United States: The Treatment of Contingent Liabilities in Taxable Asset Acquisitions

Last Updated: March 5 2004

Originally published August 2001

By Mark J. Silverman and Kevin M. Keyes

TABLE OF CONTENTS

I. INTRODUCTION

II. TIMING OF DEDUCTIONS

A. Accrual Method Taxpayers

B. Cash Method Taxpayers

III. TREATMENT OF CONTINGENT LIABILITIES IN TAXABLE ASSET ACQUISITIONS

A. Traditional Approach and Development

B. Factors that Determine Whether Liability Has Been Assumed

1. The Liability Results From Buyer’s Operation

2. Arises Out of Post Acquisition Events

3. Buyer Aware of Liability

4. When Did Legal Liability Arise

5. Liability Reflected in Price

6. Liability Expressly Assumed by the Buyer

7. Balance Sheet Reserve

8. Summary

IV. TREATMENT OF ASSUMED LIABILITIES

A. Seller’s Treatment of an Assumed Liability

1. Income Inclusion

2. Offsetting Deduction

3. Imputed Interest Income

4. Summary

B. Buyer’s Treatment of Assumed Liabilities

1. Capitalization Approach

2. Deduction Approach

3. Income Approach

4. Summary

C. Section 1060

1. Overview

a. Applicable Asset Acquisitions

b. Allocation of Consideration

2. Treatment of Assumed Contingent Liabilities Under Section 1060

a. Seller's Treatment

b. Buyer's Treatment

D. Section 338(h)(10)

1. Overview

a. Result of Section 338(h)(10) Election

b. Consequences of Section 338(h)(10) Election to Seller

c. Consequences of Section 338(h)(10) Election to Buyer

2. Treatment of Assumed Contingent Liabilities Under Section 338(h)(10)

INTRODUCTION

This outline discusses the Federal income tax treatment of contingent liabilities in the context of taxable asset acquisition transactions.

A. First, the outline will provide a brief overview of the timing rules relating to deductions.

B. Then, the outline will discuss the treatment of contingent liabilities in the context of taxable asset acquisitions. This topic is of particular interest, since the importance of contingent liabilities has increased dramatically in recent years. Common examples of contingent liabilities include environmental liabilities, employee health care and pension liabilities, and tort liabilities. The outline will highlight the factors traditionally relied on in determining whether a liability of the seller has been assumed by the buyer as part of an acquisition.

1. Unfortunately, the treatment of contingent liabilities is currently uncertain due to the fact that traditional authorities are sparse and often contradictory.

2. The parties face significant tax issues and risks where an acquisition involves contingent liabilities.

a. The concerns of the seller include:

(1) Whether additional gain must be recognized;

(2) Whether the installment method will apply;

(3) Whether an offsetting deduction can be claimed; and

(4) Whether interest income will be imputed.

b. The concerns of the buyer include:

(1) Whether the contingent liabilities can be deducted;

(2) Whether income to the buyer will be triggered; and

(3) Whether the imputed interest rules will apply.

II. TIMING OF DEDUCTIONS

A. Accrual Method Taxpayers

1. An accrual method taxpayer may deduct an expense when:

a. The "all events" test of section 461(h)(4) has been satisfied, and

b. Economic performance has occurred.

2. The all events test of section 461(h)(4) is satisfied when the liability is "final and definite in amount, fixed and absolute, and unconditional." United States v. Hughes Properties, Inc., 476 U.S. 593 (1986), citing Security Flour Mills Co. v. Commissioner, U.S. 281, 287 (1944), Brown v. Helvering, 291 U.S. 193, 201 (1934) and Lucas v. North Texas Lumber Co., 281 U.S. 11, 13 (1930).

a. The first two components of the above rule are referred to as the "all events" test, which originated in United States v. Anderson 269 U.S. 422 (1926), and is now codified in section 461(h)(4).

