Read the election request as a deal term
A buyer may offer to purchase corporate stock while asking the seller to make a section 338(h)(10) election. The seller should not treat that request as routine paperwork. The election can change the tax analysis of a transaction that legally transfers shares. Ask the tax and legal teams to review eligibility and the specific consequences before agreeing to a contract provision requiring it.
Provide the company’s classification, ownership, assets, liabilities, and proposed buyer structure. The election rules have requirements. A buyer’s preference does not establish that the transaction qualifies or that the result benefits the seller. The actual structure and participants must support the proposed treatment.
A hypothetical stock-offer comparison
Suppose a buyer proposes a $5 million stock purchase and requests the election. The seller initially models only the outside stock basis. The company also owns equipment and goodwill with their own tax histories. If the applicable election changes the modeled disposition to an asset-based result, those underlying records become central.
Ask the advisor to compare the proposed election with the feasible nonelection transaction using the same economic assumptions. The example does not calculate deemed-sale gain or tax. It shows why a legal stock price cannot be evaluated using one basis number when the contract also changes the tax framework.
Build the underlying records early
Collect fixed-asset schedules, depreciation history, receivables, inventory, goodwill records, liabilities, and prior entity returns. Reconcile assets that have been removed or acquired recently. Identify property not included in the commercial transaction and explain how it is handled under the proposed structure.
Ask the advisors which allocation and reporting schedules will be required. Keep the purchase agreement’s definitions connected to the tax model. If the parties change price, debt treatment, or retained assets, update the analysis rather than assume the original comparison remains valid.
Identify consent and signature requirements
IRS Form 8023 instructions describe elections under section 338 and the relevant filing procedures. For an S corporation section 338(h)(10) election, the instructions require each S corporation shareholder’s signature even when a particular shareholder does not sell stock in the qualified purchase. Counsel should coordinate the actual consent and signature process.
Identify all owners and obtain the needed review through the authorized transaction team. Do not discover a missing participant at the filing deadline. Keep signed forms, required attachments, delivery evidence, and the advisor’s eligibility analysis together. An agreement promising an election is not proof that the election was properly completed.
Negotiate using the seller’s actual additional cost
If the proposed election changes the seller’s tax burden, quantify the difference and discuss the commercial terms while negotiations remain open. A price adjustment or other provision may be considered by the parties with professional advice. Do not use a generic gross-up percentage without the underlying calculation.
Model federal and relevant state results separately. State conformity and transaction consequences require current jurisdiction-specific review. The owner should understand which assumptions are verified and which remain unresolved. A federal comparison alone may not establish the total after-tax result.
Coordinate filing responsibility
Assign responsibility for the election, entity returns, owner information, allocation reporting, and later amendments. Record applicable deadlines confirmed by the professionals. The buyer and seller should know who supplies each factual schedule and who confirms consistency under the agreement.
Keep a post-closing checklist because some work continues after ownership changes. Preserve access to historical records and a contact authorized to answer questions. If the buyer prepares information needed by sellers, specify how and when it will be delivered rather than rely on goodwill after the deal team disperses.
Reconcile the executed transaction
After closing, compare the signed agreement and funds flow with the final tax model. Provide every amendment to the preparer. Confirm that the filed election and reporting reflect the actual parties and terms, not a draft structure abandoned during negotiation.
The owner’s objective is an informed agreement on a material tax term. A supported comparison, complete asset records, and accountable election process make the buyer’s request reviewable. They also help preserve the economics the seller believed they negotiated when accepting the headline stock price.
Retain the final shareholder consent record alongside the filed election.
Sources & further reading
Consult the original guidance and its effective dates. These references support the educational discussion; their application depends on the specific facts.