Stock Sales Taxed as Asset Sales – How Tax Works
Feb 02, 2026
In episode 45 of How Tax Works, Matt Foreman discusses how to have stock sales taxed as asset sales by using F Reorganizations, selling wholly-owned subsidiaries, and elections under 336(e) and 338(h)(10).
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How Tax Works, hosted by FRB Partner Matthew E. Foreman, Esq., LL.M., delves into the intricacies of taxation, breaking down complex concepts for a clearer understanding of how tax laws impact your financial decisions. Through this, listeners are treated to a comprehensive breakdown of entity structures, from the robust shield of C corporations to the flexibility of partnerships and LLCs. Foreman navigates through the maze of tax considerations, shedding light on entity-level taxation, shareholder responsibilities, and nuanced tax strategies. Foreman shares valuable insights and practical advice, emphasizing the need for informed decision-making and consultation with tax professionals. From qualified small business stock to state and local tax considerations, no stone is left unturned in this illuminating exploration of tax law and entity selection.
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Transcript:
**This transcript has been prepared automatically by AI and may contain inaccuracies**
Matthew Foreman [00:00:00]:
Hello and welcome to the 45th episode of How Tax Works. I’m Matthew Foreman. In this episode, I’ll discuss stock sales, taxed as asset sales, talking about every org selling wholly owned subsidiaries through 38G, through 38H10, and 336E elections. How Tax Works is meant for informational and entertainment purposes only. This may be attorney advertising and it is not legal advice. Please hire your own attorney.
How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law, regulations, case law, guidance, and guidance to demystify how taxes shape the financial business decisions that we all make. You know, I’ve said that so many times, so many times. And I stumble on it about, I don’t know, one out of five, one out of 10. So we’re just gonna let that one roll, right? Sorry. Before we get started, administrative things. You know, new episodes in two weeks. The next episode will discuss.
The substance doctrine and the step transaction doctrine, most likely, assuming I get to recording it. The important thing is the context of that is I’m talk about it in a lot of what I’m call tax-focused investments and cryptocurrency wash sale rules and why they do exist even though they’re not securities for income tax purposes. And I think it’s really important because I get this question a lot and the answers that they get.
The taxpayer friendly answers that they get are often general misunderstandings of how tax works, ha ha. But also a cursory understanding of the underpinnings of what’s trying to be done here. And I think it’s really important from an income tax perspective to sort of set out why it’s wrong. Like why people’s understanding and what they’re trying to do is wrong. So I think that that’s really an important point. All right, anyway. So we’re talking about.
You know, stock sales, taxes, asset sales. This is a topic. If you ever see me do this in a webinar, this is one that I enjoy doing a lot. But also this is one that make when I talk through like how stuff works, clients will be like, man, you are a genius. How did you know how to do this? And I gotta tell you, this is literally just like knowing how to use the machinery at the shop. There is nothing that I’m doing here.
Matthew Foreman [00:02:18]:
That I view as particularly noteworthy or impressive. I view this as just core tax structuring that if you do enough, you just get used to it. You learn what the tools do and you go, all right, I got this, right? So this is kind of how I do it. Before you do any tax structuring, before you do any sale, there’s two rules that I always tell you. One, only pay tax when you’re getting cash.
And two, make sure your clients know when they’re gonna pay tax and roughly how much, right? If you tell them you to pay 105,000 and they have to pay 106, they won’t care. If you tell them you have pay 105,000 and they have to pay 217, they are going to be very displeased with you. Politely, well maybe not politely, but very displeased. I always tell people to check, double check and be certain. Poor communication leads to angry clients, so I strongly, politely but strongly recommend you have that conversation.
Sometimes you should lean into taxable transactions. If you’re selling stock, you get capital gains. And you could also, it’s like, talked about a number of times now, qualify some business stock under 1202, section 1202 of the code. It’s a taxable transaction, but you might not pay tax, right? So that’s really important to note. So people always say, what about taxable? Why? So you want tax free? You want tax free? I’m like, well, maybe, right? It depends, right? It can really matter or not matter.
Or if you’re selling assets, right, the buyer will often pay more because there’s depreciation or amortization. There can be a higher net for sellers, especially now, right, 199 Cafe and pass through entity taxes. I gotta tell you, I think selling assets is actually better than selling stock a lot of times because of the p-tets. Not gonna go into that. Discussed a little bit here, but not really. Whenever you do it, I always say, you know, generally form controls tax. So watch out for entities that have or had.