(1) The all events test is intended to protect against deductions that might never occur. Diversified Auto Services. Inc. v. Commissioner, 43 T.C.M. 701 (1982).

(2) Generally, accrual for tax purposes is prevented if there exists a contingency with respect to a liability. See TAM 8741001, modified by TAM 9125001.

3. The "economic performance" requirement was added to the all events test with the enactment of section 461(h) in 1984.

a. Special rules apply where property or services are provided to the taxpayer.

(1) Section 461(h)(2)(A)(i) provides that if the liability in question arises out of services to be rendered to the taxpayer by another person, economic performance occurs as the services are provided.

(2) Section 461(h)(2)(A)(ii) provides that if the liability arises out of providing property to the taxpayer by another person, economic performance occurs as the person provides such property.

(3) Section 461(h)(2)(B) provides that where the liability requires the taxpayer to provide property or services, economic performance occurs as the taxpayer provides such property or services.

(4) Section 461(h)(2)(C) provides that if the liability requires a payment to be made to another person, and arises under any workman’s compensation act or tort claims, then economic performance generally occurs as the payments are made.

4. The timing of deductions may be controlled by other provisions.

a. Section 404(a)(5) provides that contributions to a nonqualified deferred compensation plan are deductible only in the taxable year in which an amount attributable to the contribution is includible in the gross income of the employee.

b. Section 267 may defer deductions between related parties.

c. Treas. Reg. § 1.461-1(a)(2) provides that an accrual method taxpayer cannot claim an immediate deduction for an expenditure that creates an asset with a useful life extending beyond the taxable year.

B. Cash Method Taxpayers

1. Cash basis taxpayers may generally claim a deduction in the year of payment, Treas. Reg. § 1.461-1(a)(1), hence, the "all events test" described above does not apply.

2. However, cash basis taxpayers are still subject to the capitalization rules of Treas. Reg. § 1.461-1(a)(1) for any expenditure that results in the creation of an asset having a useful life extending beyond the taxable year.

3. Moreover, cash basis taxpayers may be denied an immediate deduction if the cash outlay is used to prepay otherwise deductible expenses. For the treatment of such expenditure see Keller v. Commissioner, 725 F.2d 1173 (8th Cir. 1984); Rev. Rul. 79-229, 1979-2 C.B. 210.

III. TREATMENT OF CONTINGENT LIABILITIES IN TAXABLE ASSET ACQUISITIONS

There exists significant uncertainty surrounding the treatment of contingent liabilities in taxable asset acquisitions.

A. Traditional Approach and Development

1. Almost every deal involves the existence of contingent liabilities. Most commonly, these liabilities take the form of environmental costs, pending or future tort claims, and employee costs (i.e., medical, retirement, and unemployment). However, determining the proper treatment of contingent liabilities in taxable asset acquisitions is a complex task due to the sparse and often conflicting authorities that have dealt with the topic. This section discusses both the Federal income tax treatment of contingent liabilities in taxable asset acquisitions and the issues and risks inherent in every taxable asset deal involving contingent liabilities.

2. The issue of the proper treatment of contingent liabilities arises where a buyer purchases the assets of a business and after the acquisition, the buyer pays or incurs a liability that is attributable to the acquired business.

3. Under these facts, it is not clear whether the liability is a liability of the seller that is assumed by the buyer or whether it is simply a liability arising after the acquisition that is properly treated as the buyer’s liability.

4. Thus, the threshold question is with whom did the liability arise? Specifically, is it a liability that arose only after the buyer had completed the transaction or is it a liability that originated with the seller and was assumed by the buyer as part of the transaction?

a. If the buyer did not assume the liability as part of the acquisition then:

(1) The buyer should get a deduction for the payment of the liability under the usual rules (i.e., deductible within whatever limitations apply, such as sections 404 or 461); and

(2) The seller should remain unaffected.

b. However, numerous issues arise if the liability is treated as seller liability assumed by the buyer, including:

(1) What is the seller’s amount realized on the sale of the business?

