What Is a Section 336(e) Election and How Does It Work?

A Section 336(e) election lets the seller in a corporate acquisition treat the sale, exchange, or distribution of a target corporation’s stock as if the target had sold all of its underlying assets instead. The buyer walks away with a stepped-up tax basis in those assets, which produces larger depreciation and amortization deductions going forward. The price of that benefit is immediate: the target recognizes gain on every appreciated asset at closing rather than deferring it. The election lives at 26 U.S.C. § 336(e), added by the Tax Reform Act of 1986, though Treasury did not issue final regulations until 2013.¹

When 336(e) Is the Right Election

The 336(e) election is usually discussed alongside the older Section 338(h)(10) election. Both convert a stock deal into a deemed asset sale for tax purposes. The differences determine which one you can actually use.

A 338(h)(10) election requires the buyer to be a corporation. A 336(e) election has no buyer-entity restriction, so individuals, partnerships, LLCs, and other pass-throughs qualify. That is why 336(e) is the standard election for private equity acquisitions run through pass-through entities.²

A 338(h)(10) election also covers only stock purchases. A 336(e) election reaches distributions of stock too, so a parent corporation spinning off a subsidiary can potentially get deemed-asset-sale treatment.¹ And where 338(h)(10) generally contemplates one corporate purchaser, 336(e) allows dispositions to multiple different acquirers, aggregated for purposes of the 80 percent test.²

One boundary matters when both elections are theoretically available: if the transaction qualifies for a 338(h)(10) election, the 338(h)(10) rules take precedence and the deal is not treated as a qualified stock disposition for 336(e) purposes.³

Who Qualifies: The Qualified Stock Disposition

The election is only available if the transaction meets the regulatory definition of a “qualified stock disposition,” or QSD. Three things drive that test.

Party Requirements

The seller must be a domestic corporation, or, if the target is an S corporation, its shareholders. The target must also be a domestic corporation. Foreign entities cannot fill either role.³ The buyer, again, has no entity-type restriction.

The 80 Percent Threshold Over 12 Months

The seller must dispose of stock representing at least 80 percent of the target’s total voting power and 80 percent of its total value. The dispositions can happen at a single closing or across a series of transactions, but every qualifying disposition must fall inside a 12-month period that begins on the date of the first sale, exchange, or distribution.⁴

Related-Party Stock Doesn’t Count

Stock transferred to a related person is disregarded for purposes of the 80 percent test. Relatedness is measured using the constructive-ownership rules of Section 318, which attribute ownership across family members, partnerships, corporations, trusts, and estates.⁵ The regulations also exclude stock where the buyer takes a carryover basis (as in a Section 351 contribution) or where the transfer qualifies for nonrecognition under Section 354 or 355. The disposition has to represent a real change in ownership, not a reshuffling.⁴

What Actually Happens After You Make the Election

Once a valid election is in place, the tax law treats the transaction as three near-simultaneous steps at the close of the disposition date. The “old” target is deemed to sell every asset it owns to an unrelated party in a single transaction. Immediately after, the old target is deemed to distribute all of the sale proceeds to its shareholders in a complete liquidation. A “new” target is then deemed to purchase those same assets, taking a fresh basis that reflects what was actually paid.³

The seller (or the S corporation shareholders) is treated as not having sold the stock at all. The entire deal is recharacterized at the asset level, and the old target recognizes gain or loss asset by asset based on the difference between the deemed sale price and each asset’s existing basis. All appreciation inside the corporation gets pulled forward and taxed now rather than deferred.³

Two calculations run the numbers. The Aggregate Deemed Asset Disposition Price, or ADADP, is the total for which the old target is deemed to have sold its assets, and it drives the gain calculation.⁶ The Adjusted Grossed-Up Basis, or AGUB, is the total for which the new target is deemed to have bought the assets, and it sets the buyer’s stepped-up basis in each one.⁷ Both figures are allocated across the target’s assets using the same residual method that applies under Section 338, ending with any leftover amount landing on goodwill and going-concern value.³ The allocation determines which assets get the biggest basis increase and how fast the buyer can recover the cost through depreciation or amortization, so it deserves careful appraisal work.

Where the Tax Benefit Can Shrink

Anti-Churning Rules on Goodwill

A large part of the value of a 336(e) election is a stepped-up basis in goodwill and other Section 197 intangibles, which the new target can then amortize over 15 years. The anti-churning rules in Section 197(f)(9) can block that amortization when the intangible was previously held by a related person or when the actual user of the intangible does not change as part of the deal. Under a 20 percent ownership threshold rather than the usual 50 percent (Sections 267(b) and 707(b)(1)), the stepped-up portion of goodwill may end up non-amortizable.⁸ Deals involving related parties or continuing management should be run against these rules before signing.

