Essay on Corporation

2373 Words Jan 6th, 2015 10 Pages
To: Shahab Razani, Tax Partner
From: Chinonso Nwogu, Tax Advisor
Date: January 3, 2014
RE: Tax Consequences and Compliance of Assets Acquisition

On December 1, 2012, Environmental Solutions Inc., (“Environmental”) offered to buy Joel Freedman’s (“Freedman”) company, Advanced Technologies. After discussing the offer with his attorney, he accepted to sell his company on August 1, 2013. On August 15, 2013, attorneys from both companies signed a letter of intent to acquire Advanced Technologies assets and liabilities for $5million. On September 30, 2013, the letter of intent was presented and approved by Environmental Solution’s board of directors. On October 15, 2013, the acquisition was completed and closed.
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A contingent liability is a liability which as the time of purchase had not matured. It is a type of liability which depends on an uncertain event such as settlement of lawsuit. In this case, the contingent liability rose before the acquisition by Environmental Solutions. The issue here is whether the assumed liabilities by Environmental must be capitalized to the basis of the IRC § 263(a).2 The assumed liabilities either fixed or contingent, if linked to an acquisition is must be capitalized.3 Capitalization of an amount is crucial when the amount is used to create an obligation before acquisition.
Similarly to Environmental Solutions, a taxpayer in Illinois Tool Works Inc. v. Comm. 355 F.3d 997 (CA-7, 2004) assumed a contingent tort liability in an acquisition, the court concluded that the payments were not deductible but are capitalized expenses which becomes part of the cost of the acquired assets. The fact that a liability is contingent is immaterial because the buyer has to capitalize the payment of the seller’s prior liability and then have the liability added to the cost basis of property in acquisition.4 5
Based on the IRC, Regulations and court rulings, the deduction of an assumed contingent liability is impossible because the IRS and codifications require that an assumed liability in an acquisition to be capitalized.
Issue 2
Seller (Advanced Technologies)
A. Assets Classification

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