Lot of real estate, and where the seller or buyer is foreign, there’s transfer tax rules, FERPTA, other withholding can be really important. And when you sell equity, there can be some real benefits, tax once, generally capital gains, like I said, potential for QSBS, few approvals, no retitling of assets, right? If you’ve ever sold like the assets of a car dealership, it’s supposed to be equity.
Matthew Foreman [00:04:44]:
Like that’s awful. Know, they own title to 300 cars, 500 cars, a thousand cars, I don’t know. Making up numbers at this point, seven cars, who cares? It’s annoying, it’s work. If you’re a lawyer, you’ll like it. If you’re a lawyer who doesn’t feel like sitting there doing the most boring thing, actually that might be a topic, a task for AI, but neither here nor there, right? But if you’re buying the equity, generally speaking, no additional depreciation, you get it, and you get a carry over tax attributes, which might not be great. But you know, if you’re not retitling assets, you…
You know, the question I always get is, well, what if we could do it, right? What if we get the corporate benefits of selling equity, which is the carryover tax, will sometimes carry over tax attributes, but no need to retitle, no need to rename things, but we get the tax benefits of the step-up basis, right? We’re already a password, QSDS isn’t an option, what can we do, right? In this, I’m only gonna be talking about corporate stuff. If you sell a LLC or any.
Know, LLC that’s disregard identity or an LLC or any partnership that’s taxed partnership, you can get either through revenue ruling 995, 996 and section 754 elections, you can get a step up in basis by selling the equity. Partnerships are much better and more flexible, especially in that regard. And so that’s important. This episode is only really gonna talk about corporate entities. That I’m also going to really aggressively lean into S-Corps.
But not entirely, I’ll talk about C-Corps a little bit. I always sort of assume that most people of C-Corps are just never gonna sell the assets. And if they do, they’re hemmed into being a C-Corp because of foreign investors or they’re a public company. If you’re a public company listening to my podcast, then welcome, I guess, that’s kind of confusing. Anyway, so pre-sale F-Riorganizations, right? What is an F-Riorg? If you’re listening to this and this is your first episode, go back. I don’t know what episode it is, but there’s one called What the F is an F-Riorg?
And I talk about what the F is in F-Re-Org, right? And is a mere change in form, however affected, however effectuated, whatever the word is. And it can be a variety of things. Change in a corporation’s name, change in the form of corporations, such as an Inc to a Corp, a business trust to a state law Corp, LLC to a state law Corp, as long as they’re all taxed as corporations, right? F-Re-Org is a pure tax thing, 368A1 cap F of the Internal Revenue Code.
Matthew Foreman [00:07:12]:
You can use them to change the corporation state or incorporation. So move it from state A to state B. You can use it to convert from like a mutual savings and loan association to a stock savings and loan association. What the most common FRE org, at least the ones that I deal with, are used to basically drop a new entity below the S-Corp so that it’s an LLC, you can use a tax as partnership and do it as a mechanism to have a part sale, part rollover.
That is by far the most common F-reorg that when people are talking about F-reorgs, they do. I actually think there more F-reorgs than exist otherwise, because they are used for other things, but that’s the big one. Whenever we talk about pre-sale F-reorgs, there’s slides on this that I’m not gonna post, but basically what you mechanically have to think through, you have an S-corp with one or two or six shareholders at the start, it’s just the op-co.
And by the end of it, you’re gonna have a hold co, which is gonna be an S corp, and it’s gonna own the op co. And the op co is now a subsidiary, and it’s either a S corp that is a qualified sub-tabular S subsidiary or Q sub, or it is an op co that has either converted statutorily or there’s been a merger. So the op co is now an LLC with a single owner, so it’s a disregarded entity. That’s a single owner, a single member LLC. That’s the F reorg we’re talking about. That’s the end result.
Matthew Foreman [00:09:35]:
You can also do, I always say, a stock sale. S-Corps can hold C-Corps. S-Corps can do that. And that’s really important. That’s still a stock sale. You can do asset sales if you have a C-Corp that holds a LLC that’s disregarded. Obviously, C-Corps can’t hold S-Corps. They are an eligible shareholder, so they’re not allowed. And.
