Technical Update: IRS Ruling PLR 202518014 and Section 338(h)(10)

On May 2, 2025, the Internal Revenue Service (“Service”) released PLR 202518014 (the “Ruling”).¹ The conclusions in the Ruling pertain to section 338(h)(10), which permits a buyer and seller to jointly elect to treat a stock purchase as an asset purchase for U.S. federal income tax (“USFIT”) purposes provided certain requirements are satisfied. As a result of transmuting a state law stock deal into an asset purchase, the stock sale between the buyer and selling shareholder is ignored solely for USFIT purposes.

Instead, the target corporation is treated as directly selling, and recognizing gain (or loss) on, its assets for USFIT purposes. The target corporation’s tax attributes (including net operating losses) are available to offset any gain recognized on the deemed asset sale, which can make such an election acceptable to the seller in certain circumstances. Additionally, as a result of asset sale treatment, the buyer is the beneficiary of asset basis step-up and a corresponding go-forward tax shield in the form of increased tax depreciation and amortization.

Qualification under section 338(h)(10)

To qualify under section 338(h)(10), certain requirements must be satisfied. In particular, the stock purchase must constitute a “qualified stock purchase” (“QSP”). Very generally, a QSP requires an acquisition of at least 80% of the “stock” of a corporation (or entity treated as a corporation for USFIT purposes) by another corporate acquirer. The acquisition must occur within a 12-month period in a taxable transaction and the buyer and seller must be unrelated to one another.

Additionally, an election under section 338(h)(10) is only available where the target corporation either is affiliated with the selling corporation, joins in the filing of the same consolidated income tax return as the selling corporation, or is a qualifying S corporation. Very generally, consolidated and affiliated status require the corporate seller to own (directly or indirectly through other affiliated corporations) “stock” possessing at least 80% of the total voting power and value of the target corporation.

Exactly what constitutes “stock” for QSP purposes and for purposes of the consolidation/affiliation tests is a technical determination and is the focus of the Ruling.

PLR 202518014

In the facts of the Ruling, we are told that the seller (“Seller”) is a non-profit corporation that is not exempt from USFIT. Seller is also the parent of a consolidated group of corporations and the sole member of two mutual benefit corporations that are the target corporations (each a “Target”) in the at-issue transactions. As background, mutual corporations typically do not have issued and outstanding “stock” for state law purposes,² but rather member certificates establishing certain rights with respect to the mutual corporation. In the eyes of the buyer (“Taxpayer”) who requested the Ruling, there was uncertainty as to whether the Seller’s membership status, presumably as evidenced by membership certificates, constituted “stock” for USFIT purposes.

Consistent with the legal authorities, to determine whether a transfer of the certificates constituted a QSP of the requisite quantum of “stock,” the Service considered the substance of the economic relationship between Seller and each Target rather than the label given to the certificates that caused Seller to have single-member ownership status of each Target.

That same assessment was also necessary to confirm that Seller was in a consolidated or affiliated group relationship with each Target prior to the transaction, otherwise an election under section 338(h)(10) would not be available. In doing so, the Service considered the rights inherent in the single-member relationship between Seller and Targets.

Those rights, referred to as Himmel³ factors after the case establishing them, included the economic right to distributions and proceeds upon liquidation as well as the voting rights that stemmed from the single-member relationship. For example, with respect to Target1, the facts of the Ruling state:

As the sole member of Target1, Seller had the right to elect Target1’s board of directors. In addition, under the law of State A, Target1 was not prohibited from making distributions to Seller due to Seller’s status as a nonprofit corporation.⁴ Upon the dissolution of Target1, after payment of all liabilities, Seller, as sole member, had the right to adopt a plan of distribution, whereby Seller could have received the net assets of Target1.

The Ruling concludes, in part:

The Completed Transaction will be treated as a qualified stock purchase under section 338(d)(3) with respect to each of Target1 and Target2 for which a joint election under section 338(h)(10) may be made by Taxpayer and Seller.

In sanctioning the transactions under section 338(h)(10), the ruling concludes that the relationship between Seller and Targets was equivalent to a shareholder-corporation relationship for USFIT purposes and that the certificates reflecting Seller as the sole member of each Target were akin to stock for USFIT purposes. This was based on the economic and governance rights associated with holding member certificates establishing single member status even though those certificates are not labeled “stock” for legal purposes.

What does this mean?

While the Service’s conclusion may be novel in the context of a section 338(h)(10) election, it is consistent with prior positions taken by the Service. In fact, in other contexts like section 382 (a loss-trafficking provision that looks to stock ownership), the Service has taken a similarly substance-based approach in concluding that non-stock equity instruments constitute stock for USFIT purposes. The Ruling also provides a more general reminder that the USFIT law requires a substance-based approach in assessing things like tax ownership and the USFIT classification of an economic ownership interest (for example as “debt” or “equity”). Such determinations are widely relevant, including for USFIT reporting purposes and for fundamental business transactions affecting business organizations, such as formations, initial public offerings, acquisitions, dispositions, and separations. WilliamsMarston tax has extensive experience servicing clients in each of these areas and is here to assist.