Determine eligibility before valuing the asset step-up
A section 336(e) election can treat certain qualifying stock dispositions as deemed asset transactions. Its eligibility, disposition thresholds, sellers, and election mechanics differ from section 338. The possibility is not established simply because a buyer requests a tax basis step-up. Have the tax team identify the qualifying disposition and eligible parties, then compare the consequences of making or declining the election under the actual stock-sale structure.
Obtain the full seller ownership and disposition history, including transfers during the relevant measurement period. Identify target subsidiaries and any linked elections. The election can affect seller tax, target attributes, and buyer asset basis, so the entire transaction needs a model. A letter of intent mentioning a preferred tax result should lead to an explicit workstream with agreement and filing responsibilities. Do not assume that checking a box on the buyer's return will create the intended section 336(e) treatment.
Price the seller’s incremental tax separately
Assume a hypothetical stock sale would produce $2 million of seller gain under a supported stock-sale model. A preliminary deemed-asset model instead produces several target-level gain categories, including $300,000 of equipment recapture, with an assumed additional $90,000 of combined seller-side tax. The buyer estimates a $160,000 present value from the asset-basis benefit. These amounts are hypothetical outputs, not statutory rates or a complete election calculation.
The parties can use the $90,000 and $160,000 comparison to negotiate whether an election premium is economically possible. A $100,000 price increase is not automatically sufficient if the additional price itself creates tax. Calculate the required gross-up under the actual facts and identify who bears state effects and fees. Compare the seller's final after-tax proceeds with and without the election. The buyer's total benefit and the seller's incremental cost should be presented separately so a large basis number is not mistaken for an equal immediate cash subsidy.
Prepare the binding agreement and statements on time
The regulations require specific written agreement and election-statement procedures, including rules for S corporation targets and corporate sellers. Identify exactly which parties must agree, the relevant due dates, and the returns carrying the statements. Use current instructions and the final regulations. A generic covenant to cooperate on tax matters should not be assumed to satisfy the election agreement requirements without review.
Assign a person to collect signatures and preserve the agreement with the target and seller records as required. Give each return preparer the same executed statement and transaction date. Where the parties extend return deadlines, record the actual extension and its effect on the election process. Filing calendars should distinguish the transaction closing date, agreement deadline, return deadline, and allocation reporting. The transaction lawyer's completed closing binder does not prove that the preparer attached the required statement months later.
Reconcile the deemed asset allocation and attributes
Prepare the asset allocation using supported values and the relevant deemed consideration rules. Review equipment, inventory, goodwill, liabilities, transaction costs, and any adjustments separately. The asset model should use tax basis rather than book net assets. Identify attributes that change or disappear under the election and any special rules applying to subsidiaries. A buyer should know what its opening asset register assumes, while the seller should know the gain categories used in the reserve.
Give state-tax reviewers the same step plan and election assumption. Federal deemed-asset treatment does not automatically answer every state's result. Preserve the state conclusions and additional filings with the federal file. If a later earnout or adjustment changes consideration, establish who updates the allocation and communicates the revision. Do not allow the buyer's depreciation schedule to reflect a changed price while the seller continues using the original gain model without any documented reconciliation.
Finish with matching returns and a funded reserve
Before closing, approve the election economics and cash reserve using the near-final documents. After closing, verify execution of the agreement, preparation of statements, and filing on the correct returns. Preserve the calculation, allocation, valuations, and delivery evidence. Reconcile actual proceeds to the election premium and additional taxes. The useful result is a qualifying election implemented through its own mechanics, with the seller paid for the actual incremental burden and the buyer's opening tax records connected to the same supported transaction.
Sources & further reading
Consult the original guidance and its effective dates. These references support the educational discussion; their application depends on the specific facts.