IRC § 338(h)(10) Asset-vs-Stock Sale Calculator

How this calculator works

A § 338(h)(10) election is a federal income-tax election made jointly by the buyer and seller of a corporation's stock that recasts a qualified stock purchase as a deemed asset sale for tax purposes. The legal sale stays a stock sale — the buyer takes legal title to the target's stock, not its assets — but the federal tax consequences are computed as if the buyer bought each individual asset for its allocated share of the deemed sale price, then liquidated the target back into the seller's hands.

This calculator runs the four numbers that drive the negotiation: the stock-sale baseline tax (what the seller would pay under a straight stock sale), the § 338(h)(10) tax (what the seller pays under the deemed asset sale, after the IRC § 1060 allocation recharacterizes part of the gain as ordinary income), the buyer's NPV benefit from the step-up amortization, and the break-even gross-up — the additional purchase-price dollars the buyer must pay to leave the seller financially indifferent between the two structures.

A quick history: TEFRA 1982 and the Kimbell-Diamond doctrine

Before 1982, the IRS used the case-law Kimbell-Diamond doctrine — from the 1950 Tax Court decision in Kimbell-Diamond Milling Co. v. Commissioner — to recharacterize a qualified stock purchase as a deemed asset acquisition when the buyer's intent at the time of purchase was to acquire the underlying assets. The doctrine was administrative-discretion-heavy, uncertainty-laden, and bedeviled M&A practice with disputes over what "intent" meant. The Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-248) replaced it with a statutory framework — IRC § 338 — that lets the buyer (and, under § 338(h)(10), the seller jointly) make an explicit election to treat a qualified stock purchase as a deemed asset sale, on a clear-cut filing rather than a court-tested intent test.

§ 338 has two arms:

§ 338(g) — the unilateral buyer election. Available for any qualified stock purchase. The buyer alone can elect it without seller consent. The election produces gain at the TARGET corporate level (the target is treated as having sold its assets at FMV) AND the seller still recognizes gain on the actual stock sale, producing double taxation. § 338(g) is rare outside specialized contexts — foreign target acquisitions (where the foreign seller is unaffected by the target-level gain) and NOL-rich C-corp targets where the deemed gain is sheltered by the target's own losses.

§ 338(h)(10) — the joint buyer/seller election. Requires seller consent. The seller recognizes ONLY the asset-sale gain (no separate stock-sale gain), avoiding the double tax. Available only for a narrow set of targets: S corporations, members of consolidated groups, members of affiliated groups, and qualified subchapter S subsidiaries.

Eligibility: who can use § 338(h)(10)?

The election is available only where the target is one of:

1. An S corporation — by far the most common case. Most middle-market acquisitions of S-corp operating businesses use this path.

2. A subsidiary that is a member of a consolidated group filing a consolidated federal return (Form 1120 with Form 851). The seller is the parent of the consolidated group; the target is the wholly-owned (or 80%+ owned) subsidiary.

3. A subsidiary that is a member of an affiliated group (80%+ vote-and-value common ownership under IRC § 1504) that does NOT file consolidated. Less common — most affiliated-group sales use the consolidated structure.

4. A qualified subchapter S subsidiary (QSub) — a wholly-owned S-corp subsidiary of an S-corp parent under IRC § 1361(b)(3)(B).

A freestanding C-corporation target is NOT eligible for § 338(h)(10). The buyer's only § 338 path is § 338(g), with its double-tax cost. The practical alternative is an actual asset purchase (not a stock purchase at all) or an F-reorganization that converts the target into a disregarded entity before the sale (see below).

The seven-class IRC § 1060 allocation

Once the election is in place, the deemed sale price (the Aggregate Deemed Sale Price under Treas. Reg. § 1.338-4, equal to the stock purchase price grossed up for target liabilities) must be allocated across seven asset classes under the residual method of IRC § 1060:

• Class I — Cash and cash equivalents. Demand deposits, currency. No gain ever — the asset's basis equals its face value.
• Class II — Actively traded securities, CDs, foreign currency. Marketable securities at FMV. Typically immaterial for operating-company acquisitions.
• Class III — Accounts receivable, mortgages, debt instruments. Allocated at FMV (face value less any reserve). Seller recognizes ordinary income on the spread above basis. Cash-basis sellers (common for small S-corps) have zero basis and recognize ordinary on the full allocation.
• Class IV — Inventory and stock in trade. Allocated at FMV. Seller recognizes ordinary income on the spread above cost.
• Class V — All other tangible assets. Equipment, vehicles, furniture, computers, real property, land improvements. Allocated at FMV. Seller faces depreciation recapture as ordinary income under § 1245 (personal property) or § 1250 (real property up to accumulated depreciation, at the 25% unrecaptured § 1250 rate), with any residual as § 1231 capital gain.
• Class VI — § 197 intangibles other than goodwill. Customer lists, supplier contracts, licenses, franchise rights, trademarks, covenants not to compete. Recapture is ordinary under § 1245 to the extent the seller previously amortized; otherwise capital.
• Class VII — Goodwill and going-concern value. The residual under the IRC § 1060 method — whatever is left after Classes I-VI are filled at FMV. Self-created goodwill has zero seller basis; the entire Class VII allocation is long-term capital gain.

