contingent consideration and contingent liabilities in acquisitions

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134 CONTINGENT CONSIDERATION AND CONTINGENT LIABILITIES IN ACQUISITIONS ––––––––– OUTLINE ––––––––– MARCH 2008 ROBERT H. WELLEN IVINS, PHILLIPS & BARKER WASHINGTON, D.C. TABLE OF CONTENTS INTRODUCTION ...........................................................................................................................1 NOMENCLATURE ........................................................................................................................3 TAXABLE ASSET AND STOCK ACQUISITIONS.....................................................................4 I. Contingent Purchase Price in Acquisitions of Assets and Acquisitions of Stock Without Section 338(h)(10) Elections .......................................................................................4 A. Treatment of Seller – Choice Between Installment Method and Election Out....................4 B. Treatment of Seller – Election Out of Installment Method .................................................4 1. Amount Realized at Closing ..........................................................................................4 2. Contingent Payments After Closing – Closed Transaction ...........................................7 3. Amounts Received After Closing – Open Transactions..............................................18 4. Allocation of Amounts Realized Among Assets Sold.................................................18 5. Possible Treatment of Contingent Purchase Price Obligation as Target Stock...........19 C. Treatment of Seller – Installment Method.........................................................................19 1. Application...................................................................................................................19 2. Election ........................................................................................................................19 3. Deferral Charge............................................................................................................19 4. Method of Calculating Gain Recognized.....................................................................20 5. Allocating Installment Obligation to Certain Assets ...................................................23 6. Net Benefits and Detriments of Installment Sale Method to Seller.............................24 D. Treatment of Acquiror .......................................................................................................24 1. Allocation of Contingent Purchase Price Among Assets Purchased...........................24 2. Specific Allocations – Intangible Assets .....................................................................25 3. Timing of Effects on Basis and Interest Deductions ...................................................25 4. Contracts for Use of Intangibles ..................................................................................25 5. Interest..........................................................................................................................25 E. Reporting Requirements ....................................................................................................26 1. Section 1060 Acquisitions ...........................................................................................26 2. Installment Method – Electing Out..............................................................................26 3. Installment Method ......................................................................................................26
135 II. Contingent Purchase Price and Contingent Liabilities in Stock Acquisitions with Section 338(h)(10) Elections – New 338 Regulations.............................................................26 A. Introduction........................................................................................................................26 B. Treatment of Old T ............................................................................................................27 1. Installment Method ......................................................................................................27 2. Election Out of Installment Method ............................................................................29 3. Allocation of Amounts Realized Among Assets Deemed Sold...................................32 4. Character of Amounts Realized...................................................................................32 C. Treatment of New T...........................................................................................................33 1. Allocation of Contingent Purchase Price and Contingent Liabilities Among Assets Deemed Purchased.......................................................................................................33 2. Timing of Effects on Basis ..........................................................................................33 3. Elimination of Phantom Income ..................................................................................35 4. “Breaking the Link” Between ADSP and AGUB........................................................35 D. Reporting and Administrative Requirements.....................................................................36 1. Forms 8023 and 8883...................................................................................................36 2. Other Administrative Requirements ............................................................................37 II*. Contingent Purchase Price in Stock Acquisitions with Section 338(h)(10) Elections – Old 338 Regulations..............................................................................................37 A. Treatment of Old T ............................................................................................................37 1. Installment Method Not Available...............................................................................37 2. Amount Realized at Closing ........................................................................................38 3. Amount Realized Upon Receipt ..................................................................................38 4. Allocation of Amounts Realized Among Assets Deemed Sold...................................38 5. Post-Closing Adjustments............................................................................................38 6. Recovery of Asset Basis ..............................................................................................39 7. Character of Amounts Realized – Actual and Imputed Interest ..................................39 B. Treatment of New T...........................................................................................................39 1. Allocation of Contingent Purchase Price Among Assets Purchased...........................39 2. Timing of Adjustments to New T’s Asset Basis..........................................................39 III. Escrows and Other Returns of Purchase Price.........................................................................39 A. Whose Property Is the Escrow .........................................................................................40 1. Inclusion of Escrowed Funds in Seller’s Amount Realized at Closing.......................40 2. Income on Escrowed Funds.........................................................................................40 B. If Escrow Is Acquiror’s Property.......................................................................................41 1. Escrow as Acquiror’s Property – Treatment at Closing to Seller................................41 2. Escrow as Acquiror’s Property – Treatment at Closing to Acquiror...........................41 3. Escrow as Acquiror’s Property – Income Earned on Escrowed Funds – Prop. Reg. § 1.468B-8....................................................................................................................41 4. Escrow as Acquiror’s Property – Treatment on Payment to Seller .............................42 5. Escrow as Acquiror’s Property – Treatment on Return of Escrowed Funds to Acquiror .......................................................................................................................42 6. Escrow as Acquiror’s Property – Treatment on Use of Escrowed Funds to Pay Seller Liabilities...........................................................................................................42 ii
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