www.loubar.org 6 Louisville Bar Briefs PROFESSIONAL EXCELLENCE Translating Tax: How Code § 338(h)(10) Converts a Stock Sale into a Deemed Asset Acquisition Ross D. Cohen, Kseniya A. Buck, Caitlin G. Rieser and Lucy L. McAfee When one company acquires another, buyer and seller alike should pay close attention to how they structure the transaction. In a stock sale, the buyer steps into the target company’s (“Target”) shoes, acquiring a cost basis in the stock, which the buyer cannot depreciate or amortize. By contrast, in an asset sale, the buyer acquires each asset directly, takes a cost basis in each one and re- ceives a stepped-up basis eligible for depreciation and amortization. Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (“Code”), offers a hybrid approach: the parties may jointly elect to recharacterize a stock purchase as a deemed asset acquisition, giving the buyer a stepped-up basis in Target’s assets and giving the seller the opportunity to share in the value of the buyer’s enhanced tax position through purchase-price negotiations while preserving the con- tractual simplicity of a stock-sale form, provided the transaction satisfies certain requirements. Eligibility and Mechanics To qualify for a Code § 338(h)(10) election, there must be a “qualified stock purchase,” meaning the buyer must acquire, through one or more taxable purchases within a 12-month acquisition window, stock repre- senting at least 80% of Target’s total voting power and total value. Code § 338(d)(3) (citing Code § 1504(a)(2)). However, not every stock purchase qualifies; the buyer must be an eligible corporate purchaser and must acquire the stock in a taxable transac- tion from an unrelated eligible seller. Code § 338(h)(3) (citing Code § 318(a)). In addi- tion, the buyer must acquire the stock from one of three categories of eligible sellers: [1] a selling consolidated group (a consolidated group that includes Target as a member), [2] a selling affiliate (a domestic corpora- tion that owns at least 80% of Target’s stock but does not file a consolidated return with Target), or [3] if Target is an S corporation, Target’s shareholders immediately before the acquisition date. Treas. Reg. § 1.338(h) (10)-1(c)(1). Once the parties confirm the transaction is eligible for a Code § 338(h)(10) election, the stock purchase agreement made will then usually include provisions reflecting this. After the closing of the stock purchase, the parties make the election jointly by filing Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases. Treas. Reg. § 1.338(h)(10)-1(c) (3). If Target is an S corporation, then every shareholder—including “shareholders who do not sell their stock”—must consent to the election. Id. The parties must file the elec- tion “not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs.” Id. For example, if the acquisition date falls in August 2026, then the filing deadline would be May 15, 2027. Id. How the Code § 338(h)(10) Tax Fiction Works Even though the parties still enter into a stock purchase agreement, Code § 338(h) (10) replaces the stock sale reality with a fictitious four-step transaction that pro- duces a deemed asset acquisition. Treas. Reg. § 1.338(h)(10)-1(d). In step one, the Code deems Target—now referred to as “Old Target”—as selling all of its assets to a new, unrelated entity (“New Target”), “in exchange for consideration that includes the discharge of its liabilities in a single transaction at the close of the acquisition date (but before the deemed liquidation).” Treas. Reg. § 1.338(h)(10)-1(d) (3). Old Target recognizes gain (or loss) on the assets “sold,” and New Target takes a fair market value basis in the acquired assets. Id. In step two, the deemed sale gains are re- ported on Old Target’s tax return because Old Target remains “a member of the selling consolidated group (or owned by the sell- ing affiliate or owned by the S corporation shareholders)” at the time of the deemed sale. Id. For example, if Old Target was taxed as an S corporation, then the “S corporation shareholders (whether or not they sell their AUGUST 26 Health & Wellness Committee Corner ALL MONTH AUGUST 31 CO-CHAIRS Jennifer Kleier Liz Mosler August is National Wellness Month, dedicated to self-care, stress management and building routines that actually sustain you. For lawyers, August often arrives as a deceptively quiet stretch before the fall ramp-up. That makes it one of the better opportunities in the calendar year to reset — not through a grand wellness program, but through small, consistent choices: sleep, movement, limits on after-hours communication and time that belongs to you. Use this month to build one habit you can carry into September. Women's Equality Day marks the 19th Amendment. In the wellness context, it is also a prompt to recognize that women in the legal profession carry a disproportionate share of caregiving responsibilities alongside demanding caseloads. Burnout and workplace stress affect women attorneys at elevated rates. Ask what your firm is doing to support them — not just in policy, but in daily practice. Check in with the women on your team this month. Not a formal survey, a real conversation about workload, support and what they actually need. August 2026 National Wellness Month Women's Health Equity Pick one wellness habit to build this month and protect it. One habit, consistently kept, is worth more than a plan you abandon in October. Mark August 31 on your calendar. Share what International Overdose Awareness Day means and why it matters in the legal profession specifically. GET INVOLVED JOIN THE HEALTH & WELLNESS COMMITTEE! Active LBA members who want to help promote wellness across the legal profession are welcome. Contact Lisa M. Murray at [email protected] to learn more. International Overdose Awareness Day August 31 remembers those lost to overdose and works to reduce the stigma around addiction. Substance use disorder in the legal profession is not rare. Studies consistently show that lawyers experience alcohol and drug dependency at rates significantly higher than the general population. High pressure, long hours and a culture that discourages asking for help creates real risk. If you or someone you know is struggling, KYLAP offers free, confidential support specifically for Kentucky lawyers and law students. Additionally, LBA members are eligible for assistance through The Wayne Corporation Employee Assistance Program (EAP), which provides confidential support services, including counseling and resources. Visit https://www.loubar.org/member- benefits/. UPCOMING LBA HEALTH & WELLNESS COMMITTEE HOSTED EVENTS: MAHJONG OPEN PLAY Date TBA · Watch for details from the H&W Committee 4TH ANNUAL PICKLEBALL PALOOZA Sunday, September 20 · Pickle & Pong More details - see page 12 (Continued on next page)
