College of William & Mary Law School William & Mary Law School Scholarship Repository William & Mary Annual Tax Conference Conferences, Events, and Lectures 2014 Contingent Consideration, Contingent Liabilities and Indemnities in Acquisitions (Outline) Robert H. Wellen Repository Citation Wellen, Robert H., "Contingent Consideration, Contingent Liabilities and Indemnities in Acquisitions (Outline)" (2014). William & Mary Annual Tax Conference. 712. https://scholarship.law.wm.edu/tax/712 Copyright c 2014 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository. https://scholarship.law.wm.edu/tax CONTINGENT CONSIDERATION, CONTINGENT LIABILITIES AND INDEMNITIES IN ACQUISITIONS OUTLINE REFERENCES WILLIAM AND MARY TAX CONFERENCE NOVEMBER 6-7,2014 KINGSMILL RESORT WILLIAMSBURG, VIRGINIA ROBERT H. WELLEN IVINS, PHILLIPS & BARKER WASHINGTON, D.C. SEPTEMBER 2014 THIS PAGE INTENTIONALLY LEFT BLANK ROBERT H. WELLEN IVINS, PHILLIPS & BARKER WASHINGTON, D.C. Direct phone: 202-662-3401 Email: [email protected] LAW PRACTICE Bob Wellen has practiced tax law for almost 40 years. His practice includes planning and negotiating corporate acquisitions, joint ventures, financings, equity offerings and spin-offs and developing corporate stmctures. Regarding these types of matters, he obtains IRS advance mlings; represents taxpayers in administrative tax controversies and litigation and advocates policy positions before the Treasury Department and IRS. He also serves as an arbitrator in commercial cases involving tax issues, such as tax sharing agreements, and as an expert witness on tax issues. EDUCATION Bob received his B.A. from Yale College (magna cum laude, Phi Beta Kappa) in 1968, his J.D. from Yale Law School in 1971 and his LLM (Taxation) from Georgetown University Law Center in 1974. CAREER Bob served on active duty in the U.S. Navy Judge Advocate General's Corps. Thereafter, he joined Fulbright & Jaworski (now Norton Rose Fulbright) in 1975 and became a partner in that fitm in 1979. He joined Ivins, Phillips & Barker as a partner in 1993. PUBLICATIONS Bob has written numerous articles for tax publications, including the Practising Law Institute proceedings, TAXES, Tax Notes and The Journal of Taxation. He lectures frequently at professional education programs, including programs sponsored by the American Bar Association, the Practising Law Institute, the American Law Institute, the Tax Executives Institute, the Federal Bar Association, the District of Columbia Bar, New York University, University of Chicago, Penn State University/ Dickinson College of Law, University of California at Los Angeles, University ofMiami, William & Mary Law School and the Southern Federal Tax Institute. PROFESSIONAL ASSOCIATIONS Bob is a member of the American Bar Association Tax Section, in which he served as chair of the Corporate Tax Committee. He is also a fellow of the American College of Tax Counsel and a member of the District of Columbia Bar Tax Section and the Federal Bar Association. THIS PAGE INTENTIONALLY LEFT BLANK CONTINGENT CONSIDERATION, CONTINGENT LIABILITIES AND INDEMNITIES IN ACQUISITIONS OUTLINE WILLIAM AND MARY TAX CONFERENCE NOVEMBER 6-7,2014 KINGSMILL RESORT WILLIAMSBURG, VIRGINIA ROBERT H. WELLEN IVINS, PHILLIPS & BARKER WASHINGTON, D.C. SEPTEMBER 2014 TABLE OF CONTENTS Page NOMENCLATURE ....................................................................................................................... 1 INTRODUCTION.......................................................................................................................... 1 TAXABLE ASSET AND STOCK ACQUISITIONS .................................................................. 4 I. CONTINGENT PURCHASE PRICE IN ACQUISITIONS OF TARGET ASSETS OR STOCK .................... 4 A. Treatment of Seller - Choice Between Installment Method and Election Out.. .............. .4 B. Treatment of Seller- Installment Method ........................................................................ 4 1. Installment Method -Application .............................................................................. 4 2. Installment Method- Election Out.. .......................................................................... .4 3. Installment Method -Method of Calculating Gain Recognized ............................... .4 4. Allocating Installment Obligation to Certain Assets .................................................. 7 5. Installment Method - Defenal Charge ....................................................................... 8 6. Advantages and Disadvantages of Installment Sale Method to Seller ..................... 10 C. Treatment of Seller- Consequences of Electing Out of Installment Method ................ 11 1. Timing and Character of Amount Realized .............................................................. 11 2. Closed Transaction Method ...................................................................................... 11 3. Open Transaction Method ......................................................................................... 22 D. Proposal to Replace Closed Transaction, Open Transaction and Installment Methods of Reporting Contingent Purchase Price .......................................................... 28 1 E. Treat1nent of Acquiror ..................................................................................................... 29 1. Allocation of Contingent Purchase Price Among Assets Purchased ........................ 29 2. Specific Allocations - Intangible Assets ................................................................... 29 3. Interest. ...................................................................................................................... 29 4. Timing of Adjustments to Basis of Acquired Assets ................................................. 30 5. Contracts for Use of Intangibles ............................................................................... 30 6. Restructuring ofTarget inAll Cash Type-D Reorganization After Stock Sale ......... 30 7. Pay1nent to Third Pa1iy ............................................................................................. 31 F. Allocation of Amount Realized Among Assets Sold ...................................................... 31 1. Section 1060 .............................................................................................................. 31 2. Commissioner v. Danielson ...................................................................................... 31 G. Possible Treatment of Contingent Purchase Price as Target Stock, Acquiror Stock or Partnership Interest ........................................................................................... 31 H. Repo1iing Requirements ................................................................................................. 32 1. Section 1060 Asset Sales .......................................................................................... 32 2. Stock Sales with Elections under Section 338(h)(l0) or Section 336(e) .................. 33 3. Installnlent Method ................................................................................................... 33 4. Election Out oflnstalhnent Method ......................................................................... 33 II. CONTINGENT PURCHASE PRICE AND CONTINGENT LIABILITIES IN STOCK ACQUISITIONS WITH SECTION 338(H)(10) AND SECTION 336(E) ELECTIONS- CURRENT REGULATIONS ................ 33 A. Introduction ..................................................................................................................... 33 1. Section 338 ................................................................................................................ 33 2. Section 336(e) ........................................................................................................... 34 B. Treatment of Old T ......................................................................................................... 34 1. Installment Method ................................................................................................... 34 2. Election Out ofinstallnlent Method ......................................................................... 36 3. Allocation of Amounts Realized Among Assets Deemed Sold ................................ 38 4. Character of Amounts Realized ................................................................................ 39 C. Treatlnent ofNew T ........................................................................................................ 39 1. Allocation of Contingent Purchase Price and Contingent Liabilities Among Assets Deemed Purchased ........................................................................................ 40 2. Timing of Effects on Basis ........................................................................................ 40 3. Elimination (Mostly) ofPhantom Income .............................................................. ..41 4. "Breaking the Link" Between ADSP and AGUB .................................................... .42 D. Reporting and Administrative Requirements ................................................................. .4 2 1. Election ..................................................................................................................... 42 2. Additional Filing Requirements ............................................................................... .43 3. Other Administrative Requirements .......................................................................