equipment vs goodwill sale

[kathyc2]

Client is selling all assets, intangibles, etc to buyer.

Buyer is the one who came up with allocation between equipment and goodwill; the vast majority (about 90%) is going to goodwill.

The amount allocated to equipment is less than book value, so there will be an ordinary rate loss. The equipment in question is highly specialized, so appraisal if obtained would be highly subjective. This is not a related party transaction.

Should I be concerned? Or, is the FMV being an arm length transaction between a willing buyer and willing seller sufficient?

[Uncle Sam]

I suggest an appraiser be involved because the valuations of different assets will have a different tax effect on the purchaser and it should not be on an arbitrary basis based on the buyer's values without some independent valuation. When you sell tangible personal property there are state sales tax considerations for bulk sale purchases, and as well, goodwill being a material part of the purchase will have material effects on the tax calculations each year via depreciation.

[kathyc2]

My client is the seller, not the buyer, so my concern is protecting him. Client is saving a couple hundred grand of tax with this allocation. I'm looking more if anyone is aware of a situation where the IRS could try to reclassify the allocation. Or, if the arms length transaction would rule?

The advantage to buyer is local PPT. If they try to say equipment should be valued higher, I don't see how that could affect federal allocation, or my client. State income tax is the same regardless of nature of allocation.

[WICPA]

I think as long as you fill out the asset acquisition statement form 8594 you are okay. This shows both parties agreed to the sale. Could you argue that the specialized equipment has little value to the purchaser but must be included in the sale? Had a sale similar to that. There was little equipment involved in the sale but the purchaser did not want to allocate anything to the purchase. Sure seems like a good deal for your client.

[Burke]

You state the FMV allocated to equipment is less than book value, producing an ordinary loss. It's hard to give a definite opinion on this as to whether it is a fair valuation without further details, which I assume you have taken into consideration. We don't know the type of business this is; whether the goodwill was created or purchased; whether the primary value of the business actually is the goodwill. Just because the two parties to the transaction agree, and the fact that it is going to save such large amount of taxes on both sides should not be the overriding criteria. Does it conform with other sales of this type of business as far as valuation is concerned? The IRS could certainly challenge it. Whether they will or not is another matter, but if it appears too generous to the buyer and seller and too insubstantial to the government it is possible. I am sure they have some criteria of norms just as in other aspects of income tax law. Plus there is the added scrutiny of the state and localities regarding their tax interests.

[kathyc2]

The equipment is essential for continuing as a business. There is also considerable value in the created goodwill, namely workforce in place, good reputation, procedures and customer contacts.

I can back into the allocated value of equipment is I assume a 20% reduction in value for each year of the equipment purchased in last 5 years, use 10% of costs for 6-7 year old equipment, and 5% of cost for equipment older than 7 years. The numbers in this formula seem awfully low to me as some of the equipment is 20+ years old and still being used.

The reason there is still a BV is because I've known for the last few years that he was going to sell soon and would advise to only partial 179, knowing that in the year of sale he would be at the top marginal rate. I was not expecting that portion of sale would be less than BV though.

Maybe I'm freaking out a bit too much on this, and should just tell him that there is a small risk of IRS making an adjustment in the event he is audited. Absent anything definite in tax code that this allocation is too generous, I know he would not entertain a suggestion that equipment should have a higher value in allocation.

[ATSMAN]

I think as long as you fill out the asset acquisition statement form 8594 you are okay.

I agree with WICPA. Last tax season one of my client sold his fuel delivery business and we filled out the 8594 and sent to the buyer's tax guy and requested that if any adjustment is required it bust be agreed upon by the buyer and seller before they file their returns. Now I was not dealing with FMV below book value, it was just the goodwill that was adjusted a bit.