Section 336(e) Election: Requirements, Mechanics, and Deadlines

A Section 336(e) election is an irrevocable tax election that lets the parties to a qualifying stock transaction treat it as if the target company had sold all of its assets instead. The statute allows it when a corporation disposes of stock representing at least 80 percent of the vote and value of a domestic target, and it covers sales, exchanges, and distributions.¹ The payoff is a stepped-up basis in the target’s assets, which produces larger depreciation and amortization deductions for the buyer. The cost is that the target recognizes gain on the deemed asset sale, so the election shifts tax burden from the buyer to the seller side in exchange for future deductions. Once filed, it cannot be undone.²

When a Transaction Qualifies

The triggering event is a “qualified stock disposition,” or QSD. A QSD occurs when stock representing at least 80 percent of both the total voting power and the total value of a domestic target is sold, exchanged, distributed, or some combination of those, within a single 12-month period.³ The 80 percent test tracks the affiliated-group ownership standard in Section 1504(a)(2).⁴

The 12-month window opens on the date of the first qualifying transfer. Multiple transactions inside that year aggregate toward the threshold. Stretching a sale across 13 or more months to stay under 80 percent defeats the election, and stock that the seller or a member of its consolidated group reacquires during the window does not count.³

Both the seller and the target must be domestic corporations. S corporation shareholders can also act as the sellers, which is what makes the election available for deals involving S corp targets sold to non-corporate buyers.

Several categories of transfers are carved out and do not count toward the 80 percent threshold:

Carryover-basis transactions, where the buyer’s basis derives from the seller’s old basis.
Tax-free exchanges under Section 351, 354, 355, or 356.
Stock acquired from a decedent with basis set under Section 1014(a) or Section 1022.
Sales to a related person.

One narrow exception applies for certain Section 355 distributions: if the full amount of gain would be recognized under Section 355(d)(2) or 355(e)(2), the distribution can still qualify as a disposition.³

How the Deemed Asset Sale Works

When the election is in place, the tax law ignores what actually happened with the stock and substitutes a two-step fiction. First, the “old target” is treated as selling all of its assets to an unrelated buyer in a single transaction at the close of the disposition date, recognizing gain or loss while still owned by the selling group or S corporation shareholders.²

Second, immediately after the deemed sale, the old target is treated as liquidating, distributing the deemed proceeds to its shareholders, and ceasing to exist. A “new target” springs into existence and is treated as having purchased all the assets at the close of the same disposition date. The new target’s basis in each asset equals its share of the adjusted grossed-up basis, which is the source of the step-up.²

The point of the fiction is to avoid double taxation. Rather than taxing the stock sale and then taxing the built-in gain in the target’s assets, the election collapses the two into a single asset-level gain. The sellers do not recognize gain on the stock disposal itself.

The Numbers That Drive Value

Two formulas set the economics. The aggregate deemed asset disposition price (ADADP) is the price at which the old target is treated as selling its assets. ADADP equals the grossed-up amount realized on the recently disposed stock plus the old target’s liabilities.⁵

The adjusted grossed-up basis (AGUB) determines the new target’s basis in those same assets. AGUB equals the grossed-up basis of recently disposed stock, plus the basis in any nonrecently disposed stock, plus the target’s total liabilities (including the tax liability generated by the deemed sale itself).⁶

Both amounts are allocated among seven asset classes using the residual method borrowed from Section 338. Cash and bank deposits fill up first (Class I), then actively traded securities (Class II), receivables and marked-to-market assets (Class III), inventory (Class IV), other tangible and intangible assets not otherwise classified (Class V), Section 197 intangibles like customer lists and covenants not to compete (Class VI), and finally goodwill and going-concern value (Class VII). Value inside a class is split by fair market value. Anything left after all other classes are filled goes to goodwill.⁷

Most of the deal’s tax value sits in this allocation. Weight toward depreciable equipment in Class V or amortizable intangibles in Class VI generates faster deductions for the buyer. Weight toward Class VII goodwill defers benefit until a later sale. The fair market values assigned to each class are often the most heavily negotiated tax numbers in the transaction.

When To Use 336(e) Instead of 338(h)(10)

Section 336(e) and Section 338(h)(10) reach similar destinations but are not interchangeable. The most consequential difference is the identity of the buyer. Section 338(h)(10) requires a corporate purchaser. Section 336(e) does not, so individuals, partnerships, LLCs, and other non-corporate buyers can participate.⁸

The second difference is scope. Section 336(e) covers distributions of stock, not just purchases. A parent distributing subsidiary stock to shareholders has no path to 338(h)(10) but can use 336(e), which makes it the only route to deemed-asset-sale treatment in spin-off-type transactions.

When a deal qualifies under both, 338(h)(10) takes priority. The regulations explicitly provide that a transaction meeting the definition of both a qualified stock purchase and a qualified stock disposition is not treated as a QSD, and the parties must use 338(h)(10).³ Section 336(e) fills the gaps: non-corporate buyers, distributions rather than purchases, and S corporation targets sold to individuals or pass-through entities.