(2) Is the seller permitted a deduction to offset any increase in amount realized?

(3) What is the buyer’s new basis, if any, in each asset acquired?
5. Once again, the threshold question is when will a contingent liability be treated as a seller liability assumed by the buyer and, alternatively, when will the liability be treated as a buyer liability.

a. Each case must be decided on its own particular set of facts and circumstances.

b. Although this can be an uncertain process, cases and rulings have provided some guidelines or factors as to when a contingent liability will be treated as having been assumed by the buyer.

B. Factors that Determine Whether Liability Has Been Assumed

1. The Liability Results From Buyer’s Operation

a. The first factor to be considered in determining whether the buyer assumed the liability of the seller is whether the liability relates to either: (i) the buyer’s operation of the business; or (ii) an activity performed by the buyer; or (iii) events under the buyer’s control; or (iv) a decision of the buyer.

b. The goal is to separate the occurrence of the liability from the seller (i.e., arising from the seller’s operation of the acquired business) and connect the liability to some post-acquisition event or action occurring under the buyer’s operation of the acquired business.

c. If the liability does not relate to the seller’s operation of the business then the buyer can deduct the costs of the liability incurred (and, in general, the seller should remain unaffected).

d. However, the cost of the liability must be capitalized if it is found to relate to the seller’s operation of the business.

e. The primary case that relied on this factor is Holdcroft Transportation Co. v. Commissioner, 153 F.2d 323 (8th Cir. 1946).

(1) In Holdcroft, a corporation acquired assets from a partnership in exchange for common stock and the assumption of the partnership liabilities, including two tort claims filed against the partnership. This transaction was effected under the predecessor to section 351.

(2) The taxpayer-petitioner settled the tort claims and deducted the costs. At trial, the taxpayer argued that the corporation was the successor to the partnership and that it should be able to deduct amounts paid on the tort claims.

(3) The Eighth Circuit rejected this argument in holding that the claims arose out of the business of the seller, not the buyer.

(4) As a result, the cost of settling the tort claims was not a deductible operating expense or operating loss of the buyer’s business.

(5) The Court also held that it was of no consequence that the liabilities were contingent.

(6) NOTE: The Service has announced that it will not follow the Holdcroft decision in situations where the assets of a business are acquired in a section 351 transaction. Rev. Rul. 95-74, 1995-2 C.B. 36; See also Rev. Rul. 80-198, 1980-2 C.B. 113; Rev. Rul. 83-155, 1983-2 C.B. 38. Relying upon its ruling in Rev. Rul. 80-198, the Service, in Rev. Rul. 95-74, explained that the specific congressional intent of section 351(a), which is to facilitate the incorporation of ongoing businesses through a tax-free vehicle, would be frustrated if Holdcroft was followed under these circumstances.

(a) Hence, the Service will not disallow deductions under Holdcroft that arise out of pre-acquisition operations if the business was acquired in a section 351 transaction.

(b) However, Rev. Rul. 95-74 only explicitly applies to section 351 transactions and, therefore, the factor created in Holdcroft is still applicable to taxable transactions.

(c) Moreover, it is important to note that while the Service will not apply Holdcroft in section 351 transactions, courts may still continue to do so.

(7) In Notice 2001-17, 2001-09 I.R.B. 730, the Service announced that it will not follow Rev. Rul. 95-74 in certain tax shelter transactions defined under the Notice. See also Notice CC-2001-033a, (June 28, 2001) (advising field personnel on how to develop cases involving stock loss claims as described in Notice 2001-17, 2001-09 I.R.B. 730, on contingent liability tax shelters).

(a) The tax shelter transaction, which is intended to qualify under section 351, involves a transfer of a high basis asset to a controlled corporation in exchange for stock and the assumption of a liability with a present value only slightly less than the value of the transferred asset.

