Because of the tax deductions. When a buyer purchases assets, it gets a new, stepped-up basis equal to what it paid. Goodwill and other intangibles are then written off over 15 years under Section 197, and equipment can be expensed under 100 percent bonus depreciation. If the buyer purchased your stock instead, it would inherit your low basis and get none of those deductions. On a $10 million practice, that difference is worth a lot to the buyer, which is why buyers rarely agree to a plain stock purchase.
" - q: "What is an F-reorganization in plain English?" a: "It is a way to change the legal form of your corporation without the tax code treating it as a sale. You form a new holding company, move your existing corporation underneath it, elect to treat the old corporation as a qualified subchapter S subsidiary, and then convert the old corporation into an LLC. When the buyer purchases interests in that LLC, the tax law treats the buyer as having bought assets (the step-up it wants) while your retained piece becomes tax deferred rollover equity. Rev. Rul. 2008-18 blesses the structure.
" - q: "Does my practice lose its tax ID or payer contracts in an F-reorganization?" a: "No. The operating entity keeps its employer identification number, its payer contracts, and its licenses. That is one of the practical reasons the structure is popular: nothing changes for the patients or the payers on the day of closing.
" - q: "Is an F-reorganization better than a 338(h)(10) election?" a: "For most sellers, yes. A 338(h)(10) election requires a corporate buyer to acquire at least 80 percent of your stock, treats 100 percent of the gain as taxable including the portion you roll over, and only works if your S election has always been valid. The F-reorganization has none of those limits. The rollover is deferred under Section 721, the buyer can be a partnership or LLC, and a defective S election does not blow up the deal.
" - q: "What is the Section 1374 built-in gains tax?" a: "It is a 21 percent corporate-level tax on gain that built up while your corporation was a C corporation, if you sell within five years of electing S status. Goodwill that grew during the C years is the usual problem, because it has no basis and it all counts as built-in gain. The F-reorganization does not start or stop the five-year clock. If your S election is recent, ask your CPA to measure the exposure before you sign the letter of intent.
" - q: "I am a C corporation. How bad is an asset sale?" a: "The corporation pays 21 percent on the gain, and then you pay 20 percent capital gains tax plus the 3.8 percent net investment income tax when the after-tax cash is distributed to you. The combined federal rate approaches 39 to 40 percent before state tax. The two main ways to reduce it are selling your personal goodwill directly, outside the corporation, and taking a large final-year deduction such as a cash balance plan contribution. Both need to be arranged before the letter of intent.
" - q: "My group is an LLC taxed as a partnership. How is the sale taxed?" a: "Selling a partnership interest is capital gain, except for your share of hot assets under Section 751. Cash-basis accounts receivable and depreciation recapture on equipment are ordinary income no matter how the deal is papered. The buyer can get a stepped-up basis in its share of the assets under Section 743(b) if the partnership makes a Section 754 election, so buyers are generally comfortable with this form.
" - q: "Can I just sell my stock and avoid all of this?" a: "You can ask, but a private equity buyer will almost never agree without a 338(h)(10) or 336(e) election, and those elections take away most of the benefit of a stock sale from your side. A pure stock sale gives you a single layer of capital gain and gives the buyer no deductions. The buyer will price that into a lower offer, if it agrees at all.
" llms_summary: "Explains the three ways a physician practice sale to private equity can be structured for tax: asset sale, stock sale, or F-reorganization. Buyers want asset treatment for 15-year amortization of Section 197 intangibles and bonus depreciation. Walks through the F-reorganization under Rev. Rul. 2008-18 step by step (NewCo, stock contribution, QSub election on Form 8869, LLC conversion, sale of LLC interests, Rev. Rul. 99-5) and why it beats 338(h)(10) and 336(e) for the seller. Covers the Section 1374 built-in gains tax, the double tax on C corporation sellers and its mitigants, Section 751 hot assets and the 754/743(b) step-up for partnership sellers, with a seller-side comparison table." ---The buyer wants to be treated as purchasing your practice's assets because an asset purchase gives it new tax deductions, and a stock purchase gives it none. When a buyer purchases assets, its tax basis in those assets is reset to what it paid. This is called a step-up. Goodwill and the other intangibles that make up most of a practice's price are Section 197 intangibles, and the buyer deducts them evenly over 15 years. Equipment gets a fresh basis and can be written off right away under 100 percent bonus depreciation, which is now permanent for property acquired after January 19, 2025.