The residual method requires filling Classes I through VI at fair market value up to the remaining purchase price; whatever is left after Class VI lands in Class VII (goodwill). Buyer and seller must agree on the allocation and report it consistently on IRS Form 8594. Disagreement triggers audit risk on both sides.

This calculator accepts a six-input allocation that maps onto Classes III-VII (we don't separately model Class I cash and Class II actively-traded securities — they're typically immaterial for operating-company acquisitions and the calculator's user supplies the rest of the purchase price across receivables, inventory, equipment, real property, intangibles, and goodwill). The six fractions must sum to 1.00 within a ±0.5% tolerance; the calculator flags the allocation as invalid otherwise.

The seller's tax stack: ordinary vs. capital

In a stock sale (no § 338(h)(10) election), the seller has a single capital gain on the entire spread between sale price and stock basis. Holding periods of more than one year qualify for long-term capital gain rates (0/15/20% federal under IRC § 1(h)), plus 3.8% Net Investment Income Tax under IRC § 1411 if MAGI is above threshold ($250K MFJ, $200K single).

In a § 338(h)(10) deemed asset sale, the gain is recharacterized across the seven classes:

• Class III receivables → ordinary income
• Class IV inventory → ordinary income (spread above cost)
• Class V equipment → § 1245 recapture, ordinary up to accumulated depreciation
• Class V real property → § 1250 recapture at 25% on accumulated depreciation, then § 1231 capital gain on the residual
• Class VI intangibles → § 1245 recapture, ordinary to the extent previously amortized
• Class VII goodwill → capital gain (self-created has zero basis; entire allocation is gain)

For modeling tractability, this calculator collapses the recapture / § 1231 distinction within Class V and treats:

• The full Class III, IV, V-equipment, and Class VI allocations as ordinary income (the conservative S-corp case with low historical basis or full prior amortization);
• The full Class V real property and Class VII goodwill allocations as capital gain;
• The seller's stock basis as recovered against the capital-gain portion only (a simplification of the formal IRS pro-rata sequencing under Treas. Reg. § 1.338-4 — the standard practitioner planning approximation).

Under this simplification, the seller's federal tax under § 338(h)(10) is:

ordinaryTax = ordinaryBase × sellerOrdinaryRate
capitalTax  = (realProperty + goodwill − stockBasis) × sellerLtcgRate
niit        = (realProperty + goodwill − stockBasis) × sellerNiitRate

NIIT applies only to the capital-gain portion. For active S-corp shareholders under § 1411(c)(1)(A), NIIT generally does NOT apply to ordinary recharacterization that flows from an active trade or business. Passive shareholders (those who do not materially participate under § 469) face NIIT on the ordinary portion as well.

The buyer's tax benefit: the step-up

In a stock sale, the buyer inherits the target's inside asset basis ("carryover basis") and gets no step-up — future depreciation and amortization run off the seller's old, often heavily-depreciated basis.

In a § 338(h)(10) deemed asset sale, the buyer steps up the inside basis of the acquired assets to the deemed sale price. Tangible Class V assets run on MACRS depreciation schedules (5-7 years for equipment; 27.5 for residential real property; 39 for non-residential); Class VI intangibles and Class VII goodwill amortize straight-line over 15 years under IRC § 197.

The buyer's NPV benefit is the present value of the incremental tax shield from the additional deductions:

stepUpBase         = equipment + realProperty + intangibles + goodwill
annualDeduction    = stepUpBase / depreciationYears   (straight-line)
annualTaxShield    = annualDeduction × buyerMarginalRate
npv                = PV(annualTaxShield, depreciationYears, discountRate)

The receivables and inventory allocations don't enter the step-up base — receivables are collected in cash (no ongoing deduction), and inventory rolls through cost of goods sold rather than depreciation.

The calculator's straight-line simplification matches § 197 amortization exactly (which IS straight-line) and approximates MACRS depreciation on the tangible portion. For a goodwill-heavy acquisition, the straight-line model is precise; for a tangible-heavy deal, MACRS would front-load the deductions and produce a higher NPV than the calculator reports.

The gross-up negotiation

Because § 338(h)(10) shifts tax cost from buyer to seller, deal practice is for the buyer to "gross up" the purchase price — pay the seller enough extra cash to compensate for the additional tax the seller pays under the deemed asset sale, leaving the seller financially indifferent between the two structures.