(b) The stock received in the transaction has a low fair market value because the value of the liability is almost equal to the value of the transferred asset

(c) However, the transferor’s basis in the transferee’s stock is not reduced by the assumed liability because the transferred liability is not treated as money received by virtue of sections 358(d)(2) and 357(c)(3).

i) Section 357(c)(3) excludes the amount of a liability, the payment of which would give rise to a deduction, from the determination of the amount of liabilities assumed.

ii) Section 358(d)(2) excludes liabilities described under section 357(c)(3) from being treated as money received by the taxpayer on the exchange.

(d) The transferor then sells the acquired stock for its fair market value, which is far less than the transferor’s basis in the stock, and claims a loss on the sale.

(e) For transfer’s after October 18, 1999, the Service will assert that such losses are disallowed because the transferor’s basis in the stock received is reduced under newly enacted section 358(h), which reduces stock basis by the amount of certain liabilities.

f. Other authorities seem to focus on this factor-

(1) In Illinois Tool Works, Inc. v. Commissioner, 117 T.C. No. 4 (2001), the court held that the payment of a patent infringement liability assumed by the buyer must be capitalized.

(a) In so holding, the court stated "[g]enerally, the payment of a liability of a preceding owner of property by the person acquiring such property, whether or not such liability was fixed or contingent at the time such property was acquired, is not an ordinary and necessary business expense." Id. at 11.

(b) The court rejected the taxpayer’s contention that the payment should retain its deductible character because it would have been deductible had it paid by the seller prior to the acquisition.

(c) The court also rejected the taxpayer’s argument that the payment of the liability should not be added to basis because the liability was highly spectulative and unexpected at the time of acquisition.

(d) Instead, the court held that the buyer was aware of the liability, the liability was expressly assumed in the purchase agreement, and the status of the liability was considered in determining the final purchase price.

(2) In Albany Car Wheel Co. v. Commissioner, 40 T.C. 831 (1963), aff’d, 333 F.2d 653 (2d Cir. 1.964), the court rejected the buyer’s attempt to capitalize costs associated with severance payments made to union employees pursuant to a collective bargaining agreement that arose upon the buyer’s decision to close a manufacturing plant.

(a) The court emphasized that the liability arose out of a new collective bargaining agreement that was negotiated on behalf of the buyer contemporaneously with the purchase of the business.

(b) The court also emphasized that the new agreement was substantially different from the seller’s old agreement to the extent that payments were contingent upon the buyer’s failure to provide adequate notice of a plant closing.

(c) Accordingly, the court held that the buyer’s obligation was of "such contingent character that it could not be considered part of the cost of the assets," and that any liability that became fixed in a later year was properly taken into account as a deduction.

(3) In TAM 9721002 (Jan. 24, 1997), the buyer expressly assumed the liabilities of the business. The Service determined that:

(a) [I]n the precedent requiring the buyer to capitalize, rather than deduct, the payment of an obligation, the events most crucial to creation of the obligation occur before the acquisition. Under these circumstances, the obligation is treated as a liability of the seller. By contrast, in cases allowing the buyer to take a deduction, the events most crucial to creation of the obligation occur after the acquisition. Under these circumstances, the obligation is a liability of the buyer. The difference in the cases is therefore the degree to which the obligation was fixed at the time of the acquisition.

(b) In the instant case, a liability for severance payments to Target’s employees could arise only if employees were involuntarily terminated. As no employee had been terminated by the date of acquisition, no liability existed for New Target to assume. Further, Buyer neither expressly nor impliedly agreed to pay, as part of the acquisition, any severance payments it might later incur. Buyer was free to decide after the acquisition whether to terminate employees and become liable. Finally, some employees would not be entitled to severance under either the termination protection agreements or the personnel policy if other suitable jobs could be found for them.

