Section 338 Election: How It Works, Who Qualifies, and When to File

A Section 338 election is a federal tax choice that lets a purchasing corporation treat a stock acquisition as if it had bought the target company’s assets instead, but only for tax purposes. The legal deal stays a stock deal, so shares change hands and contracts, permits, and deeds stay put. The IRS, though, treats the old target as having sold every asset it owned at fair market value and treats a new target as having bought those assets the next day. That fiction resets the tax basis of the target’s assets to what the buyer effectively paid, which produces bigger depreciation and amortization deductions going forward. The cost is an immediate tax on the deemed sale, so the election only pays off when the future deductions are worth more than the current tax hit.¹

The Deemed Sale in Two Steps

On the acquisition date, the old target is treated as selling all of its assets in one transaction at fair market value. The next day, a new target is treated as buying those same assets. The old target recognizes gain or loss on the deemed sale. The new target starts with a fresh basis in each asset equal to its allocated share of the purchase price.¹

None of that changes the legal structure of the transaction. The buyer still owns stock in a corporation that holds the same assets and carries the same liabilities. An actual asset purchase would require individually transferring every contract, license, and deed, which is why buyers often prefer the stock form. The 338 election grafts the tax profile of an asset deal onto that simpler legal form.

Who Qualifies: The Qualified Stock Purchase

A 338 election is available only after a qualified stock purchase, or QSP. That means one corporation acquires stock of another corporation by purchase, and the stock acquired hits the threshold in Section 1504(a)(2): at least 80 percent of the target’s total voting power and at least 80 percent of the total value of the target’s stock.² The 80 percent must be reached within a 12-month window that starts on the first stock acquisition counted toward the QSP. The date the buyer first crosses 80 percent is the acquisition date, and that date starts the clock for filing deadlines.

Both the buyer and the target must be corporations. Individuals, partnerships, and LLCs taxed as partnerships cannot make a Section 338 election as the purchasing entity.¹ Not every stock acquisition counts as a “purchase” either. Stock is excluded if its basis carries over from the seller (gifts, inherited stock, similar transfers), if it was acquired in a tax-free reorganization or other exchange where the seller did not fully recognize gain, or if it was bought from a party whose ownership would be attributed to the buyer under the constructive ownership rules.

Some preferred stock is excluded from the 80 percent calculation entirely. To be excluded, the stock must be nonvoting, must be limited and preferred as to dividends without meaningful participation in growth, must have redemption and liquidation rights no greater than the issue price (aside from a reasonable premium), and must not be convertible into another class. Fail any of the four conditions and the preferred stock counts toward the denominator.²

The Two Kinds of Section 338 Election

The tax code offers two versions of the election. They differ in who pays the tax on the deemed sale and who has to sign off.

Section 338(g): The Unilateral Version

A 338(g) election can be made by the purchasing corporation alone. The seller does not need to consent, or even to know. The problem is double taxation: the old target recognizes gain on the deemed asset sale, and the selling shareholders separately recognize gain on the actual stock sale. In most domestic acquisitions, the current tax on the deemed sale exceeds the present value of the buyer’s future depreciation and amortization savings, and the election destroys value.

The straight 338(g) election is most commonly used when the target is a foreign corporation. The deemed sale gain may not be subject to U.S. tax, or it may be offset by foreign tax credits, which eliminates the double-tax problem and makes the stepped-up basis close to free for the buyer.³ It can also work when the target has large net operating loss carryforwards that can absorb the deemed sale gain.

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

The 338(h)(10) election is the version that shows up in most domestic tax planning. It has two restrictions. Buyer and seller must both agree to make it, and the target must be either an S corporation or a member of a consolidated or affiliated group.⁴ It is not available when the target is a standalone C corporation sold by individual shareholders.

The payoff is that the actual stock sale is ignored for tax purposes. Only the deemed asset sale is recognized, and the tax falls on the selling consolidated group or the S corporation shareholders. That is typically one layer of tax instead of two. The buyer still gets the stepped-up basis, and the seller’s total bill is often close to what a straight stock sale would have produced. When the seller’s basis in the target’s assets exceeds the shareholders’ basis in the stock, the deemed asset sale actually generates less gain than a stock sale would, which is when the election is a win for both sides.¹

If the target is an S corporation, every shareholder must consent to the election, including anyone who is not actually selling stock.⁴ A single holdout can block the whole thing.

The Section 336(e) Alternative

Section 336(e) provides a parallel mechanism that fills a gap the 338(h)(10) election cannot. The buyer does not have to be a corporation. Individuals, partnerships, LLCs, and trusts can all be on the purchasing side, which opens the door for private equity funds and other non-corporate acquirers. The threshold is the same: a disposition of at least 80 percent of the target’s stock by vote and value within a 12-month period, and the target must be an S corporation or a member of a selling consolidated or affiliated group.

The election itself is made jointly by the seller and the target corporation. The buyer is not a party to it. That can help in negotiations, since the buyer does not need to participate in a process that primarily affects the seller’s tax treatment.

Why Buyers Want the Election: Stepped-Up Basis

The point of a Section 338 election, from the buyer’s side, is resetting the tax basis of the target’s assets to what the buyer effectively paid. In a plain stock purchase without an election, the buyer inherits whatever tax basis the target already had, which is often far below the purchase price. With the election, the purchase price is allocated across the target’s assets, and each asset gets a new basis reflecting that allocation.

