A Buyer’s Section 338(g) Election Can Create Target Tax Beside the Seller’s Stock Gain

Identify the election before agreeing to bear its taxes

Section 338 permits certain qualifying corporate stock acquisitions to receive deemed asset-sale and purchase treatment. A section 338(g) election differs from a joint section 338(h)(10) election and can produce target-level deemed-sale tax while the shareholder still has its actual stock-sale consequences. A seller should not treat every request for an asset-basis step-up as the same election or assume buyer-only filing means the seller has no contractual economic exposure.

Have the transaction tax team identify the qualified stock purchase, eligible purchaser, target, election type, deemed consequences, and responsibility for each tax. Review the purchase agreement's tax definitions and indemnities. A broad seller obligation to pay all pre-closing taxes can need specific treatment of election-generated liabilities. The seller should see a comparison using the actual election before signing, even where the buyer controls the filing decision. Keep the economic allocation separate from the legal identity of the taxpayer owing the tax.

Show the two computations side by side

Assume a hypothetical domestic corporate target has assets worth $5 million with $2 million aggregate adjusted basis. A supported simplified deemed-sale calculation could start with $3 million gain before liabilities, gross-up mechanics, asset character, and other adjustments. At an illustrative twenty-one-percent corporate tax assumption, that is $630,000. Separately, the seller receives $5 million for stock with $1 million basis, producing $4 million simplified stock gain before expenses and other rules.

The $630,000 and shareholder tax are different layers, and this example is not a complete section 338 calculation. It illustrates why a buyer's basis benefit must be compared with the target's liability and the agreement's funding allocation. If the buyer expects the seller to absorb the target tax through a price adjustment, the seller's proceeds are lower. If the buyer bears it, acquisition economics change instead. A statement that the buyer gets a $3 million step-up does not establish that the election benefits both parties equally.

Verify the acquisition and filing calendar

The Form 8023 instructions generally set a deadline on the fifteenth day of the ninth month after the acquisition date for a section 338 election. The actual acquisition date and qualified stock purchase requirements need review, including purchases during the relevant acquisition period. Identify who prepares, signs, files, and supplies copies of the form and any associated reporting. Preserve the buyer's agreement to communicate its decision and completed filing evidence.

Review target subsidiaries and possible cascading elections or other related consequences. The election analysis should match the final step plan, not just the top-level share transfer. A transaction involving foreign corporations or cross-border attributes can have materially different consequences and should not be modeled from the domestic example without specialized analysis. Give the reviewers the full entity chart and tax history. The seller's duty is to understand the actual economic and reporting effects rather than rely on the election label as shorthand for an asset sale.

Reconcile target assets, attributes, and allocations

Gather tax-basis asset registers, liabilities, depreciation, inventory, intangible history, losses, credits, and relevant elections. The target's book balance sheet does not establish the deemed-sale tax. Identify ordinary-income components and attributes available under the applicable rules. The buyer's opening basis schedule and target's deemed-sale reporting should use the same supported allocation and consideration assumptions, with later adjustments controlled through a shared process.

Have state-tax reviewers assess conformity and additional filings separately. Federal election treatment does not universally answer state results. Include professional costs, return preparation, and post-closing cooperation in the agreement. If seller records will become inaccessible, preserve them before closing. The target's return preparer may need historical information months after the founder has relinquished access, and an information covenant is more useful when the underlying files were actually exported and assigned to a custodian.

Fund the agreed liability and retain filing evidence

Before closing, reconcile the election model to the final price and tax-indemnity provisions. Reserve or fund the obligations borne by each party using the actual agreed treatment. After filing, preserve Form 8023, allocation schedules, target returns, calculations, and proof of communicated changes. The seller's final proceeds bridge should identify the stock-sale tax and any election-related burden separately, allowing the owner to evaluate the real offer rather than discover that a buyer's post-closing election changed the amount the agreement required the seller to fund.