(c) Hence, this case more closely resembles cases in which the events most crucial to creation of the obligation occurred after the acquisition. Because no employee was terminated before the date of acquisition, no liability arose before the acquisition (even though the amount of New Target’s later liability for severance pay could be based on employment status and length of service with Target). Thus, the severance payments did not result from liabilities of Target, either fixed or contingent, that New Target could be treated as assuming in the acquisition.

(4) In Rev. Rul. 76-520, 1976-2 C.B. 42, the buyer acquired a newspaper business.

(a) The Service held that the costs of fulfilling prepaid subscriptions were assumed by the buyer and had to be capitalized because the liability related to the seller’s operation of the business.

(b) However, the Service also held that costs incurred for publication and distribution to news stands were deductible because they related to the buyer’s operation of the business.

(5) In FSA 19991068 (October 8, 1993), the buyer acquired the assets and assumed the liabilities of a packaging company.

(a) The Service concluded that the buyer must capitalize post-acquisition payments made for retiree health and life insurance benefits.

(b) The Service based its conclusion on the fact that the benefits were paid to retirees who had never worked for the buyer.

(c) Accordingly, the Service determined that "[Buyer’s] obligation to pay those benefits could not have arisen out of the operation of its business, but arose instead out of employment contracts the former employees had with the seller."

(d) The Service also concluded that expenses incurred by the buyer in closing a plant were deductible because the buyer was under no obligation to make post-acquisition closings and thus, the expenses incurred therefor were not liabilities assumed by the buyer.

2. Arises Out of Post-Acquisition Events

A second factor is whether the liability arises out of post-acquisition events. This factor is closely related to the one discussed above and commonly arises in employee death benefit cases.

a. This factor has been relevant where there is a contract in place at the time of the acquisition to pay death benefits when an employee dies.

(1) The liability is contingent because the employee will one day die.

(2) The liability should be a buyer liability if the employee dies after closing.

(3) However, the buyer has assumed the liability if the employee has died prior to the acquisition.

b. Several cases illustrate this point.

(1) In M. Buten & Sons, Inc. v. Commissioner, 31 T.C.M. 178 (1972), a corporation agreed to assume the liabilities of a partnership including death benefits payable to widows.

(a) The taxpayer was not allowed a deduction for death benefits payable to the widow of an already deceased partner.

(b) However, the taxpayer could deduct death benefits payable to the widow of a partner who died after the acquistion.

(2) In David R.Webb Company, Inc. v. Commissioner, 708 F.2d 1254 (7th Cir. 1983), the buyer assumed an obligation to make pension payments to the wife of an employee that had died almost twenty years prior to the acquisition.

(a) The court held that the obligation arose prior to buyer’s operation of the business.

(b) The buyer was, therefore, not permitted to deduct death benefits paid under this obligation.

3. Buyer Aware of Liability

The third factor is whether the buyer was aware of the liability at the time of the acquisition.

a. In Pacific Transport Co. v. Commissioner, 29 T.C.M. 133 (1970), rev’d per curiam, 483 F.2d 209 (9th.Cir. 1973), cert. Denied, 415 U.S. 948 (1974), a parent corporation liquidated its subsidiary acquiring the assets and assuming the liabilities, which included law suits asserted against the subsidiary.

(1) The Tax Court held that the liabilities were not assumed because they were too remote to be accounted for.

(2) The Ninth Circuit disagreed holding that the acquiring parent was aware of the liabilities at the time of the liquidation and, therefore, the liabilities constituted capitalized costs of the acquisition.

(3) The court further held that the contingency was irrelevant, stating that no exception to capitalization treatment applies where "taxpayers enter into bargains, proceed under a mistake of, law, or fail to realize the substance or amount of the liability assumed."

b. Pacific Transport, suggests that the buyer will not be entitled to a deduction if it is aware of the liability prior to the acquisition.

c. It is uncertain whether the buyer in Pacific Transport would have been permitted a deduction had it not known of the liabilities.

d. The Tax Court’s recent holding in Illinois Tool Works, supra, also suggests that pre-acquisition knowledge of a potential liability justifies capitalization.

