How Tax Works – Episode 45: Stock Sales Taxed as Asset Sales

Host: Matthew Foreman, Co-Chair, Falcon Rappaport & Berkman LLP
Release Date: February 2, 2026

Episode Overview

Matthew Foreman unpacks the complexities of selling corporate stock with the transaction taxed as an asset sale rather than a traditional stock sale. He focuses on the mechanics, tax implications, and strategic considerations of IRS Sections 338(g), 338(h)(10), and 336(e) elections, with special attention to their application in S corporations and wholly owned subsidiaries. The episode is practical and insightful, using real-life examples, best practices, and memorable analogies to clarify when and why taxpayers or advisors might opt for these elections. The aim: empower listeners—accountants, lawyers, business owners, or the tax curious—to confidently navigate high-stakes business transactions where tax treatment often drives decision-making.

Key Discussion Points & Insights

Initial Principles: Foundations of Tax Structuring

• Always Match Tax With Cash:
  • “Only pay tax when you’re getting cash. And to make sure your clients know when they’re going to pay tax and roughly how much.” ([07:42])
• Double-Check Client Communication:
  • “Check, double double check, and be certain: poor communication leads to angry clients.” ([08:25])
• Lean Into Taxable Transactions When It Makes Sense:
  • Sometimes, taxable stock sales can be advantageous, especially with qualified small business stock (QSBS, §1202), potentially resulting in no actual tax outlay.
  • “So you want tax free? … Well, maybe, right? It depends. Rate can really matter or not matter.” ([09:26])
• Asset vs. Stock Sale Dynamics:
  • Buyers often pay more for assets (depreciation/amortization benefits), but sellers could see a better net result too, especially with pass-through entity taxes (PTETs).
  • “I think selling assets is actually better than selling stock a lot of times because of the PTETs.” ([10:11])
• Form Usually Controls, Except When It Doesn’t:
  • Exceptions and caveats are everywhere; state-specific rules (e.g., FIRPTA, transfer taxes) can be critical when parties or assets are foreign or involve real estate. ([11:31])

Pre-Sale “F Reorg” Mechanics: Setting Up Asset Sale Treatment

• What is an F Reorg?
  • “A mere change in form, however affected… F Reorg is a pure tax thing. 368(a)(1)(F) of the Internal Revenue Code.” ([13:31])
• Used to alter the structure before sale; for instance, to drop a new entity below an S corp, allowing one part to be spun off tax-free with only the other part sold in the transaction.
• Operational Steps:
  • Start with S corp → create a “holdco” S corp above the operating company (OpCo) → convert OpCo to a subsidiary/QSub or disregarded entity.
  • “When an S Corp sells either the QSub or the disregarded entity … it is taxed as an asset sale. And that’s really important.” ([17:42])
• Why Bother?
  • Useful for splitting up distinct business lines or maximizing tax efficiency when rolling over part of the deal.
• Contrast With Partnerships:
  • Partnerships/LLCs offer more flexibility for basis step-ups via separate rules (Rev. Rul. 99-5, 99-6, and §754 elections).

Stock Sales as Asset Sales: Sections 338(g), 338(h)(10), and 336(e) Elections

General Rule: Form Does Not Control Tax (Unlike Most Transactions)

• “There are three different ones you can do: there’s a 338 election … 338(h)(10) election, and 336(e). Every so often … I have to do the uncomfortable thing of, like, well, which one?” ([23:22])
• Threshold: Must sell at least 80% of the business for these elections. Control threshold is what matters; IRS treats the sale as if 100% happened for tax purposes. ([25:02])

338(g) Election – Classic Corporate Asset Sale by Election

• Steps:
  1. Seller sells stock to purchaser.
  2. Target “pretends” to sell all assets to an unrelated party.
  3. Buyer “pretends” to buy assets from that party (for new tax basis).
• “Why would you do this? It sounds really daffy… and the answer is it’s easier to document than an actual sale and you don’t need to get certain approvals... you want the tax implications of an asset sale.” ([28:22])
• Implications:
  • Buyer gets stepped-up basis in assets.
  • Seller is taxed as if they sold assets.
  • Target company’s losses can offset gains triggered by the election, but not purchaser’s gains (per §338(h)(9)), potentially useful in a loss year. ([30:27])

338(h)(10) Election – For S Corps or Affiliated Groups; Simpler Asset Sale Treatment

• Steps:
  1. Purchaser buys at least 80% of voting stock.
  2. For tax, ignore the actual purchase.
  3. Target “deemed” to sell assets for cash, then liquidate.
  4. Seller bears the tax liability; acquirer starts fresh.
• “The target is deemed to have sold all its assets for cash while it’s in the old Consolidated Group … the target is treated as if it is liquidated. … The acquirer creates a new corp; same EIN, same name.” ([31:45])
• Applications:
  • S corps can use this directly.
  • C corps must be in a consolidated group for this to apply.
• Result: Stepped-up asset basis without actually retitling assets.

