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Taxable Asset Purchases

This portion of the introduction to the basic principles of United States federal income taxation of corporate acquisitions is part of the Pillsbury Winthorp Shaw Pittman LLP Tax Page, a World Wide Web demonstration project. Comments are welcome on the design or content of this material.

The information presented is only of a general nature, intended simply as background material, is current only as of the latest revision date, October 15, 2007, omits many details and special rules and cannot be regarded as legal or tax advice.

In a taxable sale of assets, Target, the seller, recognizes gain or loss, the character (ordinary or capital) and amount of which is determined on an asset-by-asset basis.

Acquiring, the purchaser, determines its basis in the acquired assets again on an asset-by-asset basis.

Acquiring recognizes gain if it acquires the assets in exchange for appreciated property, other than its own stock.

Purchase Price Allocations

    In general, the IRS will respect the parties allocation of the total price paid among the acquired assets if, as is usually the case, the parties are "tax adverse."

    In the case of an "applicable asset acquisition," the purchase of assets constituting a trade or business, the allocation of the purchase price is generally made in accordance with the assets' relative fair market values. In addition, the parties must file an information return with the IRS.

    No individual asset can be treated as purchased for more than its fair market value. The excess of the purchase price over the aggregate fair market value of the acquired assets represents goodwill or going concern value.

      Under prior law, goodwill and going concern value were nonamortizable for tax purposes. This often lead sellers to enter into covenants not to compete with buyers. Under prior law payments under such a covenant were deductible by the payor (or amortizable if related to more than the current taxable period), but gave rise to ordinary income for the recipient.

      Under the Omnibus Revenue Reconciliation Act of 1993, purchased goodwill and going concern value are eligible for 180-month (15-year) amortization. Unfortunately, covenants not to compete must also be amortized over the same period.

      If the owner of 10% or more, by value, of an entity transfers an interest in that entity, and in connection with that transfer enters into an employment contract, covenant not to compete, royalty or lease agreement or other agreement with the transferee, then the transferor and transferee must file an information return with the IRS.

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