July 6, 2020
Explore a case study highlighting the significant tax implications resulting from an incorrect subsidiary sale structure in a business acquisition. Learn from the legal dispute and its aftermath, emphasizing the importance of accurate acquisition documents and coordination among stakeholders.
Introduction:
When selling a business, adhering to the correct sale structure is vital to avoid substantial tax implications for the owners. It’s crucial for both the seller and their advisors to meticulously review and confirm acquisition documents before finalizing any agreements.
The Scenario:
This situation revolves around the acquisition of a Texas-based electronics manufacturer dealing in computer, telecom, medical, and industrial control sectors. The company was owned by three individuals through a holding company, with the operating company’s stock being the sole asset of the holding company. With assistance from a lawyer, accountant, and investment banker, the owners planned a transaction to maximize net after-tax proceeds. The intention was for the owners to sell the holding company’s stock to the buyer, which the buyer had agreed to.
However, an error occurred: instead of purchasing the holding company’s stock as planned, the buyer bought the operating company’s stock.
The Legal Dispute:
The IRS was informed of the sale as the holding company stock sale, not the operating company subsidiary stock sale. Following an audit, the IRS imposed additional taxes, interest, and penalties amounting to approximately $2.8 million, based on the incorrect sale classification.
The taxpayers contested this in Tax Court, arguing that both parties had intended a holding company stock sale and that the incorrect paperwork was a mutual mistake. Unfortunately, the Tax Court ruled in favor of the IRS, and despite an appeal to the United States Court of Appeals, the taxpayers lost the case.
Key Point:
In transactions like these, it’s crucial for a designated coordinator to ensure that the purchase documents align with the business owners’ intentions. In this case, the coordinator would have made certain that each owner, along with the accountant, lawyer, and investment banker, were content with the accuracy of the closing documents before proceeding with signatures.
Case References:
This case is referred to as Makric Enterprises, Inc. v. Commissioner, 2016 T.C. Memo. 44, United States Tax Court, (Filed: March 9th, 2016). https://www.courtlistener.com/opinion/4562998/makric-enterprises-inc-v-commissioner/?q=cites%3A(2461464) Makric Enterprises, Incorporated v. Commissioner Of Internal Revenue, No. 16-60410, United States Court of Appeals, Fifth Circuit, (Filed March 27, 2017)
By John McCauley: I help manage the tax risks associated with buying or selling a business.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
Legal Disclaimer
The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.
Recent Comments