Section 336(e) Election
Section 336(e) Election is a tax concept relevant to M&A transaction structuring — how it applies affects a seller's after-tax proceeds and a buyer's cost basis.
Full Definition
A Section 336(e) election is a U.S. tax provision that allows a corporate seller to treat a sale of at least 80% of a subsidiary's stock as an asset sale for tax purposes, even though the transaction is legally structured as a stock sale. The election results in a deemed asset sale and purchase: the selling corporation is treated as having sold all of the subsidiary's assets at fair market value, and the buyer corporation receives a step-up in tax basis equal to the purchase price allocation — similar to the tax treatment under Section 338(h)(10) but with a broader set of qualified purchasers.
Section 336(e) was created to extend asset-sale tax treatment to situations where a Section 338(h)(10) election is unavailable — specifically when the buyer is not a corporation or when there are multiple sellers. A 338(h)(10) election requires both buyer and seller to be corporations and a joint election. Section 336(e), by contrast, is made unilaterally by the seller and can apply when the buyer is an individual, a partnership, or a pass-through entity.
In SMB M&A, Section 336(e) is most relevant when a C-corporation parent sells a subsidiary in a stock deal to a buyer (often an individual or PE fund partnership) who wants a step-up in asset basis but cannot make a 338(h)(10) election because the buyer does not qualify. The election gives the seller ordinary income tax exposure on the deemed asset sale (which it typically would have avoided in a stock sale) while giving the buyer a higher depreciable tax basis.
Since Section 336(e) increases the seller's tax burden, buyers typically compensate sellers through a tax gross-up in the deal economics — effectively paying the seller more to make the election economically neutral. The deal math requires careful modeling by both parties' tax advisors to ensure the step-up value to the buyer justifies the gross-up cost.
Seller vs. Buyer Perspective
A Section 336(e) election increases your tax burden — you will owe ordinary income tax on the deemed asset sale rather than capital gains tax on the stock sale. Agree to the election only if the buyer provides adequate compensation through a price gross-up. Your tax advisor should model the precise after-tax impact and require the buyer to cover the incremental tax cost dollar-for-dollar. Do not agree to a 336(e) election without independent tax counsel.
If you are acquiring a corporate subsidiary in a stock deal and want a stepped-up asset basis to maximize depreciation and amortization, explore whether Section 336(e) is available and whether the seller will agree to the election in exchange for a gross-up payment. Model the present value of the tax savings from the stepped-up basis and compare it to the gross-up cost — if the NPV of basis benefits exceeds the gross-up, the election is economically additive for you.
Real-World Example
A PE fund (organized as a partnership) acquired 100% of a corporate subsidiary from a public company parent for $20M in a stock deal. The fund wanted a stepped-up asset basis to generate $2M in incremental annual amortization, creating approximately $500K per year in tax savings. Since the fund was a partnership, a 338(h)(10) election was unavailable. The parties agreed to a Section 336(e) election. The seller's incremental tax cost was $1.8M. The buyer paid a $1.8M gross-up, making the seller indifferent to the election, while the buyer gained $500K/year in amortization benefits over the 15-year intangible amortization period.
Why It Matters & Common Pitfalls
- !Missed filing deadlines. Section 336(e) elections must be filed by the due date (including extensions) of the seller's tax return for the year of the sale. Missing the deadline permanently forfeits the election.
- !No gross-up negotiation. Sellers who agree to a 336(e) election without modeling the incremental tax cost and negotiating a gross-up are giving away value. Always quantify the election's tax impact before agreeing.
- !State tax conformity issues. Some states do not conform to Section 336(e). A federal 336(e) election may not produce a state-level basis step-up, creating a federal/state mismatch. Model state tax impact separately.
- !Double taxation exposure. For C-corporation sellers, the deemed asset sale under 336(e) generates gain at the corporate level, and then dividending out the proceeds generates a second level of tax. Proper modeling must account for both levels of tax.
Frequently Asked Questions
What is Section 336(e) Election in M&A?↓
When does Section 336(e) Election come up in a business sale?↓
Related Terms
338(h)(10) Election
A joint tax election that lets a stock sale be treated as an asset sale for federal tax purposes, giving the buyer a stepped-up tax basis in the company's assets while the seller recognizes gain as if assets were sold.
Capital Gains (Short vs Long Term)
The tax treatment of gain from selling a capital asset (like a business). Long-term capital gains (asset held >1 year) are taxed at preferential federal rates (typically 20%); short-term gains and ordinary income can be taxed at up to 37%.
Purchase Price Allocation
The allocation of total purchase price across asset categories (inventory, equipment, real estate, goodwill, etc.) for tax purposes under IRC Section 1060 — affecting seller's tax treatment and buyer's future depreciation deductions.
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Disclaimer: The information provided on this page is for educational and informational purposes only. It should not be considered financial, legal, or investment advice. Business valuations depend on many factors specific to each situation. Always consult with qualified professionals — including business brokers, CPAs, and M&A attorneys — before making acquisition or sale decisions. LegacyVector is not a licensed broker, financial advisor, or attorney. Data shown may be based on limited samples and may not reflect current market conditions.
LegacyVector Research Team
Reviewed by M&A professionals · Updated April 2026