What's the difference between asset and stock deals (tax treatment)?
Model answer
The structural difference is what the buyer is acquiring. In a stock deal, the buyer purchases the equity of the target entity — they inherit the entire legal entity, all assets and all liabilities, known and unknown. In an asset deal, the buyer purchases specific assets and assumes specific liabilities, leaving the legal shell with the seller.
Tax treatment is where they really diverge.
Stock deal: the buyer takes the target's existing tax basis in the assets — "carryover basis." There's no step-up. Goodwill created on the buyer's books is generally not tax-deductible. The seller pays capital gains tax at the corporate or shareholder level on the difference between proceeds and their basis in the stock — typically a single layer of tax for the seller.
Asset deal: the buyer gets a step-up in basis to fair market value across the acquired assets. Both tangible step-ups (faster depreciation) and intangible step-ups, including goodwill, are amortizable over 15 years for tax purposes under Section 197. That step-up creates a real tax shield over time — for a $500M deal with significant intangible value, the present value of the step-up tax benefit can be 5-10% of deal value. The seller, however, faces a tougher tax bill: the corporate entity recognizes gain on the asset sale at the corporate level, and then the proceeds get distributed to shareholders, which may trigger a second layer of tax. That's the double-tax problem in C-corp asset deals.
In practice: buyers prefer asset deals (step-up plus liability protection); sellers prefer stock deals (single layer of tax). The negotiation often turns on price — the buyer pays a premium to compensate the seller for the tax leakage in an asset deal.
A Section 338(h)(10) election is a clever middle-ground: legally a stock deal, but treated as an asset deal for tax purposes. Available for S-corp targets and certain consolidated subsidiaries. It gives the buyer the step-up while simplifying the legal mechanics of the closing.