(1) The taxpayer argued that it ought to be permitted to deduct the payment of an assumed potential patent infringement liability because both the likelihood of the liability vesting and the amount of the liability if vested were highly speculative.

(2) The court disagreed, stating that the liability "was a contingent liability that petitioner was aware of prior to the acquisition of assets and liabilities from [the seller] and that petitioner expressly assumed in the purchase agreement." Id. at 17.

e. The Holdcroft decision supra, seems to indicate that the buyer’s knowledge of the liability is irrelevant to the extent that the facts and circumstances of the case indicate that the liability arose from the operations of the seller.

f. Moreover, it seems quite certain that while the Service will consider the buyer’s awareness of the liability as a factor, the main test of deductibility is whether the liability arose out of the buyer’s operation of the business. See 1997 FSA LEXIS 327 (Dec. 10, 1997) ("It is not enough that the buyer is aware of the liability. Rather, it must be determined whether the liability arose out of a post-acquisition event").

g. NOTE: Pacific Transport, was recently questioned by the Seventh Circuit in Nahey v. Commissioner, 196 F.3d 866 (7th Cir. 1999).

(a) In Nahey, the court rejected the taxpayer’s claim for capital gains treatment and held that settlement proceeds paid to the buyer for a liability arising out of the seller’s operation of the business constituted ordinary income to the buyer when received.

(b) In so holding, the court stated: "In some of the cases that Nahey cites, the court may have misclassified an expenditure (he points chiefly to Pacific Transport Co. v. Commissioner, . . .) and treated an ordinary expense as a capital one. If so (and we needn’t decide), those cases are incorrect."

(c) Judge Cudahy concurring opinion argues that "Pacific Transport is on all fours with the present case except that it involves the expense side rather than the income side." Accordingly, Judge Cudahy acknowledges that it is inequitable for the government to assert capitalization in the expense context and ordinary income in the income context when the claims at issue are the complete inverse of one another.

(d) In Illinois Tools Works, supra, the Tax Court recently declined to rule upon the statues of Pacific Transport. Instead, the court ruled that the issue was controlled by David R Webb, which is the main Seventh Circuit case regarding the treatment of assumed liabilities.

4. When Did Legal Liability Arise

Another factor used by some courts to determine if a liability of the seller has been assumed by the buyer is the time the legal liability arose.

a. This factor explains the treatment of contingent tort liabilities.

b. Courts have typically held that legal liability for a tort arises when the tort occurs.

(1) As a result, a pre-acquisition cause of action is a liability of the seller.

(2) Holdcroft, supra, Pacific Transport, supra, and Illinois Tool, supra, support this conclusion.

(3) These cases also indicate that the contingent nature of the claim is irrelevant.

c. This result should be compared to the treatment of claims arising in contract.

(1) In Albany Car Wheel Co., supra, there was a collective bargaining agreement that required payment of severance wages to employees upon a plant shutting down.

(a) The purchase agreement called for an express assumption of the severance pay liability.

(b) After the acquisition, the plant was shut down and severance payments were made by the buyer.

(c) The court held that the liability did not arise until after the buyer had closed the plant.

(d) The contract that required payment upon certain events was contingent upon a future event; the liability arose only after the plant was closed down.

(e) Thus, the buyer’s payments of severance costs were deductible because the contingency occurred from the buyer’s operation of the business since the liability arose from the buyer’s decision to close a manufacturing plant without giving the contractually required notice.

(f) This decision is instructive because it indicates that:

i) The facts and circumstances of the transactions override the express assumption of a liability;

ii) A contingent liability arising in contract may not treated as an assumed liability; and

iii) A deduction is appropriate if the action that triggers the contingency is within the buyer’s control (in this case, shutting down the plant).