The higher basis feeds larger deductions. Equipment and buildings generate more depreciation. Intangibles, including goodwill, customer relationships, and trade names, become amortizable over a 15-year period under Section 197.⁵ Goodwill is often the single largest component of a purchase price in an acquisition, and internally generated goodwill on the target’s books usually has a zero tax basis without the election. Making it deductible over 15 years can be worth a great deal in a sizable deal.

How the Purchase Price Gets Allocated

The deemed sale price has to be allocated among the target’s assets using the residual method. Assets are sorted into seven classes, and the purchase price fills each class in order, from lowest to highest, with whatever is left landing in Class VII.

Class I: Cash and bank deposits (excluding certificates of deposit).
Class II: Actively traded securities, certificates of deposit, and foreign currency.
Class III: Debt instruments and accounts receivable, with exceptions for related-party and contingent instruments.
Class IV: Inventory and property held for sale to customers.
Class V: All other assets not in another class, which is where equipment, buildings, land, and furniture usually land.
Class VI: Section 197 intangibles other than goodwill and going concern value, including customer lists, patents, and non-compete agreements.
Class VII: Goodwill and going concern value, the residual category.

Within each class, value is allocated to individual assets based on their relative fair market value.⁶ The allocation matters because the class determines both the character of gain on the deemed sale and the recovery period for the buyer’s deductions. Equipment in Class V might depreciate over 5 to 7 years. Goodwill in Class VII amortizes over 15. Buyers generally want more value in Classes V and VI and less in Class VII; sellers may pull the other direction depending on how each class taxes their gain.

When the Election Pays Off

The election is not automatically a good deal. The tax on the deemed sale is due now. The deductions that offset it come in over years and have to be discounted to present value. If the future savings do not beat the current tax, the election costs money rather than saves it.

For a straight 338(g) election, the math almost never works in a domestic deal. The double tax is too expensive. It becomes attractive mainly when the target is a foreign corporation whose deemed sale gain escapes U.S. tax, or when the target has substantial net operating losses that can absorb the gain.

For a 338(h)(10) election, the critical comparison is between the target’s inside basis (the tax basis of its individual assets) and the selling shareholders’ outside basis (their basis in the stock):

If inside basis exceeds outside basis, the deemed asset sale generates less gain than a stock sale would. The seller benefits directly and the buyer gets the stepped-up basis.
If outside basis exceeds inside basis, the deemed sale produces more gain than a stock sale would. The seller’s bill goes up, the buyer usually has to compensate through a higher purchase price, and the election only makes sense if the present value of future deductions clears that incremental cost.

Asset mix also matters. Zero-basis accounts receivable from a cash-method business and equipment subject to depreciation recapture generate ordinary income on a deemed sale, which is taxed at higher rates than the long-term capital gain a straight stock sale would have produced.

Filing the Election: Forms and Deadlines

The election is made on IRS Form 8023, “Elections Under Section 338 for Corporations Making Qualified Stock Purchases.”⁷ For a 338(g) election, only the purchasing corporation signs. For a 338(h)(10) election, both the buyer and the selling consolidated group, the selling affiliate, or all S corporation shareholders must sign.⁴

The deadline is the 15th day of the ninth month beginning after the month in which the acquisition date occurs.¹ For an acquisition that closes March 15, the ninth month beginning after March is December, and the deadline falls on December 15. Miss it and the election is gone. It is irrevocable once made and unavailable if not timely filed.

Both sides also have to file Form 8883, “Asset Allocation Statement Under Section 338,” which reports how the price was allocated across the seven classes.⁸ Form 8883 is attached to each party’s income tax return for the year that includes the acquisition date. The IRS uses the matching statements to verify that both sides reported the same allocation.

Late Election Relief

If the deadline is missed, the purchasing corporation can ask for an extension under the IRS’s Section 9100 relief procedures. The IRS has discretion to grant a reasonable extension, but the taxpayer must show that it acted reasonably and in good faith and that relief will not prejudice the government.⁹ The request has to be filed before the IRS discovers the failure on its own. Relief, when granted, is typically conditioned on the taxpayer’s aggregate tax liability being no lower than it would have been with a timely election, accounting for the time value of money. Section 9100 relief requires a private letter ruling request, which is expensive and slow. Building the Form 8023 deadline into the closing checklist from the start is far cheaper.

Consistency Rules on Related Asset Purchases

The IRS does not let buyers pick favorable tax treatment for some assets and avoid it for others. The consistency rules under Sections 338(e) and (f) apply when a purchasing corporation acquires assets directly from a target (outside the stock purchase) during a window around the acquisition. If the buyer purchases an asset from the target without making a 338 election for the stock, the buyer generally takes a carryover basis in that asset rather than a cost basis, and the same principle extends to assets acquired from lower-tier subsidiaries.¹⁰ The practical takeaway is to commit to consistent tax treatment across the whole deal rather than trying to structure around the rules asset by asset.

1
Office of the Law Revision Counsel. 26 USC 338 – Certain Stock Purchases Treated as Asset Acquisitions
2
Office of the Law Revision Counsel. 26 USC 1504 – Definitions
3
The Tax Adviser. Sec. 338(g) Elections for Foreign Corporations and Creeping Acquisitions
4
GovInfo. 26 CFR 1.338(h)(10)-1 – Section 338(h)(10) Election
5
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
6
Internal Revenue Service. Instructions for Form 8883
7
Internal Revenue Service. About Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases
8
Internal Revenue Service. About Form 8883, Asset Allocation Statement Under Section 338
9
Internal Revenue Service. Private Letter Ruling 202510008
10
eCFR. 26 CFR 1.338-8 – Asset and Stock Consistency