Why might a seller choose to engage in a 338 (h)(10) deal even if the tax treatment is unfavorable?

In the context of M&A transactions, a 338(h)(10) election allows a buyer to treat the acquisition of a subsidiary as an asset purchase for tax purposes while giving the seller the benefits of a stock sale. Even if the tax treatment may initially seem unfavorable, there are strategic reasons a seller might still consider this option.

Opting for a 338(h)(10) deal can provide a seller with an opportunity to offset the capital gains tax that arises from the sale by utilizing tax losses from other areas of its business. This means that while the immediate tax implications of the 338(h)(10) election may not be ideal, the seller can leverage existing tax attributes to lessen the financial impact. In instances where the seller has accumulated losses or other tax attributes, combining these with the gains from the sale can create a more favorable overall tax situation.

This perspective highlights why a seller may choose to proceed with a 338(h)(10) deal despite potential tax drawbacks. By utilizing potential offsets, they may find the overall financial outcome more advantageous in the long term, aligning with their broader tax strategy.