M&A Tax Structures: Stock vs Asset, 338(h)(10), F-Reorg

Introduction

Every M&A deal has two parallel architectures. The first is the legal and commercial structure that the deal lawyers, M&A bankers, and operating teams negotiate. The second is the tax structure that determines who pays tax, when, and on what base. The two are linked: a single decision about whether to sell shares or assets, whether to make a 338(h)(10) election, whether to pre-sale F-reorganize an S corporation, or whether to design a deal as a tax-free reorganization under Section 368(a) can shift hundreds of millions of dollars between buyer, seller, and the U.S. Treasury. Bankers who can navigate this architecture earn senior bankers' trust faster, defend their valuation models more credibly, and move into PE roles with a leg up on candidates who only know the M&A process at the surface.

This guide walks through the full M&A tax-structuring toolkit that strategic acquirers, private equity buyers, and their advisors actually deploy in 2026. It covers the baseline stock-versus-asset decision, the Section 338(h)(10) and 338(g) elections, the F-reorganization playbook that has become the dominant pre-closing structure for middle-market S-corp deals, the Type A, B, and C tax-free reorganizations under Section 368(a), Section 355 spin-offs and the Morris Trust rule, NOL preservation and the Section 382 limitation, and the practical decisions that the deal team negotiates against the tax accountants. The goal is to give you enough fluency to defend a tax-structure question in an interview, recognize what the senior banker is asking when she says "we should look at an F-reorg here," and read a deal proxy or S-4 with an eye for how the parties allocated tax cost.

The most fundamental tax decision in any M&A transaction is whether the buyer acquires the target's stock (or other equity interests) or its assets. The two structures have very different consequences for both sides, and most of the more advanced tax structures in this guide exist precisely to bridge the buyer-versus-seller preference gap.

In a stock deal, the buyer acquires the target's equity from its existing shareholders. The target corporation continues to exist with the same tax attributes (basis in assets, NOLs subject to Section 382, tax accounting methods, prior tax positions) and continues to own its assets directly. The buyer's tax basis in the target's assets is therefore unchanged from before the deal: the buyer inherits the seller's historical, depreciated tax basis (a "carryover" basis). The seller recognizes capital gain (or loss) on the difference between sale proceeds and tax basis in the stock sold.

In an asset deal, the buyer acquires specific assets (and assumes specific liabilities) directly from the target entity. For tax purposes, the target sells each asset individually. The buyer takes a stepped-up tax basis equal to the purchase price (allocated across assets under Section 1060 rules), which usually unlocks materially higher future depreciation and amortization deductions, including amortization of Section 197 intangibles such as goodwill, customer relationships, and assembled workforce over 15 years. For deeper mechanics of how the price is allocated across asset classes, see the purchase price allocation guide.

The seller side is where asset deals get expensive. A C-corp asset sale triggers two layers of tax: first at the corporate level on the gain on each asset (often with depreciation recapture taxed as ordinary income rather than capital gain), then again at the shareholder level when after-tax proceeds are distributed. This double taxation is why C-corp sellers almost always push for stock deals. Pass-through sellers (S corporations, partnerships, LLCs taxed as partnerships) have only one level of tax, which makes asset-deal structures more tolerable but still rarely optimal compared to pass-through equity sales.

For a non-tax-centric walkthrough of when each structure is used commercially and legally, see the broader asset vs stock purchase explainer.

The economic gap between the two structures is rarely closed by goodwill alone. A buyer who values the step-up at $50 million of present-value tax savings and a seller who will pay $20 million of incremental tax in an asset structure rather than a stock structure have a $30 million zone of agreement that the deal team will negotiate over through purchase-price grossups and choice of structure. Sometimes the parties simply pick the structure that captures more total value and split the surplus. Other times, the Internal Revenue Code offers a cleaner solution.

The most famous tax-bridging election in M&A is the Section 338(h)(10) election. It is available only in very specific circumstances, and when those are met it lets the parties get the legal simplicity of a stock sale and the tax economics of an asset sale at the same time. For that reason it is sometimes called "the unicorn of M&A."

Section 338(h)(10) Election

A joint buyer-seller tax election that treats a qualifying stock acquisition as if the target sold all of its assets to a hypothetical new corporation and then liquidated, for tax purposes only. The transaction is still a stock sale for legal, contractual, and operational purposes. The election is available when the target is an S corporation or a subsidiary member of a consolidated group, the buyer is a corporation, and the buyer acquires at least 80% of the target's stock. Both buyer and seller must consent to the election, which is filed on IRS Form 8023.

