to liquidate tax-free into its parent. The actual stock sale disappears for tax purposes.⁴

It’s only available when the target fits one of three categories:

A consolidated subsidiary that is a member of the seller’s consolidated group (not the common parent).
An affiliated subsidiary: a domestic corporation that owns Section 1504(a)(2) stock in the target but does not file a consolidated return with it.
An S corporation immediately before the acquisition date.

With one level of tax instead of two, 338(h)(10) is usually the preferred structure when the target qualifies. The seller pays tax on the deemed asset sale, and the buyer gets stepped-up basis without the extra corporate-level hit.

Depreciation Recapture Sellers Underestimate

Because the deemed sale runs asset by asset, gain attributable to prior depreciation on equipment and other depreciable property is taxed as ordinary income rather than capital gain. For a target with heavily depreciated fixed assets, recapture can convert a meaningful slice of proceeds from capital gain rates to ordinary rates. S corporation targets still inside the recognition period for the built-in gains tax face an additional 21% corporate-level tax on built-in gain, further reducing net proceeds.

The Section 336(e) Alternative for Non-Corporate Buyers

Because Section 338 requires a corporate buyer, individuals, partnerships, and LLCs are shut out. Section 336(e) fills that gap. It permits deemed asset sale treatment for a “qualified stock disposition” of at least 80% of the voting power and value of a target’s stock without requiring the acquirer to be a corporation or even a single entity.⁸

Section 336(e) differs from 338(h)(10) in three practical ways. The acquirer does not need to be a corporation, which opens the door to private equity funds and individual buyers. Stock sold to different acquirers can be aggregated to meet the 80% threshold, whereas under Section 338 a single corporate purchaser has to cross 80% on its own. And the mechanics are seller-driven: the seller and target enter into a written agreement, and the seller attaches the election statement to its tax return, rather than requiring the same joint buyer-seller filing.

The tax outcome resembles 338(h)(10): one deemed asset sale, a step-up in the target’s assets, no separate stock-sale gain. For deals where the buyer isn’t a corporation, 336(e) is often the only route to asset-sale treatment.

Consistency Rules Prevent Cherry-Picking

The consistency rules under Sections 338(e) and (f) block buyers from selectively stepping up some target assets while leaving others alone. Without them, a buyer could purchase appreciated assets directly from the target at cost basis while acquiring the target’s stock without electing, effectively hand-picking which assets get new basis.⁹

The rules apply when the buyer acquires an asset directly from the target during the “target consistency period” and the target is a subsidiary in a consolidated group. In that situation the buyer takes a carryover basis in the asset (the target’s basis) unless a Section 338 election is made for the target. The same idea extends to assets acquired from lower-tier affiliates when the gain would otherwise be reflected in the target’s stock basis through the consolidated return investment adjustment rules.

The practical effect is an all-or-nothing choice. If you want stepped-up basis in individual assets bought from the target, you have to make the Section 338 election for the target itself.

1
Office of the Law Revision Counsel. 26 USC 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
GovInfo. 26 CFR 301.9100-1 – Extensions of Time to Make Elections
4
GovInfo. 26 CFR 1.338(h)(10)-1 – Section 338(h)(10) Election Requirements
5
Internal Revenue Service. Instructions for Form 8883 – Asset Allocation Statement Under Section 338
6
eCFR. 26 CFR 1.338-5 – Adjusted Grossed-Up Basis
7
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
8
Federal Register. Regulations Enabling Elections for Certain Transactions Under Section 336(e)
9
eCFR. 26 CFR 1.338-8 – Asset and Stock Consistency