If the buyer purchased your stock instead, it would inherit your basis. For a physician who built the practice rather than bought it, that basis is close to zero. The buyer would own the same practice but have nothing to deduct. On a $10 million purchase, the step-up produces well over $600,000 a year of deductions for 15 years, which is why the buyer's counsel proposes it in the first draft of the letter of intent.
The tax pillar page covers what each piece of the price means for you once the structure is set. This page is about choosing the structure.
There are three ways to get from your practice to the buyer's ownership, and they lead to different tax results.
The practice entity sells its equipment, receivables, records, and goodwill to the buyer, then distributes the cash to you. For an S corporation the gain passes through to you once. For a C corporation it is the worst path, because the corporation pays tax on the sale and you pay tax again when the cash comes out.
You get a single layer of capital gain. The buyer gets carryover basis and no deductions. Private equity buyers rarely accept this without a Section 338(h)(10) or 336(e) election, which makes the stock sale look like an asset sale for tax purposes. Those elections solve the buyer's problem but create yours: all of your gain becomes taxable, including the portion you were planning to roll over.
This is the standard private equity playbook for an S corporation target. It gives the buyer the step-up and gives you deferral on your rollover.
An F-reorganization is a reorganization under Section 368(a)(1)(F), a "mere change in identity, form, or place of organization" of one corporation. Rev. Rul. 2008-18 describes the version used in practice sales, and Reg. 1.368-2(m) sets the rules. Your existing corporation is called the Target below. The steps happen in this order, usually over a few weeks before closing.
You and your fellow shareholders form a new corporation, often called NewCo or Holdco. It has no assets yet.
Each shareholder contributes his or her shares of the practice corporation to NewCo in exchange for NewCo shares, in the same proportions. Target is now a wholly owned subsidiary of NewCo.
NewCo files Form 8869 to treat Target as a qualified subchapter S subsidiary, or QSub. For federal tax purposes Target disappears and is treated as part of NewCo. Your S election continues in NewCo. This step is what makes the whole thing a mere change in form rather than a sale.
Target files a conversion with the state and becomes a limited liability company. Because it was already disregarded as a QSub, converting it to a single-member LLC (also disregarded) changes nothing for federal tax. The practice keeps its employer identification number, its payer contracts, and its licenses. Patients notice nothing.
NewCo sells a majority of the LLC interests to the buyer for cash and keeps the rest. The kept portion is your rollover. Under Rev. Rul. 99-5, when someone buys part of a single-member LLC, the tax law treats the seller as having sold an undivided share of the underlying assets, and then treats both parties as contributing their shares to a new partnership. The buyer gets a stepped-up basis in the assets it is treated as buying. NewCo's retained share is a tax-free contribution under Section 721, which is why your rollover is deferred rather than taxed.
The result is that the cash you receive is taxed as a sale of assets (mostly capital gain on goodwill, ordinary income on receivables and recapture, as explained on the tax pillar page), and the rollover piece carries over your low basis into the new partnership with no tax until the second sale. The rollover equity page explains what you hold afterward.
The F-reorganization gets the buyer the same step-up as those elections while removing four problems that sit on your side of the table.
Because of these points, 338(h)(10) and 336(e) elections have been largely replaced by the F-reorganization in deals where rollover deferral matters. You may still see a 338(h)(10) proposed when a corporate buyer is acquiring all of your stock with no rollover. New York sellers should note that a 338(h)(10) election makes the gain New York-source even for a seller who has moved away, as covered on the New York page.
Section 1374 taxes an S corporation on gain that built up while it was a C corporation, at the 21 percent corporate rate, if that gain is recognized within five years of the S election. The five years is called the recognition period. The tax is paid by the corporation before the cash reaches you, and then you pay your own tax on what is left.
The usual problem is goodwill. A practice that operated as a C corporation for years and then elected S status carries all the goodwill it built during the C years as built-in gain with no basis. If the sale happens inside the five-year window, that goodwill is taxed at 21 percent under Section 1374, and again at 20 percent when it passes through to you. The same rule applies if your S corporation acquired assets from a C corporation with carryover basis.
