The buyer wants a 338(h)(10) election. That is a price negotiation, not a formality.

A Section 338(h)(10) election lets the buyer treat your stock sale as an asset purchase for tax purposes. The buyer gets stepped-up basis and amortizable goodwill. You absorb the tax cost, and your signature is required. So consent is a priced item. Decide the number before signing, as a fixed price increase. Stated as of August 2026.

What does a 338(h)(10) election actually do for the buyer?

The election treats the target as having sold all of its assets at fair market value at the close of the acquisition date, then as a new corporation that bought them. The buyer gets stepped-up basis and amortizable goodwill. The legal form stays a stock purchase, so assets and contracts are not conveyed one by one.

That is why buyers ask. An actual asset sale means chasing landlord consents, assignment clauses and license transfers, each one a chance for a third party to say no.

Do not oversell the saving. A stock purchase avoids assignment, not scrutiny. Anti-assignment clauses drafted to catch a change of control still bite, and franchise agreements, government contracts and regulated licenses commonly require notice or approval when ownership changes. Read the triggers before you call the election consent-free.

Understand the limit of the fiction. It is a tax election only. The buyer still takes your entity, its history and its liabilities, and your representations, indemnity and escrow stay stock-deal shaped. The benefit is one-directional, and yours to sell.

Law: 26 U.S.C. 338(a), 338(h)(10); Treas. Reg. 1.338-1(a).

Does my company even qualify for a 338(h)(10) election?

Four gates. The target must be an S corporation or a member of a selling consolidated group, or sold by a selling affiliate. The buyer must be a corporation. The buyer must acquire 80 percent of vote and value by purchase within 12 months. And the election must be joint, signed by the buyer and every S corporation shareholder.

A standalone C corporation owned by individuals is outside 338(h)(10). The other three gates do the work.

• Corporate buyer. The regulations say it directly: an individual cannot make a qualified stock purchase. The test is tax classification, not state-law label, so an LLC taxed as a corporation counts and a disregarded single-member LLC does not. An individual can form a corporation to buy the stock, and the regulations then ask whether that corporation is really the purchaser. Many buyers at this size are individuals or family LLCs. For them, this gate closes.
• 80 percent of vote and value. The section 1504(a)(2) test, acquired by purchase, inside the 12-month acquisition period. Keep more than 20 percent of the target’s stock and the buyer never crosses the line, though rolling equity into the buyer’s parent instead of retaining target stock generally preserves the qualified stock purchase. Stock acquired in a tax-free exchange or from a related person is not acquired by purchase.
• Every shareholder signs. All S corporation shareholders must consent, including those who sell nothing. One holdout defeats it. A dissenting minority holder, an estate with no appointed executor, or a trustee without clear authority has the same effect as a refusal.

The mechanics are unforgiving. The election goes on Form 8023, due no later than the fifteenth day of the ninth month beginning after the month containing the acquisition date. The trigger is the acquisition date, not signing and not your year end. It is irrevocable, and old target and new target each file Form 8883.

Late relief exists but is not a plan. Rev. Proc. 2003-33 grants an automatic extension under the section 9100 regulations where everyone required to file Form 8023 can make the representations it requires; outside that route, relief is discretionary. Section 338(g) is different: the purchasing corporation makes it alone, typically on a C corporation target, and the target carries the tax. You will not sign it.

Your signature is a gate. A gate only you can open has a price.

Law: 26 U.S.C. 338(d)(3), 338(h)(1), 338(h)(10), 1504(a)(2); Treas. Reg. 1.338-2(d), 1.338-3(b)(1), 1.338(h)(10)-1(c)(1), 1.338(h)(10)-1(c)(3); Instructions for Forms 8023 and 8883; Rev. Proc. 2003-33.

When is a Section 336(e) election the right tool instead?

Section 336(e) reaches dispositions Section 338 cannot. A qualified stock disposition covers stock of a domestic corporation sold, exchanged or distributed by a domestic corporate seller or by S corporation shareholders inside a 12-month period. The purchaser need not be a corporation. No Form 8023 is filed. Sales to a related person do not count.

The two do not overlap. A transaction that also qualifies as a qualified stock purchase is generally not a qualified stock disposition. So the map is short. Corporate buyer over 80 percent: 338(h)(10). Individual or LLC buyer, multiple unrelated buyers, or a disposition that includes a distribution: 336(e).

Now the part that matters. For an S corporation target the election is made by the target and its shareholders, through a written binding agreement joined by every shareholder, with an election statement attached to the timely filed return. The buyer signs nothing. So some buyers add a covenant barring you from electing without their consent. At this size that covenant is the exception, not the market, and its absence is silence rather than a concession. Where it appears, read it as the buyer conceding that the election has value and that the value belongs to whoever controls it. Price your consent. One asymmetry: these regulations disallow certain losses on the deemed disposition, so a loss asset may not shelter a gain asset.

Law: 26 U.S.C. 336(e); Treas. Reg. 1.336-1(b)(5), 1.336-1(b)(6)(i), 1.336-1(b)(6)(ii), 1.336-2(b), 1.336-2(h).

How does the election change my tax bill as the seller?

A deemed asset sale changes the character of your gain and can add a second layer of tax. Depreciation recapture and inventory gain become ordinary income. If the company was ever a C corporation and is still inside the recognition period, the entity itself can owe built-in gains tax. Nonconforming states add their own bill.

Character conversion. In a plain stock sale, gain on stock held more than a year is generally long-term capital gain. In a deemed asset sale the allocation drives character: equipment value produces ordinary recapture income, inventory produces ordinary income, goodwill stays capital. The allocation is not a free negotiation. The residual method fills the earlier asset classes at fair market value and drops the remainder into goodwill, and both sides report consistently. What you negotiate is the value of the recapture-heavy classes.

