Buyers in business acquisition transactions generally favor asset transactions. Why? One common reason is that buyers want to make sure that they get a stepped-up cost basis in the assets acquired. This means that buyers generally oppose stock purchase transactions where the cost basis of the assets on the books of the acquired corporation remain the same. However, that may not always be the case. In a declining economy, the cost basis of assets may be less than their fair market value. But at the end of the day, it is often a tough sell to convince the buyer to acquire ownership of the stock rather than underlying assets because of the cost basis and undisclosed liability issues.
Some factual situations may exist where it is not practical for the parties to structure the sale as an asset purchase transaction. Say the company to be acquired has valuable contracts which may not be assigned to a new purchaser. If those contracts are what the proposed purchaser wishes to acquire, an asset purchase transaction may be out of the question.
What’s a possible solution? It could be an IRC Section 338(h)(10) election where the seller and buyer jointly elect to treat a stock purchase transaction as an asset purchase for income tax purposes. To accomplish that election, there are a number of technical requirements that need to be met. One of those requirements is that both buyer and seller need to be corporate entities. If it is not possible to meet all of those technical requirements, then the buyer has an opportunity to make an IRC Section 338(g) election. The parties need to check if the Section 338(g) election would have negative income tax consequences for the seller as the IRS still regards this as a stock sale transaction from the seller’s perspective.
If neither Section 338(g) nor Section 338(h)(10) are available, then the seller may be able to make a Section 336(e) election, discussion of which is which is beyond the scope of this blog.
Michael W. Margrave
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.