Some sellers assume that dropping the corporation under a new holding company resets the clock. It does not. The F-reorganization neither starts nor cures a Section 1374 recognition period. If your S election is less than five years old, or you are not sure when it was made, get the date from your CPA before you sign a letter of intent. If you are in year four, the difference between closing in December and closing the following spring can be 21 percentage points of tax on the built-in gain.
A C corporation seller faces two layers of tax on an asset sale, and the F-reorganization does not remove either one. The corporation pays 21 percent on the gain when it sells the assets. Then, when the after-tax cash is distributed to you, you pay 20 percent capital gains tax plus the 3.8 percent net investment income tax on the dividend or liquidation. The combined federal rate approaches 39 to 40 percent before state tax, and state tax applies at both levels too.
Two tools reduce the damage, and both must be set up before the deal is agreed.
If the patient relationships and reputation that make up the practice's value belong to you personally rather than to the corporation, you can sell that personal goodwill directly to the buyer under a separate agreement. The payment never enters the corporation, so it is taxed once, to you, at capital gains rates. This works only if you have never signed an employment agreement or covenant not to compete with your own corporation. The personal goodwill page explains the case law, including the dentist who lost in Howard v. United States for exactly that reason.
The corporation can reduce its 21 percent tax with large deductions in the year of sale. Compensation paid to you is deductible to the corporation and taxed to you once as ordinary income, which is better than 21 percent followed by 23.8 percent. A cash balance plan contribution in the final year is deductible to the corporation and goes into your retirement account rather than being taxed now. The cash balance plan page covers the 2026 limits and the timing rules.
If your group is an LLC or PLLC taxed as a partnership, the structure question is simpler. Selling a partnership interest is capital gain to you, except for your share of "hot assets" under Section 751: cash-basis accounts receivable and the depreciation recapture built into your equipment. Your share of those items is ordinary income no matter how the purchase agreement is written.
The buyer gets its step-up another way. If the partnership makes a Section 754 election, the buyer's share of the partnership's assets is adjusted under Section 743(b) to reflect what it paid, and the buyer deducts the goodwill portion over 15 years. Private equity buyers therefore rarely need any restructuring to buy into a partnership. You keep some of your partnership interest, or contribute it to the buyer's holding company under Section 721, and that is your rollover.
The table below summarizes each structure from the seller's point of view. It assumes a typical deal where the buyer purchases 60 to 70 percent and you roll the rest.
| Structure | Layers of tax on the cash | Rollover taxed now? | Buyer gets step-up? | Main risk to you |
|---|---|---|---|---|
| Asset sale by S corporation | One (passes through to you) | Depends on how the rollover is papered; often yes | Yes | Section 1374 if S election is under five years old |
| Asset sale by C corporation | Two (21% corporate, then 20% plus 3.8% to you) | Usually yes | Yes | Double tax; needs personal goodwill and final-year deductions |
| Stock sale, no election | One | Not applicable if the buyer takes all the stock | No | Buyer rarely agrees; lower price if it does |
| Stock sale with 338(h)(10) | One | Yes, 100% of gain is taxable | Yes | Needs 80% corporate buyer and a valid S election; New York sources the gain to New York |
| Stock sale with 336(e) | One | Yes, 100% of gain is taxable | Yes | Same as 338(h)(10) except buyer need not be a corporation |
| F-reorganization (S corporation) | One | No, deferred under Section 721 | Yes | Does not cure Section 1374; does not help a C corporation's double tax |
| Sale of partnership interest | One | No, if retained or contributed under Section 721 | Yes, with a Section 754 election | Section 751 ordinary income on receivables and recapture |
There are sellers for whom this page changes little, and it is worth knowing if you are one of them.
Before you respond to a letter of intent, ask your CPA for the exact date of your S election and whether the corporation ever operated as a C corporation or acquired C corporation assets; that date decides your Section 1374 exposure. If you are a C corporation, pull every employment agreement and covenant not to compete you have ever signed with your own corporation, because those documents decide whether personal goodwill is available to you. Then read the structure paragraph of the letter of intent and confirm which code section the rollover relies on. If the draft says 338(h)(10) and you are rolling equity, that is the moment to raise the F-reorganization. Once exclusivity begins, the buyer has less reason to change it.