How To Make the Election

Every version of the election requires a written, binding agreement and a formal election statement attached to the right return by the filing deadline (including extensions). The election is irrevocable once filed.² The mechanics vary with the corporate structure.

Consolidated Groups

If the seller and target are in the same consolidated group, they must sign a written, binding agreement on or before the due date (including extensions) of the group’s consolidated return for the year that includes the disposition date. The common parent retains a copy, attaches the election statement to the group’s timely filed return, and sends a copy of the statement to the target by the return due date.²

S Corporation Targets

When the target is an S corporation, every shareholder must sign the agreement, including any who did not sell stock during the QSD. The S corporation retains a copy and attaches the statement to its own timely filed return.⁹ The unanimous-consent requirement is what most often derails S corp deals. A single holdout can block the election.

Other Targets

When the target is neither part of the seller’s consolidated group nor an S corporation, the seller and target still must execute a written, binding agreement and attach the statement to their timely filed returns.²

What Goes in the Election Statement

The regulations require thirteen items. Miss any of them and the election is at risk. The core content includes:

Names, addresses, taxpayer identification numbers, taxable years, and state of incorporation for the seller(s) or S corporation shareholders, the target, the common parent (if any), any 80-percent purchaser, and any holder of nonrecently disposed stock.
The disposition date and the percentage of target stock disposed of by each seller or S corporation shareholder, both overall and through the disposition date.
A statement about whether the target realized a net loss on the deemed asset disposition, and if so, whether target stock or higher-tier stock was distributed during the 12-month period.
The percentage of target stock retained by each seller or shareholder after the disposition date.
The name, address, and TIN of any purchaser that made a gain recognition election under Section 1.336-4(c).
Confirmation that all sellers or S corporation shareholders and the target have executed a written, binding agreement to make the election.

A wrong TIN or a missing disposition date can be enough to invalidate the filing, so tax counsel typically drafts the statement well ahead of the return deadline.¹⁰

If the Deadline Is Missed

Deadlines here are unforgiving. If the written agreement is not executed or the election statement is not attached to a timely filed return, the election fails. The fallback is a request for relief under Treasury Regulation Section 301.9100-3, under which the IRS Commissioner has discretion to extend the time for regulatory elections. The taxpayer must show it acted reasonably and in good faith and that relief will not prejudice the government.⁹

Several factors weigh in the decision:

Whether the taxpayer filed the request before the IRS discovered the failure.
Whether the taxpayer is trying to alter a return position for which an accuracy-related penalty has been or could be imposed under Section 6662.
Whether relief can be conditioned so that the parties’ aggregate tax liabilities are no lower than they would have been under a timely election, accounting for the time value of money.

When relief is granted, the IRS typically gives the taxpayer 75 days to execute the agreement and file the statement, and 150 days to file or amend all affected returns.⁹ A private letter ruling is expensive, slow, and published in redacted form. Building the election into the deal timeline from the start is cheaper.

Protective Elections

Sometimes it is genuinely unclear whether a transaction qualifies as a QSD. The 80 percent threshold may be borderline, a particular transfer may or may not count as a disposition, or a related-party rule may or may not apply. The regulations allow a protective Section 336(e) election in those cases. The election is filed on the assumption that the transaction qualifies and takes effect only if the disposition ultimately meets the QSD requirements. If it does not, the protective election has no effect. Filing one preserves the election window while a gray area gets resolved.

State Tax Considerations

Federal treatment is not the whole picture. Not every state follows federal deemed-asset-sale treatment when a 336(e) election is made. Some conform automatically, others decouple from all or part of the federal rules. A deal that works cleanly for federal purposes can produce unexpected state-level tax if a relevant state does not recognize the election or allocates deemed sale gains differently. Checking each state’s conformity rules before closing belongs on the deal checklist alongside the federal filing.

1
Office of the Law Revision Counsel. 26 USC 336 – Complete Liquidation of Corporation
2
eCFR. 26 CFR 1.336-2 – Availability, Mechanics, and Consequences of Section 336(e) Election
3
eCFR. 26 CFR 1.336-1 – General Principles, Nomenclature, and Definitions
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Office of the Law Revision Counsel. 26 USC 1504 – Definitions
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eCFR. 26 CFR 1.336-3 – Aggregate Deemed Asset Disposition Price; Various Aspects of Taxation of the Deemed Asset Disposition
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eCFR. 26 CFR 1.336-4 – Adjusted Grossed-Up Basis
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eCFR. 26 CFR 1.338-6 – Allocation of ADSP and AGUB Among Target Assets
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The Tax Adviser. Sec. 336(e) Elections for S Corp. Targets: Get a Step-Up Without a Letter Ruling
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Internal Revenue Service. Private Letter Ruling 202506009
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GovInfo. 26 CFR 1.336-2 – Availability, Mechanics, and Consequences of Section 336(e) Election