Most buyers know the tradeoff: stock deals preserve licenses and contracts, but asset deals deliver the stepped-up tax basis that fuels future depreciation. Section 338 of the tax code exists precisely to close that gap — letting a buyer keep the legal form of a stock purchase while capturing the tax treatment of an asset acquisition. This episode of HoldCo unpacks the mechanics and limits of the Section 338 election, explaining when it creates genuine economic value and when it quietly makes a deal more expensive.

The episode walks through the full landscape of 338 strategy, covering:

• Why stock deals sacrifice tax efficiency — buyers inherit the seller's historical asset basis, locking out the depreciation benefits they'd get in a true asset purchase.
• How a 338 election works — when a buyer acquires at least 80% of a target's stock within a 12-month window, they can elect to have the transaction treated as an asset sale for tax purposes, triggering a step-up in basis on the target's assets.
• The catch that limits its use — the deemed asset sale triggers a corporate-level gain, creating an immediate tax cost that often wipes out the benefit unless something specific offsets it.
• The NOL scenario — when the target carries significant Net Operating Loss carryforwards, those losses can absorb the triggered gain, making the election genuinely powerful and the depreciation upside essentially free.
• Section 338(h)(10) and C-corp subsidiaries — this joint-election variant applies when the target is a subsidiary in a consolidated tax group, delivering a single layer of tax for the seller and a clean basis step-up for the buyer, without the double-taxation problem that haunts the standard election.
• Procedural and eligibility traps — the filing deadline (IRS Form 8023, due by the 15th day of the ninth month after the acquisition month) is hard and unforgiving; S-corp targets add further complexity; and the full after-tax impact must be modeled across every entity in the structure before any election is made.

The episode closes with a practical framework: run the numbers under every applicable structure — straight stock deal, asset deal, standard 338, and 338(h)(10) — before terms are locked. The analysis depends on clean tax documentation and experienced transaction counsel in the room early. For more on how asset structure shapes buyer appetite more broadly, the episode Asset-Light vs. Asset-Heavy: What Really Drives Buyer Appetite in M&A is a strong companion listen.

Investment Bank