11.2.3.2. Stock vs. Asset Purchases and Section 338(h)(10) Elections
From a tax perspective, stock purchases tend to be better for the seller, whereas asset purchases tend to be better for the buyer.
Proceeds from stock purchases are less likely than proceeds from asset purchases to be subject to taxation at the higher ordinary income rate, as opposed to the capital gains rate. Additionally, stock purchases are less likely than asset purchases to result in double taxation for the seller. Double taxation is when proceeds are taxed at the corporate level, distributed to shareholders in the form of a dividend, and taxed again at the individual level.
However, asset purchases typically give the buyer a stepped-up basis in the purchased assets. A stepped-up basis is an increase in the cost basis of an asset. In this case, the increase would be due to the fact that the asset is more valuable at the time the buyer buys it than it was at the time the seller bought or built it. A higher cost basis allows for larger depreciation deductions, and also reduces the buyer’s capital gains tax if the acquired asset is later resold.
A stock purchase typically doesn’t give the buyer a stepped-up basis in the target’s assets, because the target’s assets technically haven’t changed hands: the target owned them before the transaction, and still owns them after the transaction. Rather, it is the target itself that is under new ownership.
If a stock purchase is specifically of stock in a subsidiary of the seller (as opposed to the seller’s own stock), the Internal Revenue Code offers a third option: the buyer and seller may jointly make a Section 338(h)(10) election, allowing both sides to treat the stock purchase as an asset purchase for tax purposes. Unlike a standard asset purchase, the seller avoids double taxation. The buyer, for its part, takes a stepped-up basis in the subsidiary.
