Tax Alert: Tax Court Case Emphasizes Need to Conduct Cost Segregation Studies Prior to Purchase Allocations
1/30/2012
On January 17, 2012, the United States tax court issued a decision impacting a business’ ability to modify purchase price allocations agreed on by a buyer and seller.
According to United States tax court memo. 2012-18 (Peco Foods v. Commissioner), the food processor was not able to modify purchase price allocations that it agreed to in connection with its acquisition of certain assets at two food processing plants. The seller and buyer (“Peco”) agreed to allocate the purchase price among 26 assets “for all purposes (including financial accounting and tax purposes)” in accordance with the original purchase price allocation schedule. Peco then had a cost segregation study performed to further allocate one of the purchased assets, described as “Processing Plant Building.” The inclusion of the word “building” was significant to the conclusion as it inferred that this asset was solely the building, as the equipment was separately allocated as part of the purchase price.
Section 1060 prescribes special allocation rules for determining a transferee's basis and a transferor's gain or loss in an applicable asset acquisition. An applicable asset acquisition is any transfer of assets that constitutes a trade or business and with respect to which the purchaser's basis in such assets is determined wholly by reference to the consideration paid for them.
Sec. 1060(c). The Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, sec. 11323(a), 104 Stat. 1388-464, amended section 1060(a), provides that where the parties to an applicable asset acquisition agree in writing as to the allocation of any amount of consideration, or as to the fair market value of any of the assets transferred, that agreement is “binding” on the transferee and the transferor unless the Commissioner determines that the allocation (or fair market value) is not appropriate.
In this particular case, the Internal Revenue Service determined that there was no basis to re-allocate the agreed upon allocations. Stating that the original allocation schedules are binding upon Peco and that it may not subdivide assets in a manner at odds with those schedules.
Taxpayers contemplating the purchase of the assets of a business should consider arranging a cost segregation analysis before entering into the purchase agreement.
For further information, please contact David Grant, CPA, J.H. Cohn partner, at dgrant@jhcohn.com or 973 403-6905, or your J.H. Cohn engagement partner at 877-704-3500.
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