336(e) Election – “Like 338(h)(10) But More Flexible”

• Key distinction:
  • Buyer does not have to be a corporation; individuals or partnerships can use 336(e).
  • “336(e) is really interesting because it’s the same thing as 338(h)(10) except the buyer does not have to be a corporation…” ([34:40])
• Why Use It?
  • Common if the purchasers want to ultimately convert the company to a passthrough (like an LLC), typically performed right after the step-up.
  • “After the sale, they take that corporation and with the new step up basis … just convert it to an LLC. Tax is a partnership, taxed disregarded entity...” ([36:25])
• History Note:
  • Not operational until 2013, due to delayed regulations (code created in 1986!). ([38:44])

State-Specific Issues & Other Nuances

• Some states (e.g., New Jersey, New York City, Ohio CAT) ignore these elections for state/local tax purposes; can affect planning and outcome. ([26:18])
• Related party rules can block some elections—important to note distinctions between IRC rules for relatedness.
• “Sometimes you can do the same thing two different ways and you do it in a way that will give you the favorable tax treatment. … You don’t have to pay more in tax. You just can’t structure in a way that makes no sense to get there.” ([28:01])

Important Technical & Practical Considerations

Tax Character and Earn-outs

• “The character of the gains is whatever it would be if you were just to sell it... the earn out retains the same character as when you sold it.” ([46:06])
• Installment sales: be wary of limitations under §453 and §453A for large transactions.

Drafting & Deal Management

• Don’t Go Rogue: “The parties need to agree and then don’t go rogue like in Danielson…” referencing a famous case on sticking to the agreed allocation or treatment. ([47:43])
• Golden Parachute and S Corp Nuances: Unintended consequences if S election is blown, especially with deal bonuses or payments to departing shareholders. ([48:16])

Losses & Credits

• NOLs vs. Suspended Losses:
  • Suspended losses can be used immediately post-transaction.
  • NOLs have an 80% of income limitation; less flexible.
  • Important: Determine which you have—can affect value and deal structuring. ([50:01])

Dealing With State/Local Taxes and PTET

• PTETs (pass-through entity taxes) are increasingly significant in determining whether asset sales or stock sales make the most sense, especially after the SALT deduction cap.

Overarching Advice for Sellers, Buyers & Advisors

• Plan. Model. Communicate:
  • “Model it out, have the discussion, you know, definitely talk to your clients.” ([55:57])
  • “Anyone who says they know what’s going to happen is either lying or stupid or perhaps both.” ([53:41])
• “It is theoretically possible to slip this in if people don’t know what they’re doing, don’t have proper tax counsel or a proper tax advisor.” ([52:37])

Notable Quotes & Moments

• On Why This Knowledge Matters:

  • “This is literally just like knowing how to use the machinery at the shop. There is nothing that I’m doing here that I view as particularly noteworthy or impressive. I view this as just core tax structuring, that if you do enough, you just get used to it.” ([05:22])

• On Elections and Mistaken Jargon:

  • “Every so often I have people… ‘we’re going to do a 338 election.’ And I have to do the uncomfortable thing of, like, well, which one?” ([23:28])

• On Regulatory Delay:

  • “They were not proposed until 2008. So 22 years later and then finalized in 2013. … You are done with college and medical school by then and you are halfway through your residency.” ([38:56])

• On Predicting Future Tax Law:

  • “Anyone who says they know what’s going to happen is either lying or stupid—or perhaps both.” ([53:41])

Key Timestamps

• 07:42 – The two golden rules before tax structuring
• 13:31 – F Reorg explained, and why it matters
• 17:42 – Asset sale treatment via selling a QSub or disregarded entity
• 23:22 – Introduction to IRC §338(g), §338(h)(10), and §336(e) elections
• 28:22 – Why use a 338(g) election?
• 31:45 – How the 338(h)(10) election works in practice
• 34:40 – Distinctives of the 336(e) election
• 38:44 – Regulatory history and delay for 336(e)
• 46:06 – How gain character (capital vs. ordinary) is determined
• 48:16 – Golden parachute issues when S Corp status is compromised
• 50:01 – Comparing NOLs and suspended losses
• 53:41 – Legislative uncertainty and practical advice
• 55:57 – Importance of modeling outcomes and proactive client discussion

Final Takeaways & Best Practices

• Thorough Pre-Planning Is Essential: Model the consequences and communicate with every stakeholder early and often.
• Elections Enable Custom Outcomes: With 338(g), 338(h)(10), and 336(e), advisors can often “have their cake and eat it too”—gaining a step-up in basis while avoiding messy retitling or adverse state/local tax consequences.
• State Nuances and IRS Details Can Make or Break a Deal: Always account for local law, PTET, and related party rules.
• Always Keep Clients Informed: Transparency and repeated explanations prevent surprises and angry clients.
• Stay Humble About Legislative Change: The only certainty is uncertainty—particularly with rapid regulatory shifts or delayed implementation, as the 336(e) saga shows.

“There is nothing that I’m doing here that I view as particularly noteworthy or impressive. I view this as just core tax structuring… you learn what the tools do and you go, alright, I got this, right?”
—Matt Foreman ([05:22])