Insights and Resources
LB&I to focus on proper reporting of tax purchase price allocations
Campaign could signal an effort to match buyer and seller forms
TAX ALERT |
Authored by RSM US LLP
On Jan. 29, 2021, the IRS’s Large Business and International (LB&I) division released a new active compliance campaign relating to the reporting of purchase price allocations in taxable asset transactions. Depending on the specific transaction structure, the parties entering into a taxable or partially taxable asset acquisition must report the purchase price allocation in their tax return on either Form 8594 or Form 8883. LB&I’s campaign will focus on parties that either fail to report the transaction on the appropriate form or parties that report the transaction inconsistently with the other party’s reporting of the transaction. Taxable asset acquisitions subject to these allocation rules and reporting go far beyond literal asset acquisitions. Transactions such as taxable stock acquisitions with a section 338(h)(10) or section 336(e) election are treated as taxable asset acquisitions subject to reporting on Form 8883. In addition, many acquisitions of limited liability company (LLC) interests where the LLC was or became a disregarded entity either before or after the transaction, such as transactions addressed in Rev. Ruls. 99-5 and 99-6, represent section 1060 transactions subject to reporting on Form 8594. Likewise, many partnership disguised sale transactions are subject to reporting on a Form 8594.
It is important to note that many of these transactions are only partially taxable transactions that include a ‘rollover’ or continuing interest of the seller in the taxable asset acquisition. This type of transaction is prevalent in the private equity (PE) space, as well as certain industries such as medical practices and similar professional businesses, where roll-ups and consolidations of smaller businesses are occurring.
Buyer and seller conformity
What is most interesting and potentially concerning is the statement in the compliance campaign regarding looking at inconsistencies between buyer and seller reporting. First, we are not aware of prior situations involving the IRS matching buyer and seller forms reporting tax purchase price allocations, and when under IRS exam, it is either the buyer or seller under exam. Second, and more concerning in our view, is that a buyer and seller are not required to agree to a purchase price allocation, and as such, inconsistencies are often expected. The new LB&I campaign does not change this fact. The exception to this is, of course, the requirement that parties follow an agreed upon purchase price allocation, but again, this is only where the buyer and seller have legally agreed to a purchase price allocation. As buyers and sellers often have divergent interests in an allocation, it is not uncommon for the parties to decide not to agree on the allocation. Further, it is quite common for parties to state their intent to agree upon an allocation in a purchase agreement, but subsequently fail to come to an agreement, again leading to differences in purchase price allocations. Lastly, coming to an agreement amongst the parties often provides a false sense of security to the parties; however, the IRS is not bound by an agreement on an allocation by the buyer and seller.
The LB&I campaign has not changed the law or rules surrounding tax purchase price allocations. Agreement on allocation of purchase price is not required unless the parties specifically agree to an allocation. With that said, the campaign does put taxpayers on notice of the increased scrutiny the IRS is placing on the appropriate reporting of taxable asset acquisitions. In light of the campaign, and in particular the potential matching of allocation forms, buyers and sellers that do not agree to purchase price allocations may want to shore up documentation as to how they came up with their allocation. Taxpayers should consult with their tax advisors when considering entering into purchase price allocation agreements in taxable asset acquisitions.
Call us at +1 213.873.1700, email us at email@example.com or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Nick Gruidl, Sarah Lieberman, Eric Brauer and originally appeared on 2021-02-03.
2020 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.