Author: Joseph Nacmias (CPA)
McGladrey & Pullen, LLP., Certified Public Accountants 
750 3rd Avenue, New York, NY 10017 

Telephone: (212) 297-4888 / Fax:  (212) 972-9088
E-Mail: Joseph_Nacmias@rsmi.com / http://www.mcgladrey.com

6.1 Asset and stock acquisitions

In most cases, purchasers prefer to buy assets rather than shares of stock because of the assumption of liabilities (recorded or unrecorded) inherent in a stock transaction. In addition, in an asset purchase, depreciation and amortization of long-lived assets “starts over” from the market value at the time of purchase, which can generate significantly higher tax deductions than in a stock transaction where the seller’s depreciation methods/lives would continue. In stock purchase situations there are fairly severe limitations on the utilization of a seller’s net operating tax losses (“NOL”). A rule enacted to limit “trafficking” in tax losses permits purchasers to deduct sellers’ NOL’s based on the long-term municipal bond rate times the capital invested; this typically results in 15 to 20 year utilization periods and expiration of a good part if not all of a seller’s NOL’s (NOL’s normally expire in 15 or 20 years and will usually be several years old at the time of acquisition).

Depending on the selling entity’s structure (“flow-through” entity or taxable at entity level), sellers’ interests may or may not be similar to those of purchasers’; obviously, the sellers’ taxes will impact their perception of the value of the business.

The following is an illustration of the US tax structure’s potential effects:

(1)     Approximate average combined rates Federal/State/Local

(2)     Excludes cash flow from sold net assets which would be the same in both cases

It may be possible to help sellers defer or minimize taxes by the use of installment arrangements, issuance of some purchaser’s restricted stock, creation of a new entity in which the sellers have an interest, etc.

Sales of assets may generate significant “sales taxes” (see 7.3) especially if large amounts of equipment and machinery exist; there are no transfer taxes on sales of businesses (whether or not stock) in the U.S. unlike in various other countries.