When 338(h)(10) Works

Three eligibility conditions must hold for a 338(h)(10) election. First, the target must be either an S corporation or a subsidiary of a consolidated group (a corporate subsidiary owned by a U.S. parent that files a consolidated federal income tax return). Second, the buyer must be a corporation (not an individual, partnership, or LLC taxed as a partnership, although a corporate LLC subsidiary of a PE fund holding company can qualify). Third, the buyer must acquire at least 80% of the target's stock by vote and value within a 12-month period (a "qualified stock purchase").

Both buyer and seller must consent to the election. There is no unilateral 338(h)(10): a buyer cannot impose it on a reluctant seller, and a seller cannot make it without the buyer.

What the Election Does for Each Side

For the buyer, the election delivers exactly the tax economics of an asset deal: stepped-up basis across the target's assets equal to the grossed-up purchase price (allocated under the Section 1060 residual method), full depreciation and amortization restart on the step-up amount, and Section 197 amortization of goodwill, trade names, customer relationships, and other intangibles over 15 years. The buyer does not have to negotiate individual asset transfers, deal with sales tax on each asset, or face the contractual mess of separating assets from a legal entity. From the buyer's operational perspective, it is a stock deal. From the buyer's tax perspective, it is an asset deal.

For the seller, the election shifts the tax base. Instead of selling stock and recognizing capital gain on the stock-basis differential, the seller is treated as selling assets at the corporate level and then liquidating. For an S-corp seller, this means the gain is reported as ordinary or capital depending on the asset, with depreciation recapture taxed as ordinary income, and inventory gain taxed as ordinary income. This is generally less favorable than a pure stock sale, where the entire gain is capital. The mismatch is what makes 338(h)(10) negotiations interesting.

The 338(g) Election: The Cross-Border Cousin

The closely related Section 338(g) election is unilateral (the buyer can make it without the seller's consent) and is generally only useful when the target is a foreign corporation. In that case, the buyer's election triggers gain at the foreign target level, which the U.S. seller may not feel because the seller has no U.S. tax exposure on the foreign sub. The 338(g) election lets the U.S. buyer step up the inside basis of a foreign target's assets for U.S. tax purposes (with implications for GILTI, Subpart F, and foreign tax credit calculations) without imposing additional tax cost on a U.S. seller. The 338(g) is genuinely buyer-friendly and is therefore much more common in cross-border deals than its 338(h)(10) cousin is in domestic ones.

For domestic deals where the target is an S corp and the seller refuses the 338(h)(10) gross-up, the modern alternative is the F-reorganization.

The F-reorganization, named after Section 368(a)(1)(F) of the Internal Revenue Code, has become the dominant pre-closing tax structure for U.S. middle-market M&A involving S-corp targets. The mechanics are intricate but the economics are clean: the structure produces a tax basis step-up for the buyer, preserves a single level of tax for the seller (with capital-gain treatment on most of the gain), and avoids the rigidities of a 338(h)(10) election.

F-Reorganization

A statutory tax reorganization under Section 368(a)(1)(F) that involves a "mere change in identity, form, or place of organization" of a single operating corporation. In the M&A context, the F-reorg is used pre-closing to convert an S corporation's tax identity into a holding company structure, allowing the seller to sell partnership interests (treated as an asset sale for tax) while operationally selling a single integrated entity. The structure delivers a buyer-side step-up in tax basis without the buyer-corporation and 80% requirements of a 338(h)(10) election.

The Standard F-Reorg Sequence

The standard pre-sale F-reorganization runs the following sequence over a few days or weeks immediately before signing or closing.

Why F-Reorgs Beat 338(h)(10) Elections in 2026

The F-reorganization has steadily displaced the 338(h)(10) election as the preferred S-corp structure because it offers four practical advantages.

First, the F-reorg accommodates rollover equity. PE buyers routinely require sellers to roll a portion of their proceeds (typically 15% to 30%) into the new buyer entity to align incentives post-close. A 338(h)(10) election sits awkwardly with rollover because the rollover portion is technically a tax-free contribution to the new entity, which complicates the asset-deal treatment for tax. The F-reorg structure handles rollover cleanly: rollover equity is a separate, tax-deferred contribution to the buyer's holding company under Section 721, and the cash portion is fully taxable as an asset sale.