If you, you I’ve seen it where they have a C Corp that holds another C Corp, they own a couple, they’re trying to sell the subsidiary, like, well, how can we get this stuff up in basis? What can we do? What’s this, this, what’s that? And I always point out that that’s Gregory. That’s a stock sale, trying to sell it as an asset sale might not really be what you’re looking for. So there’s other ways to do it. Gregory is a fairly famous case, talked about it in a prior one, I reference it every so often. Never a good sign when there’s an audit and the IRS starts by saying, you know,
Could you describe how this is different from Gregory? I’ve never had that happen, but I suspect that it would be an unpleasant position to be in from an advisor standpoint. So let’s talk about, you know, we’ve talked about FRE orgs, we’ve talked about sales of Q subs and disregarded entities. But, you know what, before we actually get to that, let’s take a quick music break and we’ll come back for 338G, 338H10, and 336E election.
Matthew Foreman [00:11:29]:
Okay, so let’s come back. Now we’re going to talk about stock sales treated as asset sales under the various elections, right? This is situation where form does not control the tax. As a general rule, the three different ones you can do, there’s a 338 election, which the elections actually made under 338 G.
There’s an election that 338 H10 election at 330 60. Every so often I have people they’re like, oh, we’re do a 338 election. And then I have to sort of do the uncomfortable thing of like, well, which which one.
And they’re like, the 338. And I’m like, there’s two of them. They almost always meet 338H10. 336E is really the same as the 338H10 with a different buyer. As a general rule, you must sell at least 80 % of the business. You can creep to 80%. You just need control under 368C. It’s taxed as if you sold 100%. So if you only buy 80,
You make any of these elections. It is taxed if you sold 100. So the seller needs to be aware of this. The buyer won’t care. But the seller would be very interested. And it is an alternative to an F reorg for a tax re-rollover. I have never seen one of these where less than 100 % was sold. I’ve seen them discussed where they’re 99%, 98%.
I’ve had ones that I think ended up being them, but they didn’t hire me, where there was a 95 % and it was a small enough number where they made the decision that that’s what they’re gonna do and that’s the easier way to do it. But generally people want to be as maximally efficient so they’re gonna do an F for your.
Matthew Foreman [00:13:04]:
State specific issues. Some states ignore 338 H10 and 336 E elections. New Jersey does, kind of fascinating for me. Ohio’s cat commercial activity tax, actually it ignores these. So you’re fine, you don’t trigger the cat by doing this because it is an income tax and the commercial activity tax is technically not a income tax, which is interesting. I always say New York City is a party. So New York City ignores the existence of S-Corps, right? So it doesn’t, it just imposes a tax at city level.
So what ends up happening is you’re taxed at the entity level on these elections. So that’s a really important thing to do.
There are specific rules for related party that are pretty broad. No 338H10 or 338, which is G, or 336E if you’re related, you know, the buyer’s related to the seller, so watch out for that. However, if you do an F-reorg and sell a Q-sub, that is still good asset shell treatment. You don’t trigger 1239, because 1239 has different related party rules than the related party rules under 336E, 338.
And I think that’s really important. I think it’s really important that you know that sometimes you can do the same thing two different ways, and you do it in a way that will give you the favorable tax treatment. This is Gregory, right? You don’t have to pay more in tax. You just can’t structure in a way that makes no sense to get there.
So for the 338 election, which is 338G, form does not control the tax. The actual step is the seller sells the stock of the subsidiary to the purchaser. The pretend step is that the target then after the sale, the target then sells its assets to an unrelated person.
Matthew Foreman [00:14:41]:
Then the new target purchase all the assets back, right? Why would you do this? It sounds really daffy. Why would you sell it? And the buyer is like, want to, I want to trigger some gain here. And the answer is it’s easier to document than an actual sale and you don’t need to get certain approvals. And then for tax reasons, the tax implications of an asset sale. So you want that. What are the tax implications? Right? So you cannot, first off, it’s like can’t do.
You can’t offset the purchaser’s gains with the targets losses. 338H9 says no, but you can offset the target losses with the targets gain from a 338G election. So if it’s having an atrocious year and you sell it, that’s a way to actually trigger it. You can use NOLs. Obviously there’s the 80 % limitation, but that’s something you can actually do. So the target post-sale, so the inquirer through the target, right, bears the brunt of the taxes within. It’s at the entity level, but it does get the steps.
