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.
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This article was written by Nick Gruidl, Sarah Lieberman, Eric Brauer and originally appeared on 2021-02-03.
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