Second, the F-reorg accommodates non-corporate buyers. A 338(h)(10) election requires the buyer to be a corporation. PE funds typically acquire through LLC holding companies for liability and structuring flexibility, which would technically disqualify the buyer from the 338(h)(10). The F-reorg has no buyer-side entity requirement.

Third, the F-reorg solves the S-corp eligibility risk problem. S-corp status can be inadvertently lost if any of the technical requirements (one class of stock, no ineligible shareholders, fewer than 100 shareholders) was ever breached historically. Because the F-reorg creates a fresh entity, due diligence risk on historical S-corp validity is contained: even if the historical S-corp election was flawed, the F-reorg starts the new entity from a clean slate.

Fourth, the F-reorg works for partial sales. A 338(h)(10) requires the buyer to acquire at least 80% of the target's stock in a 12-month qualified stock purchase. An F-reorg has no such threshold and can be combined with a wide range of partial-sale and minority-investment structures.

The substantive interview point is that asking "338(h)(10) versus F-reorg" is mostly a question of buyer entity type, presence of rollover, and historical S-corp risk. The F-reorg is almost always the modern default for U.S. middle-market sponsored deals.

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Strategic acquisitions of public companies (and many large private deals) are frequently structured as tax-free reorganizations under Section 368(a). The point is to allow target shareholders to receive acquirer stock without immediately recognizing gain on the exchange. The acquirer's stock is treated as a continuation of the target stock for tax purposes; gain (or loss) is recognized only when the shareholder later sells the acquirer stock. This deferral can be worth a significant fraction of headline value to target shareholders, particularly when the target has appreciated meaningfully from its tax basis.

There are several sub-types of tax-free reorganization, each with its own requirements and quirks. The three most common are Types A, B, and C.

A Type A reorganization is a statutory merger or consolidation under state law. The target merges into the acquirer (or a subsidiary of the acquirer), with target shareholders receiving a mix of acquirer stock and cash. To qualify as tax-free, the IRS safe harbor for advance rulings requires that at least 40% of the consideration be acquirer stock (a "continuity of interest" requirement, with case law occasionally approving lower percentages), the acquirer must continue the target's historic business or use a significant portion of the target's assets (a "continuity of business enterprise" requirement), the transaction must have a non-tax business purpose, and the form must follow Section 368(a)(1)(A). Type A is the most flexible of the tax-free reorganization sub-types because it allows the highest cash component. It is the structure that underpinned the 2015 Kraft-Heinz combination, which qualified as a reorganization under Section 368(a) and used a special cash dividend funded outside the merger to give Kraft shareholders cash without breaching the continuity requirement (see the Kraft-Heinz S-4 filing on SEC EDGAR for the actual structuring disclosure).

A Type B reorganization is a stock-for-stock acquisition: the acquirer exchanges only its voting stock for at least 80% of the target's voting and value. No cash is permitted (except for fractional-share cash-outs). The 80% threshold is strict, and the structure is rarely used today because the all-stock requirement is too restrictive for most modern deals.

A Type C reorganization is an assets-for-stock acquisition: the acquirer transfers its voting stock to the target in exchange for "substantially all" of the target's assets (typically interpreted as 70% of gross and 90% of net assets). The target then liquidates and distributes the acquirer stock to its shareholders. Type C is occasionally used when the parties want an asset-deal legal form for liability isolation while keeping tax-free treatment for shareholders.

A different family of tax-deferred transactions covers corporate separations: spin-offs, split-offs, and split-ups. Under Section 355, a parent corporation can distribute the stock of a subsidiary to its shareholders without recognizing gain at either the corporate or shareholder level, provided that strict requirements are met. Recent high-profile separations using Section 355 include GE's three-way breakup (creating GE Aerospace, GE Vernova, and GE HealthCare), Kellanova's split from WK Kellogg, and Johnson & Johnson's spin-off of Kenvue. For deeper coverage of the commercial mechanics, see the spin-off and carve-out transactions guide.

Core Section 355 Requirements

A Section 355 spin-off is tax-free at the corporate and shareholder level only if all of the following are met:

In 2024 the IRS released Revenue Procedure 2024-24 and Notice 2024-38, tightening documentation and representation requirements for taxpayers seeking private letter rulings on Section 355 transactions. In September 2025, however, the IRS reversed course with Revenue Procedure 2025-30, which superseded Rev. Proc. 2024-24 and revoked Notice 2024-38, returning to a posture closer to the earlier Rev. Procs. 2017-52 and 2018-53. Practitioners read the 2025 reversal as restoring a more accommodating environment for legitimate separations after pushback from the deal bar.