That’s one way to think about it and it is a fairly viable option. The next one is the H10 election, 338H10. The actual step is the acquirer purchases at least 80 % of the vote or value of the target stock from the seller. The pretend step starts coming in. The target is deemed to have you, so you ignore the purchase, okay? You ignore the actual step altogether. Whereas in 338 normally it actually happens, 338H10 it does not happen.
The target is deemed to have sold all its assets for cash while it’s in the old consolidated group, 1.338 H10-1D. The target is treated as if it is liquidated. Cash goes to the seller, 338 H10-1D as well. The seller inherits the tax liability. The seller’s basis in the new stock disappears. Then the acquirer creates a new corp, has the same EIN, same name as the acquired company. What a shocker.
Matthew Foreman [00:17:01]:
For an S Corp to undertake a 338H10, a transaction through 338H10 election. That’s really important to know. If it’s C Corp, you do need a consolidated group because you do need to impose corporate tax in a certain way. Then we’re gonna talk about 33060. 33060 is really interesting because it’s the same thing as 338H10 except the buyer does not have to be a corporation. I always leave this out in the first part. H10 elections.
Choir must be a corp, CRS doesn’t matter. In a 336E, the acquirer cannot be a CRS Corp. And I think this is really important is if you have a situation where the parent is acquirers a C Corp and the subsidiary is a disregarded entity, tax is a tax or LLC taxes disregard identity. That is still the C Corp buying it. You have to do the H10. However, if you just have an individual buying it, you have a partnership buying it, that’s you’re doing 336E.
Same steps, same everything as 338H10, couple little wiggles, couple little wrinkles, but same basic idea. I’m not gonna go into it. The reason people do this one in particular is after the sale, they take that corporation and with the new step up basis and they just convert it to an LLC, taxed as a partnership, tax disregard entity, they merge to make it whatever. And the idea is it’s a way to get out of the S-Corp or C-Corp structure, pretty common.
People are like, well, how did I not know this existed? And they’re like, well, when was it made into law? And I said, well, the law was actually part of the general utilities repeal as a part of the Tax Reform Act of 1986. And they’re like, but I’ve never done one before. I’ll say, yeah. So what happened is the code did not do anything by its own terms. The Internal Revenue Code said that 33060 is not operative until there are finalized regulations. They were not proposed until 2008, so 22 years later.
And then finalized in 2013. So five years after that, 27 years, okay, you are done with college and medical school by then and you’re halfway through your residency. Okay, by the time they did it pretty, pretty incredible. And I think that’s really important to note how long it took. You know, it’s really similar to FRE org than selling a disregarded entity, but no need to retitle the assets. And I think it’s really important to know who can do it. And this is something I hammer home. H10.
Matthew Foreman [00:19:25]:
Choir has to be a corp, CRS, 336E. A choir cannot, one word, cannot, not allowed to be a CRS corp. And I think that’s really important. All right, we’re gonna get a little more music and then I’m gonna bring it home with a couple kind of best practices and sort of some ancillary comments that I think tie this all together.
Matthew Foreman [00:20:00]:
Okay, so we’re gonna bring it home with stock sales treated as asset sales. So just sort of the other concerns department tying it all together. The character of the gains is whatever it would be if you were just to sell it. If you were to do like an earn out, for example, under Aerosmith v Commissioner 344 US 6.
The earn out retains the same character as when you sold it. So it doesn’t all become capital or doesn’t all become ordinary. It’s the same ratio. Ordinary income, sales bonus, stuff like that. That’s important.
I was still people with installment sales under 453. Watch out for 453 cap A. If you have a large enough amount that’s owed, I think that’s really important. The parties need to agree. And then don’t go rogue like in Danielson, 378 F2D, 771 Third Circuit decision. It exists in every circuit. That’s why there has not been any Supreme Court case, because the Third Circuit actually got it right. And basically one party decided, you know, we don’t like this. We’re going to make it capital. And yeah, Third Circuit said no. IRS said no.
Could agree with the IRS. I always tell people watch out for golden parachutes under 280G because you could have a, know, people always say, what happens? We have an S-Corp, we have an S-Corp and as anyone who deals with S-Corp knows that it’s really easy to blow the S-Election. So if you’ve accidentally blown the S-Election, you may have a golden parachute if you have to a deal bonus, right?