Loss Disallowance on Distributed Stock

If the 336(e) transaction includes a distribution of target stock rather than only a sale, a special rule can knock out losses. When the old target’s deemed asset sale produces a net loss, the portion attributable to distributed stock is disallowed. The disallowed amount equals the net loss multiplied by a fraction: the value of target stock distributed during the 12-month period over the total value of stock disposed of during that same period.³ The rule is aimed at preventing manufactured losses through related-party distributions.

S Corporation Deals: Every Shareholder Has to Sign

The 336(e) election is common in S corporation acquisitions because it is often the only route to deemed-asset-sale treatment when the buyer is not a corporation. It comes with a distinctive requirement, though. Every shareholder must participate, including those who are not selling any stock.

The regulations require all S corporation shareholders and the S corporation target to enter into a written, binding agreement to make the election. “All” is literal, minority holders keeping their shares included.³ Because the election triggers a deemed liquidation of the entire corporation, non-selling shareholders are treated as receiving their share of the liquidation proceeds and will recognize gain or loss on their shares even though nothing actually left their hands. Miss unanimous consent before the filing deadline and the election dies. Line this up early rather than at closing.

How to Make the Election

The Binding Written Agreement

The election starts with a written, binding agreement. For a C corporation target, the seller and the target sign. For an S corporation target, every shareholder (selling and non-selling) and the target sign. The agreement must be executed on or before the due date, including extensions, of the earlier-due federal income tax return: seller’s or target’s return for a C corporation, the S corporation target’s return for an S corporation.³

The Election Statement

There is no pre-printed IRS form for the election itself. The parties prepare a narrative election statement that identifies the target by name and EIN, declares that the election is being made under Section 336(e), and includes identifying information for each seller or S corporation shareholder, any common parent of the seller’s consolidated group, and the target. The statement must confirm that a written, binding agreement to make the election has been executed.³

If the target has subsidiaries that also qualify for deemed-asset-sale treatment, a separate election statement goes with each one. Form 8883 (Asset Allocation Statement Under Section 338) is typically filed alongside the election statement to report the purchase-price allocation, but the 336(e) election statement itself is a distinct document.⁹

Where and When to File

For a C corporation seller, attach the election statement to the timely filed Form 1120 (or the seller’s consolidated return) for the tax year that includes the disposition date. For an S corporation target, attach it to Form 1120-S. An S corporation making a 336(e) election generally must file its return by the 15th day of the third month after the disposition date.¹⁰ Returns filed within a valid extension count as timely.¹¹

The IRS does not send a confirmation that the election has been accepted. Validity gets tested on audit, so keep the appraisals and valuation analyses supporting the asset allocation.

The Election Is Irrevocable

Once filed, a 336(e) election cannot be revoked. The regulations do allow a “protective” election, which has no effect if the deal ultimately fails to qualify as a QSD but becomes binding and irrevocable if it does qualify.³ Protective elections are common when the parties are not certain the 80 percent threshold will be crossed inside the 12-month window. Irrevocability cuts both ways: it locks in the stepped-up basis, and it locks in gain recognition at the corporate level. Model both sides before filing.

Late Election Relief

Missing the deadline is not automatically fatal. Under Treasury Regulation Section 301.9100-3, the IRS has discretion to grant a reasonable extension of time to make the election if the taxpayer acted reasonably and in good faith and if granting relief will not prejudice the government’s interests. The request must be filed before the IRS independently discovers the failure, and the taxpayer cannot be trying to alter a return position that could trigger an accuracy-related penalty.¹²

When relief is granted, it comes with tight follow-up deadlines and a condition that the parties’ aggregate tax liability cannot be lower than it would have been had the election been timely, accounting for the time value of money.¹² Section 9100 relief is a safety net, not a planning tool. The private letter ruling process is slow and expensive, and no outcome is guaranteed. Filing on time is much cheaper.

1
Office of the Law Revision Counsel. 26 USC 336 – Gain or Loss Recognized on Property Distributed in Complete Liquidation
2
Federal Register. Regulations Enabling Elections for Certain Transactions Under Section 336(e)
3
eCFR. 26 CFR 1.336-2 – Availability, Mechanics, and Consequences of Section 336(e) Election
4
GovInfo. 26 CFR 1.336-1 – General Principles, Nomenclature, and Definitions for a Section 336(e) Election
5
Office of the Law Revision Counsel. 26 USC 318 – Constructive Ownership of Stock
6
eCFR. 26 CFR 1.336-3 – Aggregate Deemed Asset Disposition Price
7
eCFR. 26 CFR 1.336-4 – Adjusted Grossed-Up Basis
8
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
9
Internal Revenue Service. Instructions for Form 8883 – Asset Allocation Statement Under Section 338
10
Internal Revenue Service. Instructions for Form 1120-S
11
Internal Revenue Service. Private Letter Ruling 202619014
12
Internal Revenue Service. Private Letter Ruling 202506009