M&A Tax Structuring, Corporate Acquisitions & IRC Section 338(h)(10)
IRC Section 338(h)(10) Basis Step-Up & Tax Shield PV Formula
Calculate Joint IRC Section 338(h)(10) / 336(e) Deemed-Asset-Sale 15-Year Section 197 Annual Amortization, Annual Buyer Cash Tax Shield, Present Value of the 15-Year Tax Shield Annuity, and Net Value Created After Seller Tax Gross-Up.
Unlock 15-year Section 197 goodwill tax shields while preserving legal stock-purchase contracts!
Buyers prefer asset purchases for the 15-year IRC Section 197 straight-line tax amortization of stepped-up goodwill and intangibles, whereas sellers prefer legal stock sales to transfer non-assignable customer contracts, licenses, and permits seamlessly! Jointly filing an IRC Section 338(h)(10) election (when buying an S-Corporation or an 80%-owned subsidiary out of a consolidated corporate parent!) treats a legal stock purchase as a DEEMED asset acquisition for tax purposes! Dividing Total Purchase Basis Step-Up by 15 years yields Annual Section 197 Deduction = StepUp / 15 and Annual Cash Tax Shield = (StepUp / 15) * Buyer_Tax_Rate, whose 15-year discounted annuity PV = Annual_Shield * ((1 - (1 + r)^-15) / r) creates positive joint deal value whenever PV_Tax_Shield exceeds the Seller’s Incremental Ordinary/Recapture Tax Gross-Up!
Verify on an S-Corp Platform Buyout—Qualified_Sec197_Basis_StepUp = $150.00M (B2 -> Annual Deduction = $150M / 15 = $10.00M/yr in E2), Buyer_Combined_Tax_Rate = 0.25 (25.0%, B3 -> Annual Cash Tax Shield = $2.50M/yr in E3), Tax_Shield_Discount_Rate = 0.10 (10.0%, B4 -> 15-Year Tax Shield PV = 2.50 * ((1 - 1.10^-15) / 0.10) = $19.02M in E4), and Seller_Tax_MakeWhole_GrossUp = $11.50M (B5): Net Joint Value Created by the Section 338(h)(10) Election is $19.02M - $11.50M = +$7.52M (E5)!
| Sec 338(h)(10) Tax Metric ($150M Step-Up, 25% Tax, 10% WACC, $11.5M Seller Gross-Up) | Formula | Verified Output |
|---|---|---|
| Annual Sec 197 Amortization ($M) | Total_Basis_StepUp / 15 | $10.00M/yr |
| Annual Buyer Tax Shield ($M) | Annual_Sec197_Amort * Buyer_Tax_Rate | $2.50M/yr |
| 15-Year Tax Shield PV ($M) | Annual_Shield * ((1 - (1 + r)^-15) / r) | $19.02M |
| Net Election Value Created ($M) | Tax_Shield_PV - Seller_Tax_GrossUp | +$7.52M (-$2.98M @ $22M C-Corp) |
15-Year Section 197 Tax-Shield Present Value & Net Value Created Formula
Validate StepUp > 0, Buyer_Tax_Rate in (0, 0.55), Discount_Rate r > 0, and non-negative Seller_GrossUp!
=LET(su_m, B2, tx_r, B3, ds_r, B4, gr_s, B5, IF(OR(su_m <= 0, tx_r <= 0, tx_r >= 0.55, ds_r <= 0, gr_s < 0), "Invalid Sec 338 Election Input", LET(sh_a, (su_m / 15) * tx_r, pv_s, sh_a * ((1 - ((1 + ds_r) ^ -15)) / ds_r), ROUND(pv_s - gr_s, 2))))Standalone C-Corp Double-Tax Destruction Check (Set Seller Tax Cost = $22.00M)
Test why regular standalone C-Corporations rarely elect deemed asset sales by setting Seller_Tax_Cost B5 = $22.00M (corporate + shareholder double tax): Net Election Value E5 turns negative (-$2.98M), destroying deal value!
=IF(ISTEXT(E5), E5, ROUND(E3 * ((1 - ((1 + B4) ^ -15)) / B4), 2))Try the example
Use the original values or change them to test your understanding.