The most interesting, and I talked about this in my episode about golden parachutes, is that there is no golden parachute, which is a significant tax, if it could have been an S-Corp at the time, but it wasn’t for a variety of reasons. So if you just happened below the S-Election, but let’s just say that you had an ineligible shareholder and then they left. Then you sold, then you don’t have a golden parachute problem because it could have been an S-Corp at the time, even if it wasn’t. And I think that’s really important.
Matthew Foreman [00:21:55]:
Other benefits to talk about, there’s NOLs and deductions. So NOLs versus suspended losses. I always point out to people that suspended losses are usable immediately in full with no restrictions, whereas NOLs have a rule where they can only offset up to 80 % of your income. So NOLs are slower than suspended losses. So if you have losses and you wanna use it, do analysis, see if they’re actually suspended losses, passive activity, at-risk rules, things like that, because that actually can be tax beneficial. I have run into that situation.
It’s something you want to think about. Carryover NOLs and credits. There are limitations if you buy it. If you’re doing a C Corp and you’re selling the stock, it’s important to know, can you actually use the NOLs in loss corporations or use the carry forward credits? The answer is often no, you really can’t. And so it’s important to make sure you understand the math of that.
You know, there’s business expenses between the parties, like when the expenses happen, if there’s a buyer and a seller, and they’re totally different, right? If you just buy the stock of a C Corp, it kind of cranks itself, keeps going along. But if you buy the stock of a C Corp, and you do a 338H10 election, for example, it’s two separate returns altogether. It’s totally separate. And for an S Corp, that can be important too, so it’s really important to do it. Drafting best practices, be clear, discuss early and often.
Give slide decks as to what’s going on. I don’t think it’s possible, well, I don’t think it’s possible to slip this in without someone noticing who’s paying attention and knows what they’re doing. It is theoretically possible to slip this in if people don’t know what they’re doing, don’t have proper tax counsel or proper tax advisor generally. Talk to accountants, make sure they know what to do, how this is done, what’s important. And, you know, look, the lead here, the most important thing is talk to your clients. Explain to them what’s going on, explain what they have to do.
People always ask me, know, are these going to change? Is this going to, is this this and that? And I, don’t know. I mean, it hasn’t changed. I don’t see this as a big issue. So I don’t really see how this would change. It is possible that states could couple, decouple, whatever, you know, New Jersey is obviously out in certain ways, but it’s really important. You know, what I always point out to people is the 336E, 338H10 election.
Matthew Foreman [00:24:13]:
Can actually be much more efficient for pass-through entities due to the P-TEKs. State and local tax, the deduction cap, I know they raised it, but for a really high income earner, half a million dollars, $600,000 is not a huge amount of income, especially when you’re selling a business in a year, so the P-TEK becomes really important, and I think it’s really important. Anyone who says, and I always talk about, say this, whenever I talk about legislative or possible potential legislative changes, is anyone who says they know what’s gonna happen is either lying or stupid or—both. Always, always a great thing. And I think that’s really important to say that look like, yes, asset sales do get generally get higher purchase prices, not necessarily. The seller may also look at it and say, well, I don’t really want to deal with everything that I have to deal with. If I do this. So maybe I’ll just buy the stock and call it a day. Or they can get it at a discount because look, especially QSBS, right? If the seller is getting QSBS.
They are totally fine with a 30 % cut or 20 % cut or whatever because they’re paying no tax, right? So you look at, you know, corporate tax rates are 21 % plus whatever the state is, effective rate 25%, you’re gonna slide that over, you know, 15 years for amortization, right? So like the time value of money might be only like an eight or 10 % drop off in purchase price. So like the assets may be worse, may be better. You might actually get more, especially with P-TEKs, right? You sell stock, there’s no P-TEK.
Because you’re selling stocks. So it depends, right? It depends. And it can be really important. So I think it’s really important to make sure you know you’re controlling the type of entity it is, how it’s taxed, what it is, model it out, have the discussion. Definitely talk to your clients.
All right, that was the 45th episode of How Tax Works. Hope you enjoyed it. Hope you learned something. I’ll be back in two weeks with the 46th episode, where I’m gonna talk about the economic substance doctrine and the step transaction doctrine in the context of, I’ll just say, people’s general misunderstandings of how tax functions. Now, for the best song of all time, hope you enjoy.