The APA should contain clear provisions allocating responsibility for taxes. Parties should also be familiar with the tax laws applicable to their transaction, particularly if it could be argued that the transaction had no practical economic effects other than the creation of income tax losses.
In Slone v. Comm’r, No. 12-72464 (9th Cir. Jun. 8, 2015), the Ninth Circuit considered tax deficiencies, interest and penalties which were not paid after an asset purchase agreement. The IRS sent notices of liability to the former shareholders of the company arguing that the shareholders were “transferees” (under federal tax law) of a party substantively liable for unpaid taxes under state law. The Ninth Circuit found that the tax court “failed to make a finding on whether the shareholders had a business purpose for entering into the stock purchase transaction other than tax avoidance”… or whether there was some economic substance behind it, and remanded the case back to the tax court.
Takeaway:
- Parties should be familiar with the tax laws applicable to their transaction and the tax provisions in the asset purchase agreement in order to minimize the potential for future allegations of tax avoidance.