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The Muenster Tax Court has handed down a decision (EFG 1997, 1381 - 10 June 1997) which will affect "asset deal" purchases of businesses no matter which way the case goes on appeal.
The case involves a withdrawing partner in a German commercial general partnership (oHG) who received a settlement payment from the sole remaining partner (sec. 142 (1) and 105 (2) HGB, sec. 738 (1) BGB). Since the payment of a settlement in return for the interest of a withdrawing partner is a purchase transaction for tax purposes, the holding of the case applies to all asset purchases of businesses including purchases of interests in partnerships. Under German tax law, the purchase of a partnership interest is treated as a pro rata purchase of the underlying assets.
The court held that the profits inherent in contracts on the order books of the purchased business constitute distinct intangible assets which the purchaser must capitalise separately on his opening balance sheet following purchase of the entity. (Such intangibles would not appear on the balance sheet of the entity being purchased because of the presumption of equal consideration on both sides of an executory contract and the prohibition on capitalisation of unrealised profits.) The court further stated that the profit expectation inherent in contracts in the course of performance is not to be subsumed under goodwill. This, while not new, is favourable for the taxpayer because, for tax purposes, acquired goodwill can only be written off over a period of 15 years, whereas the purchased "contracts in progress" can generally be depreciated much faster.
At issue in the decision was primarily the valuation of this item. The taxpayer had apparently valued the intangible with respect to both profit expectation and the fixed costs covered by the contracts (Deckungsbeitrag). There is support in the literature for this position. The court rejected this approach in favour of valuation with respect to the profit expectation alone. It considered the contribution to fixed costs to be subsumed in goodwill, even though it explicitly held that the profit expectation was not.
The legal standard of valuation is the so-called going concern value (Teilwert - sec. 6 (1) no. 7 EStG). This is defined as the price which a purchaser of the entire business would assign to the particular asset if he intends to continue operating the business. A good argument can be made that a purchaser would take account of the cost contribution ratio of contracts already on the order books in arriving at a price for the overall business. However, the taxpayer was apparently unable to provide specific evidence that the purchaser had in fact given separate consideration to the cost contribution effect. The court implied that it might have ruled differently had such evidence been produced.
The court stated that valuation with respect to the cost coverage contribution would lead to a double deduction for the taxpayer, once by way of depreciation of the intangible asset "contracts in progress" and a second time when the costs were actually incurred. This might be an aspect to consider in deciding on the value to assign to the cost coverage ratio, as opposed to an argument against taking any account of it whatsoever.
The taxpayer has appealed the decision to the Federal Tax Court.
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