Rule Atlas
IRC § 338: Stock vs. Asset Transactions
Under IRC § 338 (AICPA / FASB / IRS), stock vs. Asset Transactions establishes the authoritative rules tested on the CPA Exam. Analyze the critical tax consequences of structuring a business sale as a stock or asset deal, including the §338(h)(10) and §338(g) elections, for both C corporations and S corporations, with a deep dive into purchase price allocation and the built-in, verified against VoraPrep's CPA Exam blueprint.
Worked Example: The C-Corporation Tax Gap
| Parameter | Value |
|---|---|
| Sale Price (FMV) | $20,000,000 |
| Seller's Basis in Corporate Assets | $8,000,000 |
| Seller's Basis in Apex Stock | $5,000,000 |
| Corporate Tax Rate | 21% |
| Long-Term Capital Gains + NIIT Rate | 23.8% |
For the tax year 2026 (post-OBBBA window), Alpha Corp., a C corporation, received a $100,000 dividend from Beta Corp., a domestic C corporation. Alpha Corp. owns 25% of the outstanding stock of Beta Corp. What is the amount of Alpha Corp.'s dividends received deduction (DRD) for this dividend?
Worked Example: The C-Corporation Tax Gap
Scenario: Let's quantify the difference. Apex Inc., a C-corp, agrees to be acquired for $20 million.
- | Parameter | Value | | :--- | :--- | | Sale Price (FMV) | $20,000,000 | | Seller's Basis in Corporate Assets | $8,000,000 | | Seller's Basis in Apex Stock | $5,000,000 | | Corporate Tax Rate | 21% | | Long-Term Capital Gains + NIIT Rate | 23.8% |
- Scenario 1: Asset Sale (Double Taxation) 1. Corporate-Level Tax: The corporation sells its assets. Gain: $20,000,000 (FMV) - $8,000,000 (Asset Basis) = $12,000,000 Corporate Tax: $12,000,000 x 21% = $2,520,000 2. Shareholder-Level Tax: The corporation distributes the remaining cash in a liquidation. Cash to Distribute: $20,000,000 (Proceeds) - $2,520,000 (Tax) = $17,480,000 Shareholder Gain: $17,480,000 (Distribution) - $5,000,000 (Stock Basis) = $12,480,000 Shareholder Tax: $12,480,000 x 23.8% = $2,970,240 3. Total Impact: Total Tax Paid: $2,520,000 + $2,970,240 = $5,490,240 * Seller's Net Proceeds: $20,000,000 - $5,490,240 = $14,509,760
- Scenario 2: Stock Sale (Single Taxation) 1. Shareholder-Level Tax: The shareholder sells their stock directly. Shareholder Gain: $20,000,000 (Sale Price) - $5,000,000 (Stock Basis) = $15,000,000 Shareholder Tax: $15,000,000 x 23.8% = $3,570,000 2. Total Impact: Total Tax Paid: $3,570,000 Seller's Net Proceeds: $20,000,000 - $3,570,000 = $16,430,000
- The stock sale leaves the seller with an additional $1,920,240 in after-tax cash. Therefore, from the seller's perspective, the stock sale is overwhelmingly superior.
Common CPA Exam Distractors on IRC § 338
- 1Use this systematic approach to deconstruct any business sale scenario on the exam:
- 2Step 1. Identify the Entity Type. Is the target a C-corp, S-corp, or a consolidated subsidiary? This is the most critical first step, as it dictates the entire tax landscape (double vs. single tax).
- 3Step 2. Determine the Transaction's Legal Form. Is it a stock sale or an asset sale? The default tax treatment follows this legal form unless an election is made.
- 4Step 3. Scan for Special Elections. Does the fact pattern mention a §338(h)(10) or §338(g) election? If so, the tax treatment decouples from the legal form. A stock sale will be treated as an asset sale for tax purposes.
- 5Step 5. Check for Nuances and Traps. Is there a C-corp that recently converted to an S-corp (potential BIG tax)? Are there NOLs involved (potential §382 limitation or a reason for a §338(g) election)?
Frequently Asked Questions: IRC § 338
What is the core rule under IRC § 338 (Stock vs. Asset Transactions)?
Under IRC § 338 (AICPA / FASB / IRS), stock vs. Asset Transactions establishes the authoritative rules tested on the CPA Exam. Analyze the critical tax consequences of structuring a business sale as a stock or asset deal, including the §338(h)(10) and §338(g) elections, for both C corporations and S corporations, with a deep dive into purchase price allocation and the built-in, verified against VoraPrep's CPA Exam blueprint.
How is IRC § 338 tested on the CPA Exam?
Use this systematic approach to deconstruct any business sale scenario on the exam: Step 1. Identify the Entity Type. Is the target a C-corp, S-corp, or a consolidated subsidiary? This is the most critical first step, as it dictates the entire tax landscape (double vs. single tax).
Where can I practice CPA Exam questions on Stock vs. Asset Transactions?
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.