Situation.

[Safire]

Buyers purchase an ongoing business for the cost of the inventory and 50k for the "business", name, goodwill, trademark, patents. But the agreement is not to exceed 225k.

Upon shipment of the inventory, the seller states that he sent 182k, which of course does not leave 50k for the "business".

Upon first inventoy of goods, purchaser discovers that he has even more inventory than the 182k. Very much more.

When trying to find out how they will break down to remaining 43k, so I know how to set it all up for depreciation, I NOW hear that the seller has considered the entire sale as inventory.

Upon the inventory done at the end of June, a 40k+ adjustment to inventory had to be made, so it is highly possible that they received close to 225k in inventory.

My questions. Can we just forget about the 50k for the "business" and just treat the entire purchase as inventory? Would this cause red flags?

I'm thinking they need to redo the sales agreement to state so.

[OldJack]

Form 8594 allocation

This is an asset sale/purchase that both parties are required to agree and report on form 8594, “Asset Acquisition Statement”, under Code Section 1060.

Code Section 1060(a) states “the consideration received for such assets shall be allocated among
such assets acquired in such acquisition in the same manner as
amounts are allocated to assets under section 338(b)(5).”

Code Section 338 (b)(5) states “(5) Allocation among assets
The amount determined under paragraphs (1) and (2) shall be
allocated among the assets of the target corporation under
regulations prescribed by the Secretary.”

IRS Instructions for form 8594 describes how you allocate fair-market-value of the assets based on 7 classes of assets. Class IV includes inventory at fair market value and the other assets you describe would be classified as higher. Therefore, the price allocated to the going business intangibles (class VI) and goodwill (class VII) are allocated what is left over of the sale price (not the contract stated price).

[Safire]

Thanks Jack. I know that is what they are supposed to do, when I asked if he had filled out the form and could we get a copy, they said he is not planning to fill one out. They still owed hime some money, so I guess this year will be the last year for his return.

From what I understand, unless both parties fill out the form, both are likely to get audited. Is that true?

[OldJack]

I don't know about the likely to get audited thing, that is just one score in what it would take to get audited. However, the fact that one party does not attach the form does not excuse the other party from filing the form with their tax return. It would appear that in your case the inventory fair market value is easily to establish and that leaves the rest to the difference in total sale price less inventory. As a practical matter I would send the other party the filled out form (with a copy of the IRS instruction sheet) that I was going to use and then they know they are supposed to do the same. Money still owed has nothing to do with the requirement to report the sale with the form.