(2) The same result was reached in United States v. Minneapolis & St. Louis Ry. Co, 260 F.2d 663 (8th Cir. 1958).

(a) The seller was in negotiations with a labor union for retroactive wage increases.

(b) The balance sheet contained a reserve for the retroactive wages to be paid once a settlement was reached.

(c) The agreement with the union was reached after closing; the liability arose at that point.

(d) The court held that there was no liability of the seller to assume and the buyer’s payment of the retroactive wages was deductible.

(e) NOTE: The balance sheet reserve was not an issue in the case.

5. Liability Reflected in Price

The next factor is whether the contingent liability is reflected in the price of the acquired assets of a business.

a. Courts look to see if the purchase price was reduced on account of the existence of contingent liabilities.

b. If purchase price appears to have been reduced, then the liability looks more like an assumed liability. But see Pacific Transport, supra (acknowledging that the purchase price had not been reduced by the value of the liability but finding in favor of assumption nonetheless).

c. This factor is most evident where:

(1) There is a reserve on the company’s balance sheet prior to the acquisition for the amounts of a liability that is not currently deductible (e.g., employee retirement and medical benefits owed);

(2) Where the purchase price is based upon the company’s balance sheet (e.g., book value of assets minus the anticipated cost of liabilities); and

(3) Where there is a clear reduction in purchase price allowing the Service to argue that the liability is reflected in the cost.

6. Liability Expressly Assumed by the Buyer

The next factor is whether the Buyer has expressly assumed a liability of the seller.

a. If the Buyer expressly assumes the liabilities of the seller, it is generally concluded that the buyer has assumed the liability as part of the acquisition, therefore, requiring capitalization

b. However, this factor alone is not always fatal to the buyer’s chances of deducting liability costs.

c. For example, in Minneapolis & St. Louis Ry. Co., supra, the buyer purchased assets of a business and assumed all the liabilities of a business at a foreclosure sale.

(1) The Eighth Circuit affirmed the Tax Court in upholding a buyer-taxpayer’s deduction for retroactive wage increase payments.

(2) The court held that the liability could not have been assumed because it did not exist at the time of acquisition.

(3) This case implies that an express assumption of liabilities will not result in capitalization if the facts and circumstances of the liability indicate that the liability could not have been assumed.

d. In Albany Car Wheel Co., supra, the buyer made severance payments to terminated employees after the buyer decided to close a manufacturing plant.

(1) The purchase agreement required that the buyer procure a release of the seller’s liability under a union contract for severance pay.

(2) The buyer procured the release by entering into a new contract for severance pay, which had terms that substantially differed from the seller’s contract.

(3) The court held that the liability had not been assumed because the liability arose out of the buyer’s conduct, which obligated the buyer under its own contract.

e. In TAM 9721002 (Jan. 24, 1997), the Service ruled that the buyer’s express assumption of an obligation to make severance payments under a pre-acquisition agreement did not preclude a deduction because the liability arose solely out of the buyer’s decision to terminate employment.

f. In GCM 39274 (Aug. 16, 1984), the Service ruled that the buyer’s express assumption of an obligation to fund a past service liability did not preclude the deductibility of the buyer’s own contributions paid in order to meet post-acquisition minimum funding requirements.

7. Balance Sheet Reserve

The last factor is the balance sheet reserve. This factor can be viewed as a combination of:

a. The buyer’s awareness of the claim, and

b. Reflections in purchase price.

8. Summary

The seven factors that determine whether the buyer has assumed the liability of the seller are:

a. Whether the liability results from the buyer’s operation of the business;

b. Whether the liability arises out of post-acquisition events;

c. Whether the buyer was aware of the liability at the time of the acquisition;

d. Whether the legal liability arose before or after the acquisition;

e. Whether the liability is reflected in the price of the acquired business assets;

f. Whether the buyer has expressly assumed the liability; and

g. Whether the liability is reflected in the seller’s balance sheet.

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Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.