Final answer:
A Section 338(h)(10) election is a tax provision that allows a stock purchase to be treated as an asset purchase, offering tax benefits to both buyer and seller in an M&A deal. The buyer obtains a stepped-up basis leading to more significant deductions, while the seller may receive a higher purchase price or use it to offset tax liabilities.
Step-by-step explanation:
The Section 338(h)(10) election is a tax provision under the United States Internal Revenue Code that allows for the restructuring of certain business acquisitions. Essentially, it treats a stock purchase as an asset purchase for tax purposes. This can benefit buyers by allowing them to obtain a stepped-up basis in the assets of the acquired company, leading to greater future tax deductions. Conversely, sellers might consent to a Section 338(h)(10) election if they can offset their tax liabilities with losses or credits or if they receive an increased purchase price in exchange for the tax benefits accorded to the buyer.
Companies choose to utilize a Section 338(h)(10) election in an M&A deal primarily to optimize tax consequences. By treating the purchase as an asset sale, the buyer can start depreciating the assets afresh, based on the purchase price, which often results in higher depreciation expenses and, hence, lower taxable income in the initial years after the deal. Sellers may agree to this election because it may expedite the deal, or they might negotiate a higher purchase price.