Built-in gains tax. Section 1374 taxes net recognized built-in gain at the entity level during the recognition period, at the highest rate specified in section 11(b), 21 percent as of August 2026. The recognition period is the five taxable years beginning with the first year of S status, made permanent by the 2015 PATH Act. The tax reaches only gain built in at conversion, capped by net unrealized built-in gain and limited by taxable income. Application: convert from C to S four years ago, sell into an election, and pre-conversion appreciation can draw a corporate-level tax a stock sale would never have triggered. Consequence: two layers on part of your gain, offset only in part, because the 1374 tax is treated as a loss of the S corporation that reduces what passes through to you.

State tax. A deemed asset sale can push income into every state where the company has apportionable activity, even if you live in a state that would not have taxed your stock gain. Conformity is not uniform. As of August 2026 check it state by state, where the company files and where each shareholder resides.

Three corrections. Installment reporting is available to selling shareholders under the 338(h)(10) regulations, but it does not defer the part that hurts: section 1245 recapture is recognized in the year of disposition and inventory is not installment property, so the ordinary income the election creates is taxed in the closing year even as your money arrives later. Second, the election triggers a deemed liquidation of old target, so gaps between your stock basis and the company’s asset basis do not net cleanly. Third, if you are rolling equity, run the Section 197 anti-churning rules. They reach only intangibles held or used by the taxpayer or a related person between July 25, 1991 and August 10, 1993, so they are irrelevant to goodwill created after 1993 and decisive for a business that predates it. Where they apply, the buyer is paying for amortization it will not receive.

Law: 26 U.S.C. 1374(a), (b)(1), (d)(1), (d)(2), (d)(7); 1366(f)(2); 453(i), 453(b)(2)(B); 197(f)(9); 1060; Treas. Reg. 1.338-6(b), 1.338(h)(10)-1(d)(4), 1.338(h)(10)-1(d)(8), 1.197-2(h); PATH Act of 2015, Pub. L. 114-113.

What does the make-whole computation look like in numbers?

The make-whole restores the after-tax result you would have had with no election, grossed up because the extra money is itself taxable. Price increase equals the incremental tax caused by the election, divided by one minus your marginal rate on the incremental payment. Run federal, state and entity-level tax together.

An illustration. An S corporation sold for 10,000,000 in cash, stock basis of 2,000,000, and an allocation producing 1,800,000 of recapture and 100,000 of inventory gain. Rates are illustrative only, 37 percent ordinary and 20 percent capital, before surtax and state tax. Confirm the rates for your closing year with your accountant.

Check the arithmetic as the buyer will. The additional 403,750 is itself deemed sale consideration. At 20 percent it costs 80,750, leaving 323,000 net, exactly the incremental tax. You are whole. If that consideration carries ordinary character under the allocation, the divisor changes, so fix the allocation and the rates in the document that fixes the number. Built-in gains tax and state deltas go in the numerator; any deduction flowing through from that tax comes back out.

What will the buyer try to carve out of the make-whole?

Buyers who need the election will usually pay something for it, then narrow what they pay for. Expect carve-outs for built-in gains tax, for state tax, and for anything traceable to a defect in your S corporation history. Each sounds technical. Each moves a real number back onto you.

• “The make-whole excludes built-in gains tax.” That tax exists only because the assets are deemed sold. No election, no tax. It belongs in the numerator.
• “The make-whole excludes state taxes.” For a multi-state operator, state tax is often the larger half of the delta. Excluding it makes the calculation theater.
• “You bear taxes from any invalidity of the S election.” A broken S election is a legitimate concern. It belongs in the status representation and the indemnity, not in the gross-up formula.
• “We will pay after the returns are filed.” That converts a priced concession into an unsecured receivable owed by the party that now owns your company.
• “Our accountant will verify your computation.” Verification before signing is fine. Verification as a condition to payment after closing is a dispute waiting to happen.

At this size this usually resolves into one number in the price, not a formula with its own dispute mechanic. A smaller number paid at closing beats a larger one you must enforce.

A make-whole with the built-in gains tax carved out is not a make-whole. It is a discount with a courteous name.

How do I handle this in the documents, and in what order?

Decide the election before signing and record it as a fixed dollar increase to the price in the stock purchase agreement. Do not leave the buyer a post-signing option to elect. An option gives the buyer months of free optionality on your tax bill, and it gives you a fight at a moment when you have no leverage left.

• Pull the S election filing and acceptance, three years of returns, and the fixed asset schedule with adjusted basis. The recapture number lives there, and the date S status began decides the built-in gains question.
• Ask the buyer in writing whether it is a corporation for tax purposes and whether it intends to elect. That tells you which election is on the table.
• Get two after-tax numbers from your accountant: sale with no election, and sale with it, for every state where the company files.
• Push the allocation schedule into an exhibit at signing. At this size it is often left to a post-closing covenant, where the negotiation continues without you.
• Collect written commitments from every shareholder before signing, including non-selling holders, trustees and executors. One refusal ends it.
• Deliver your executed Form 8023, or the 336(e) agreement, at closing against payment. If the buyer needs optionality, sell it: fixed payment now, exercise by a date certain ahead of the deadline.

State elections and statements deserve their own line in the covenant: who prepares, who signs, who pays, and by when. As of August 2026, state treatment varies enough that silence becomes someone’s problem later, and that someone is usually the seller who has already been paid. Price the election, get paid at closing, and sign the forms last.