The Reverse Morris Trust

A Reverse Morris Trust structures a tax-free spin followed by a tax-free merger so that both the separation and the eventual disposition qualify under Section 355 and Section 368. The mechanics: the parent spins off a subsidiary to its shareholders in a Section 355 distribution; immediately after, the spun subsidiary merges with an unrelated third-party acquirer in a Section 368(a) reorganization. The key requirement is that the parent's original shareholders retain at least 50.1% of the combined post-merger entity, which preserves Section 355(e) tax-free treatment despite the change of control over the spun business.

Reverse Morris Trust structures have been used in some of the most prominent telecom, media, and consumer separations of the last two decades because they allow a parent to dispose of a subsidiary at a value reflecting acquisition synergies (often 20% to 30% higher than what an outright sale would deliver) without triggering corporate-level tax on the disposition.

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When a target has significant net operating losses (NOLs) or other tax attributes, the value of those NOLs can be a material portion of deal value. A profitable acquirer who can use the target's NOLs against post-close profits saves real cash; the present-value of usable NOLs is often baked directly into the purchase price. The constraint is Section 382, which limits the rate at which pre-change NOLs can be used after a corporate ownership change.

Section 382 Limitation

A federal income tax limitation on the use of pre-acquisition net operating losses and other tax attributes following an "ownership change" of a loss corporation. The annual limitation equals the equity value of the loss corporation immediately before the ownership change multiplied by the IRS-published long-term tax-exempt rate. Unused limitation amounts carry forward, but losses subject to the limit can only be deducted against post-change taxable income up to the annual cap.

When Section 382 Applies

Section 382 triggers when there is an "ownership change," defined as a more than 50 percentage point increase in the ownership of 5%-or-greater shareholders over a rolling 3-year testing period. Most acquisitions of a loss corporation by an unrelated buyer easily satisfy this test and trigger the limitation. Internal restructurings often do not, but the analysis is fact-specific.

Calculating the Annual Limitation

The basic Section 382 annual limitation is straightforward in formula and intricate in detail:

The long-term tax-exempt rate is published monthly by the IRS in its Revenue Rulings on applicable federal rates (see for example IRS Rev. Rul. 2025-1 for January 2025 rates and the corresponding rates in subsequent monthly rulings). In 2025 the rate ran roughly between 3.43% and 3.67% across the year, settling near 3.58% in late 2025 ahead of 2026 deal activity. The applicable rate for a given deal is the rate published for the month of the ownership change (or, technically, the highest of that month and the two preceding months).

So a target with $200 million of equity value and a long-term tax-exempt rate of 3.65% generates an annual NOL utilization limit of about $7.3 million. If the target carries $100 million of pre-change NOLs, it would take more than a decade of capped utilization to absorb them, and any unused NOLs that hit their 20-year carryforward expiry (for pre-2018 NOLs) or that have no expiry but are still capped per year (for post-2017 NOLs under the TCJA rules) effectively go to waste.

NUBIGs, NUBILs, and the Recognition Period

The basic formula gets adjusted for net unrealized built-in gains (NUBIGs) and net unrealized built-in losses (NUBILs) in the target's assets at the time of the ownership change. If the target has built-in gains (the FMV of its assets exceeds tax basis), recognition of those gains during the 5-year recognition period post-change increases the annual limitation. If the target has built-in losses, recognition of those losses during the recognition period reduces the limitation. This is a common point of audit dispute and is one of the more technical areas of the M&A tax practice.

The 2017 Tax Cuts and Jobs Act made two changes that affect this analysis. First, post-2017 NOLs have no expiration date but are limited to offsetting 80% of taxable income in any year (the 80-percent rule). Second, the corporate tax rate dropped to 21%, which directly reduces the cash value of each dollar of NOL by lowering the tax shield generated when the NOL is used.

For technology companies with R&D-heavy losses, the interaction between Section 382 and the TCJA's R&D capitalization regime under Section 174 (now substantially modified again in 2025 legislation) has been a particularly active area in 2024 and 2025 M&A diligence.

Inside a live deal, tax structure is rarely set unilaterally by either side. The standard playbook on the deal team runs as follows.

