A Tax Benefit Payment

A Tax Benefit Payment

June 01, 2005
A TAX BENEFIT PAYMENT made in a corporate acquisition had to be reported as income.

Company A sold two subsidiaries to company B. The acquisition agreement had standard language making the seller responsible for any taxes that relate to the period before closing. The buyer took the subsidiaries with net operating loss carry forwards that the seller group had been unable to use. At the time, such losses could be carried back two years and forward for 20.

Soon after the transaction, Congress changed the law to allow companies with losses to carry them back up to five years. The idea was to inject cash into struggling companies; it was part of a package of measures that were supposed to jump-start the US economy after the terrorist attacks on the World Trade Center and Pentagon in September 2001.

The buyer contacted the seller and asked whether it could use the net operating losses if they were carried back five years. It could. The parties entered into an agreement in which the seller agreed to pay the buyer two-thirds of its tax savings from using the losses.

The IRS said in a private letter ruling the government released in May that the buyer had to report the payment from the seller for the losses as ordinary income. At the same time, the seller could deduct the payment. The ruling is Private Letter Ruling 200518014.

Keith Martin