The break-even gross-up math: at break-even, the additional after-tax dollars from the gross-up Δ must equal the seller's incremental tax under § 338(h)(10) (the difference between deemed-sale tax and stock-sale tax). Each additional dollar of Δ generates (1 − blendedMarginalRate) of after-tax cash to the seller, where blendedMarginalRate is the seller's weighted-average marginal rate on an additional dollar of price under § 338(h)(10), weighted by the allocation:

blendedMarginalRate = ordinaryFraction × ordinaryRate
                    + capitalFraction × (ltcgRate + niitRate)
Δ                   = sellerTaxIncrease / (1 − blendedMarginalRate)

If the gross-up Δ is less than the buyer's NPV benefit from the step-up, the election is pareto-improving relative to a stock sale: the buyer can fund the gross-up and still come out ahead, and the seller is no worse off. The calculator surfaces this pareto check explicitly.

Worked example 1: a goodwill-heavy $10M S-corp acquisition

Baseline: $10M purchase price, $2M stock basis. Allocation: 5% receivables ($500K), 10% inventory ($1M), 10% equipment ($1M), 15% real property ($1.5M), 10% intangibles ($1M), 50% goodwill ($5M). Seller rates: 37% ordinary, 20% LTCG, 3.8% NIIT. Buyer rate: 21% (C-corp). Horizon: 15 years. Discount: 10%.

Stock-sale baseline:

• Capital gain: $10M − $2M = $8M
• Tax: $8M × (20% + 3.8%) = $1,904,000
• After-tax proceeds: $10M − $1,904,000 = $8,096,000

§ 338(h)(10) deemed asset sale:

• Ordinary base (receivables + inventory + equipment + intangibles): $3.5M
• Capital base (real property + goodwill − stock basis): $4.5M
• Ordinary tax: $3.5M × 37% = $1,295,000
• Capital tax: $4.5M × 20% = $900,000
• NIIT: $4.5M × 3.8% = $171,000
• Total tax: $2,366,000
• Seller incremental tax: $2,366,000 − $1,904,000 = $462,000

Buyer step-up:

• Step-up base (equipment + realProperty + intangibles + goodwill): $8.5M
• Annual deduction: $8.5M / 15 = $566,667
• Annual tax shield: $566,667 × 21% = $119,000
• NPV at 10% over 15 years: ≈ $905,123

Gross-up:

• Blended marginal rate: 35% × 37% + 65% × 23.8% = 12.95% + 15.47% = 28.42%
• Δ = $462,000 / (1 − 28.42%) = $462,000 / 0.7158 ≈ $645,432

Pareto check: Buyer NPV $905K > seller incremental tax $462K → pareto-improving. Buyer can fund the $645K gross-up and still net $260K of value vs. a stock sale.

Worked example 2: an ordinary-heavy distribution business

Same $10M / $2M basis, but allocation is receivables-and-inventory-heavy (distributor with lots of working capital): 25% receivables, 30% inventory, 15% equipment, 5% real property, 10% intangibles, 15% goodwill.

• Stock-sale tax: same $1,904,000 (depends only on price and basis)
• § 338(h)(10) ordinary base: $8M (receivables $2.5M + inventory $3M + equipment $1.5M + intangibles $1M)
• Capital base: $0 (real property + goodwill = $2M, fully absorbed by $2M stock basis)
• Ordinary tax: $8M × 37% = $2,960,000
• Capital tax + NIIT: $0
• Total deemed-sale tax: $2,960,000
• Seller incremental tax: $2,960,000 − $1,904,000 = $1,056,000

The ordinary-heavy allocation hurts the seller badly. The buyer's step-up base is $4.5M (excluding the $5.5M of receivables and inventory), generating a 15-year tax shield with NPV around $480K — less than half the seller's incremental tax cost. Pareto check fails: a stock sale is the preferred structure for this fact pattern.

Worked example 3: a 100%-goodwill professional-services acquisition

Same $10M / $2M basis, but pure goodwill: 0% across Classes III-VI, 100% goodwill.

• Stock-sale tax: $1,904,000
• § 338(h)(10) ordinary base: $0
• Capital base: $10M − $2M basis = $8M
• Total deemed-sale tax: $8M × (20% + 3.8%) = $1,904,000
• Seller incremental tax: $0 — the structure is tax-neutral on the seller side.

The buyer still gets the step-up — $10M base over 15 years at 21% rate, 10% discount → NPV ≈ $1,065,000 — and the gross-up is $0. Pareto check passes with full value flowing to the buyer. This is the cleanest § 338(h)(10) fact pattern and the reason professional-services and software acquisitions are the most reliable § 338(h)(10) candidates.

