Business Purchase

[SunTaxMan]

New client. Purchased ongoing business (restaurant - carry-out and eat-in), three locations, franchise.

SINGLE purchase price has NO allocation between the three stores, nor contents of stores (PP), goodwill. No non-compete contract involved. No real property involved - all locations are rentals.

There is NO attachment to, nor listing IN, Bill of Sale with specifics of purchase. Taxpayer paid separately for inventory of stores - so at least we have that figure.

I am wondering how to allocate purchase price, other than taxpayer's memory of store contents at time of purchase (3 years ago! - with no returns filed since, except payroll returns.)

Is it reasonable to make list of items and "estimated" value, apportioning the purchase price? and then proceed with depreciation/amortization on basis of "estimated" purchase prices? Would it be wise to note "estimated" on tax return?

One further thought, is there a potential of "defective contract" because no specific listing of purchase allocation included? Is this worth legal action? Seller insists there is no such listing and never was. I find it hard to believe that seller's 4562 and 4797 could be anywhere near accurate without some kind of documentation of exactly WHAT was sold.

Thanks for comments in any regard to these components of dilemma. And no, because of other aspects of relationship with taxpayer, this is not someone I want to tell to go somewhere else. I want to find a way to deal with this and bring tax returns to reasonable semblance of accuracy and completeness.

[kcjenkins]

Estimate, but do NOT put 'estimated' on the return. TR, all depreciation on purchased used assets is essentially 'estimated'. Any time your client buys multiple assets in a bulk purchase, you have to 'estimate' if the buyer and seller had not already 'estimated' what each item was worth. And it's no big deal, since you do know what he paid, and essentially what he purchased. Since he paid for inventory separately, and there is no land or real estate, you can basically say he bought "Furniture & Fixtures" and "Goodwill". So what you have to do is allocate to the F&F whatever seems reasonable, and then GW is the remainder.

[SunTaxMan]

KC,

Thanks,

One of my concerns, perhaps the primary concern, is the potential of "variance" with the seller's records. AT this point, the seller is saying "there is no listing of purchase breakdown" which, as I stated, I find hard to believe, because the seller would need this for his own 4797, etc.

My concern is the risk of making an allocation that would not be in agreement with the figures reported to IRS by the seller. I am wondering what the potential is for IRS to EVER compare these figures - except in an audit and then it would need to be an audit of both the seller and the buyer. I an thinking this could happen if IRS would audit EITHER buyer or seller and seek to document the figures used by the one audited - and the only documentation for these figures would be the list, as reported by the other party.

I realize this scenario seems very remote, but I like to have NO skeletons in the closet.

I do appreciate the comments.

Thanks again.

[TAXBILLY]

>>the seller is saying there is no listing of purchase breakdown<<

I would have him provide something to you in writing.

taxbilly

[Booger]

Wouldn't Form 8894 (Asset Acquisition Statement) come into play here?

Booger

[kcjenkins]

Even if the seller does not use the same allocation, the worst that could happen, if [unlikely unless the amounts are huge] the return is audited, is that they would ask you how you arrived at the allocation. As long as your logic is reasonable, that should not be a problem. While it's always best to have this sort of thing spelled out in a sales contract, it's usually long after the sale that we get informed about it. So all we can do, when there is no paperwork, just a check and a handshake between the buyer and the seller, is form an allocation that makes sense, keep notes on why you arrived at those values, and go on. Seldom do you ever get asked. And only if it is clearly unreasonable will they deny it.

[TAXBILLY]

The allocation is the responsibility of the client. If you take it on and there is a problem later be prepared to be thrown under the bus.

taxbilly

[kcjenkins]

I would always assume that any allocation would be discussed with, and agreed to, by the client before I would ever use it.

[TAXBILLY]

I don't assume ... I document. Been burned before. There always seems to be a "misunderstanding" when things go bad.

I have my clients sign a verification of their business miles for my records so that later they don't say "my accountant put down that number ...

taxbilly

[tim g]

Was there a form 8594 filed for the sale of the business? That form would have a break down by class for depreciation. It is supposed to filed by both the selling party and the purchasing party with their tax return in the year of sale/purchase.

Tim

[SunTaxMan]

A quick perusal of form 8594 and the instructions leads me to believe this form is not (1) necessary or (2) applicable to this situation.

I do not see an agreement, or disagreement for that matter, between the buyer and seller over the value of assets purchased as a group - or any reason for the buyer to "change" the value specified by the seller.

What I do see is the failure of the seller to provide the information, forcing the buyer to make the determination of value, i.e., an allocation of the purchase price between F & F and goodwill.

I can also see the value of making as detailed a list as possible of assets purchased (that portion under the category of F & F), so that disposal of any of those assets could be more easily handled and reported (Form 4797) - much like the difference between an auto mechanic purchasing a "tool box full of tools" or that same person purchasing a "detailed list of tools," the kind of list that would be required for insurance coverage.

Comments?

[kcjenkins]

I agree with you, TR.

[SunTaxMan]

One further thought - that came to me during the night - you know, when you wake up with one of those "earth shaking" moments at 3 AM!!!!!

8594 applies to a "bulk purchase" (various items lumped into a single purchase). Correct?

If this taxpayer sits and and makes a list (detailed list) of items purchased, and we allocate the purchase price to EVERY item on the list, we then will have a detailed "Detail" list in 4562 and NOT a "bulk purchase" (single item of F & F) to depreciate. Correct?

I realize this makes a "mountainous" chore "upfront" for the 2006 purchase - but makes disposition of a microwave (e.g.) in 2008 a simple entry in Asset Dispositon and 4797 -- and a legitimate loss calcuation for a discarded asset.

Thoughts?

[kcjenkins]

I'm inclined to a middle road approach, lumping together small items of the type that are normally discarded when worn out, rather than sold, or that are low-value items [i.e. three microwave ovens, $150 vs listing each one at $50] but entering anything that is likely to be sold when replaced as a separate item.

[RoyDaleOne]

Different locations, here in Florida the assets would have to be allocated to each different location for local tax authorities.