Rule Atlas
IRC § 338: Advanced M&A Tax Strategy: Section 338 Elections
Under IRC § 338 (AICPA / FASB / IRS), advanced M&A Tax Strategy: Section 338 Elections establishes the authoritative rules tested on the CPA Exam. A world-class deep dive into Section 338 elections for corporate acquisitions. VoraPrep verifies every threshold, worked table, and practice question below against the current CPA Exam blueprint.
Worked Example: Section 338(h)(10) Election in Practice
| Item | Amount |
|---|---|
| Stock Purchase Price | $15,000,000 |
| Sarah's Stock Basis (Outside Basis) | $3,000,000 |
| T Corp's Asset Basis (Inside Basis) | $5,000,000 |
| T Corp's Liabilities Assumed by P Corp | $2,000,000 |
On January 15, 2026, Polaris Corp. purchased 100% of the stock of Titan Corp. for $5,000,000 in a qualified stock purchase. At the time of the acquisition, Titan's assets had a collective fair market value of $4,500,000 and an adjusted tax basis of $2,000,000. Polaris Corp. makes a timely and valid election under IRC Section 338(g). What is the amount of gain or loss that Titan Corp. must recognize on the deemed sale of its assets?
Worked Example: Section 338(h)(10) Election in Practice
Scenario. P Corp agrees to acquire all the stock of T Corp, an S corporation, from its sole shareholder, Sarah. The transaction closes on December 31, 2026. Both parties agree to make a joint Section 338(h)(10) election.
- | Item | Amount | | :--- | :--- | | Stock Purchase Price | $15,000,000 | | Sarah's Stock Basis (Outside Basis) | $3,000,000 | | T Corp's Asset Basis (Inside Basis) | $5,000,000 | | T Corp's Liabilities Assumed by P Corp | $2,000,000 |
- Analysis without the Election (Baseline) 1. Seller (Sarah): Sarah has a capital gain of $12,000,000 ($15,000,000 amount realized - $3,000,000 stock basis). 2. Buyer (P Corp): P Corp takes a $15,000,000 basis in T Corp's stock. T Corp's assets retain their old $5,000,000 carryover basis. P Corp gets no new tax shield from depreciation.
- Analysis with the Section 338(h)(10) Election The stock sale is ignored. The transaction is a deemed asset sale and liquidation.
- Step 1. Calculate ADSP & Deemed Asset Sale Gain:
Common CPA Exam Distractors on IRC § 338
- 1When you encounter a corporate acquisition on the TCP exam, use this systematic approach to dismantle the question.
- 2Step 2. Identify the Election Type and Eligibility. The facts will tell you if an election is made. Is it a unilateral §338(g) or a joint §338(h)(10)? For an (h)(10), confirm the target is eligible (an S-corp or a subsidiary in a consolidated group).
- 3Step 3. Calculate the Deemed Sale Price (ADSP). The seller's gain or loss is based on the ADSP. The core formula is the grossed-up amount realized on the stock plus the target's liabilities. Don't forget the liabilities!
- 4Step 4. Determine the Buyer's New Basis (AGUB). The buyer's new stepped-up basis in the target's assets is the AGUB. The core formula is the grossed-up basis in the purchased stock plus the target's liabilities. This value is then allocated among the assets.
- 5Purpose: A Section 338 election treats a stock purchase as an asset purchase for tax purposes, allowing the buyer a stepped-up basis in the target's assets.
Frequently Asked Questions: IRC § 338
What is the core rule under IRC § 338 (Advanced M&A Tax Strategy: Section 338 Elections)?
Under IRC § 338 (AICPA / FASB / IRS), advanced M&A Tax Strategy: Section 338 Elections establishes the authoritative rules tested on the CPA Exam. A world-class deep dive into Section 338 elections for corporate acquisitions. VoraPrep verifies every threshold, worked table, and practice question below against the current CPA Exam blueprint.
How is IRC § 338 tested on the CPA Exam?
When you encounter a corporate acquisition on the TCP exam, use this systematic approach to dismantle the question. Step 2. Identify the Election Type and Eligibility. The facts will tell you if an election is made. Is it a unilateral §338(g) or a joint §338(h)(10)? For an (h)(10), confirm the target is eligible (an S-corp or a subsidiary in a consolidated group).
Where can I practice CPA Exam questions on Advanced M&A Tax Strategy: Section 338 Elections?
Test yourself instantly with the free playable CPA Exam question on this page, or launch VoraPrep's full CPA Exam adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/cpa.