The F-reorganization alternative

An F-reorganization under IRC § 368(a)(1)(F) is a "mere change in identity, form, or place of organization" of a corporation — it preserves tax attributes (NOLs, basis, E&P) and does not trigger gain. The classic M&A pattern: a target S-corp converts to an LLC via an F-reorg before the sale, then the LLC interests are sold to the buyer. The sale of LLC interests is treated as a sale of the underlying assets for federal tax purposes (Rev. Rul. 99-5/99-6 partnership-disregarded-entity rules), achieving the same step-up economics as § 338(h)(10) WITHOUT requiring Form 8023, without the 15th-day-of-9th-month deadline, and (critically) WITHOUT requiring buyer-seller cooperation on a joint election.

For sophisticated S-corp sellers, the F-reorg-then-sell structure has largely replaced § 338(h)(10) in recent practice because it avoids the joint-election coordination cost and the buyer can pursue the structure unilaterally. F-reorgs are also the workaround for C-corp targets that are not § 338(h)(10) eligible: the C-corp can sometimes be converted to a disregarded entity via a chain of F-reorgs before the sale, achieving step-up economics without the § 338(g) double-tax penalty.

The F-reorg pattern is fact-intensive and requires careful tax counsel — the IRS scrutinizes the bona fides of the form change and the timing relative to the sale — but for the right seller, the F-reorg is the structurally cleaner path.

Common errors

Five frequent failure modes practitioners should screen for before signing:

1. Forgetting NIIT under § 1411 on the capital-gain portion of the deemed sale (and on the stock-sale baseline). The 3.8% adds up — on the goodwill-heavy $10M example above, NIIT alone is $171,000. NIIT is also a moving target across years; the threshold and rate have been stable since 2013 but the application to active S-corp shareholders has evolved through guidance.

2. Mis-classing intangibles between Class VI and Class VII. Federally this matters less (both are § 197), but it matters for state-tax treatment in non-conforming states and for the residual computation when total intangibles approach the residual capacity.

3. Missing the Form 8023 deadline at the 15th day of the 9th month BEGINNING AFTER the month of the acquisition date. For a March 15, 2026 closing, the deadline is December 15, 2026. Missing the deadline is fatal in most cases — there is no automatic extension. Rev. Proc. 2003-33 provides narrow relief for inadvertent failures with reasonable cause, but the standard practice is to file Form 8023 with the buyer's federal return for the year of acquisition, with calendar reminders set 90 days before the deadline.

4. Assuming a freestanding C-corp target is eligible for § 338(h)(10). It is not — only S-corps, consolidated/affiliated group members, and QSubs are. A buyer who closes a stock purchase intending to make a § 338(h)(10) and finds the target is not eligible has to fall back to § 338(g) (double tax) or restructure post-close, both of which destroy value.

5. Under-pricing the gross-up. Sellers who negotiate a fixed dollar gross-up without modeling the full ordinary-vs-capital recharacterization across the seven classes typically leave 1-3% of purchase price on the table. The break-even gross-up depends on the allocation, which is itself a negotiation point — buyers prefer goodwill (deductible over 15 years); sellers prefer the same (capital gain at 20% + NIIT instead of ordinary at 37%). Surprisingly, the buyer and seller's interests are aligned on the allocation question for a pure-services business; they diverge sharply when meaningful tangible-asset value is in the mix.

State tax conformity

A § 338(h)(10) election is a federal election; state conformity varies. Most states "conform" to the federal election — they accept the deemed asset sale treatment for state income tax — but a handful of states do not, requiring a separate state-level election or treating the transaction as a stock sale for state purposes regardless of the federal election.

The state-conformity question is most important when (a) the seller is a multi-state filer, (b) the target operates in non-conforming states (Pennsylvania is the most-cited non-conforming state for § 338(h)(10); the rules change periodically), or (c) the seller is in a state with a high LTCG vs. ordinary differential.

For a single-state Florida S-corp seller, state conformity is largely moot because Florida has no individual income tax — the federal calculation is the full picture. For sellers in California, New York, Oregon, or other high-tax states, the state recharacterization can add 5-10 percentage points to the effective tax rate on the ordinary portion, and the gross-up math must include the state piece. The calculator models federal tax only; add state-residency rates manually for a complete picture, or consult state-resident tax counsel.

Last reviewed

This calculator was last reviewed against the statutes and regulations cited above on 2026-05-16. The federal statutes (IRC §§ 338, 1060, 197, 1245, 1250, 1231, 1411) and Treasury regulations (Reg. §§ 1.338-4, 1.1060-1) have been stable since enactment with periodic technical updates. Form 8023 instructions are revised periodically by the IRS; verify the current form before filing.

This is a planning tool, not professional advice. Consult a Florida-licensed CPA or a multi-state M&A tax attorney before relying on the calculator's output for an actual transaction.