M&A Spotlight: Section 338(H)(10) Stock Purchases

Significant Tax Savings & Legal Continuity Advantages

Tax Savings

• For buyer: treats stock purchase as asset purchase for tax purposes. Buyer step-ups in basis of assets to fair market value for higher amortization and depreciation deductions. Result: reduced taxable income and lower tax liability in future years. 

• For seller: avoid or reduce certain taxes such as depreciation recapture, state and local taxation, and built-in-gains.

Legal Continuity Advantages

• Unlike an asset purchase requiring time-consuming assignment processes for licenses and contracts, these legal agreements transfer uninterrupted simplifying the transaction process for buyer and seller.

Please note that both buyer and seller must be corporations and the Section 338(h) (10) election must be made jointly by each of the parties. There are other eligibility requirements and administrative steps that must be followed. Readers should consult their tax advisors and business transaction professionals. 

SP&H can assist in several ways: 

• Pre-acquisition: assist with successful closing for seller with SP&H customized Transaction Support Services (link to TSS one pager, copy enclosed). 

• Post-acquisition: provide buyer with valuation of the tangible and intangible goodwill assets to measure the higher amortization and depreciation expenses lowering income tax liabilities in future years.