The M&A banker flags structure questions early during the buyer-screening or sell-side preparation phase, identifying whether the target is a C-corp, S-corp, partnership, or LLC, and noting whether the seller is sensitive to ordinary-versus-capital rate treatment. For sponsor-backed targets, the entity history (often a chain of holding LLCs above an operating C-corp) determines what is possible.

The tax accountant or M&A tax partner (typically from a Big Four firm or a specialized M&A tax boutique) runs the structuring analysis: modeling 338(h)(10) versus F-reorg outcomes, evaluating whether a tax-free reorganization is feasible given continuity and business-purpose tests, running Section 382 limitations on NOLs, and pricing the after-tax cost of each structure to each side.

The deal lawyers translate the chosen tax structure into the legal documentation: structuring the entity steps in a pre-closing reorganization, drafting tax representations and indemnification provisions in the purchase agreement, and securing tax opinions (especially in tax-free reorganizations, where a tax-counsel opinion that the transaction qualifies is often a closing condition).

The PE buyer or strategic acquirer weighs the tax cost against the underwriting model and the rollover discussion. A buyer is rarely willing to pay full headline value plus a gross-up plus a step-up cost; instead the buyer's bid is calibrated against the net after-tax economics, with structure flexibility as a key part of the bidding.

The result is a negotiated structure that allocates the surplus the tax code created. Bankers who can describe this allocation in interview answers (and who can spot the trade-offs as they read a deal) are visibly stronger than those who can only describe the legal form.

A handful of recurring errors give away candidates who have memorized tax structures rather than understood them. Knowing what these mistakes look like is the difference between sounding fluent and sounding rehearsed.

The first mistake is conflating legal form with tax form. A reverse triangular merger is legally a merger but tax-wise can be a Section 368(a) reorganization. A 338(h)(10) is legally a stock deal but tax-wise an asset deal. A candidate who says "this is a stock deal so the buyer doesn't get a step-up" without considering the 338(h)(10) or F-reorg overlay is missing the point of the question.

The second mistake is ignoring the seller's tax math. Interview answers that focus only on what the buyer wants (the step-up) and not on what the seller is giving up (ordinary-income recapture, additional shareholder-level tax) miss that the structure is a negotiation, not a buyer's unilateral choice. The right framing is "the buyer wants X, the seller wants Y, here is how the parties bridge the gap."

The third mistake is misstating the Section 382 limitation as a percentage cap. The 382 limit is a dollar amount per year (equity value times long-term tax-exempt rate), not a percentage of NOLs that can be used. A candidate who says "Section 382 limits you to using 50% of the NOLs" is wrong.

The fourth mistake is assuming all spin-offs are tax-free. A spin-off qualifies for Section 355 treatment only if the active-business, business-purpose, distribution-of-control, and non-device tests are met, and only if Section 355(e) is not triggered by a planned acquisition. Plenty of "spin-offs" in news headlines are taxable.

The M&A tax toolkit is wide, and using it well is a senior skill rather than a junior one. But fluency at the analyst level pays off. A first-year analyst who can identify whether a target should F-reorganize before closing, calculate a rough Section 382 limit on NOLs, and explain why a strategic acquirer might prefer a Type A reorganization over a 338(h)(10) is a meaningfully more useful analyst on the deal team than one who can only describe the legal mechanics of a merger.

The framework to remember: the legal structure of a deal is what gets signed; the tax structure of a deal is what determines who pays. Asset deals deliver a step-up but double-tax C-corp sellers. Stock deals are clean for sellers but deny the buyer a step-up unless a 338(h)(10) (for S-corp and consolidated-sub targets where the buyer is a corporation) or an F-reorganization (the modern default for S-corp deals) bridges the gap. Section 368(a) tax-free reorganizations let strategic acquirers offer their stock to target shareholders without triggering immediate gain at the shareholder level if continuity and business-purpose requirements are met. Section 355 spin-offs let parents separate subsidiaries tax-free if active-business and 80% distribution tests are met, with the Section 355(e) anti-Morris-Trust rule policing spin-and-sell plans. NOLs survive an ownership change only inside the Section 382 limitation, calculated as equity value times the IRS-published long-term tax-exempt rate.

Every M&A interview answer that touches valuation should be ready to add the tax overlay if the interviewer asks. Every pro-forma model should be ready to flex on tax structure (see the pro forma financial statements guide for the modeling angle). And every deal you read in the news has a tax structure embedded in its proxy statement or merger agreement. Reading those documents with an eye for tax structure is the fastest way to internalize the framework.