asset acquisitions - Jackson Walker LLP

equires a buyer to withhold a sufficient portion of the purchase price to cover the amount ofsuch taxes; and (3) provides that if the buyer:shall fail to withhold a sufficient amount of the purchase money as aboveprovided, he or she shall be personally liable for the payment of the taxes,interest, and penalties accruing and unpaid on account of the operation ofthe business by any former owner, owners or assigns.In addition to statutory successor liability, a buyer could be subject to liability for aseller’s taxes under a common law successor liability theory. See e.g., Peter L. Faber, Stateand Local Income and Franchise Tax Aspects of Corporate Acquisitions, NEGOTIATINGBUSINESS ACQUISITIONS, J-14 - J-15 (ABA-CLE, 1998).If the buyer were acquiring subsidiaries of the seller, the buyer would want to besure all taxes of the subsidiaries have been paid, because any acquired subsidiary remainsresponsible for any such liability after the acquisition. To avoid taking over all of asubsidiary’s liabilities, the buyer could either (1) purchase the assets of the subsidiary,thereby making a multiple asset acquisition, or (2) have the seller liquidate the subsidiary,which can be accomplished tax-free under Code Section 332, and then acquire the assets ofthe former subsidiary directly from the seller.Section 3.14(a) focuses on the tax returns and reports that are required to be filed bya seller, the accuracy thereof, and the payment of the taxes shown thereon. Thus, it isdesigned to ensure that the seller has complied with the basic tax requirements. Thisrepresentation can stay the same even if the seller is an S corporation, because an Scorporation may be subject to state, local and foreign taxes and may be subject to federalincome tax with respect to built-in-gains under Code Section 1374 and to passive incomeunder Code Section 1375. Even though an S corporation generally is not subject to federalincome taxation, it still must file a return.Section 3.14(b) deals with the background information relating to the seller’s taxliability. Here the seller must turn over all tax returns and information relating to the audit ofthose returns. The seller may insist upon a carve-back on the returns and audit information itmust provide, such as limiting the returns to the federal income tax returns and material state,local and foreign returns. This subsection also seeks information regarding tax issues thatcould be raised in the future with respect to returns that have not yet been audited or evenfiled. Thus, it might be seen as a provision designed to ferret out all issues with respect to thepotential underpayment of taxes previously paid or currently due.Section 3.14(c) is designed to ensure that any outstanding tax liabilities are properlyreflected in the books of the seller.Section 3.14(d) deals with specific potential tax liabilities or situations that may ormay not be present depending upon the circumstances. Most of the items are addressed in amore general manner in preceding subsections, but it may be helpful in focusing the attentionof the parties to address certain specific items in subsection (d). The first item, withholdingobligations, is particularly important. Tax sharing agreements, covered in clause (ii), arecommon for consolidated groups where there is a minority interest. Clause (iii) is designedto ensure that there is no potential tax liability with respect to other consolidated groups ofwhich the seller may have been a member.3148166v1- 85 -