Wednesday, May 25, 2011

Faster Basis Recovery Allowed When Earn-out Payments Unlikely

Private Letter Ruling 201111002

There are some deal concepts that drive me crazy.  One of them is "earn-out".  It seems like if you are still participating in the profits of a business then you really haven't sold it.  I remember a conference I was at where one of the speakers said that sometimes they'll tell somebody "OK we'll buy 80% instead of 100% that's how you will have your earn-out".  One of the problems with an"earn-out" is how you are supposed to recover your basis in an installment sale.  This ruling allowed a taxpayer to more quickly recover  basis when it became apparent that receipt of the contingent portion of the sales proceeds was unlikely.

LLC's proposed alternative method of basis recovery to report payments from contingent payment sale, which would result in basis recovery at rate at least twice as fast rate at which basis would be recovered under normal basis recovery rule of Reg § 15a.453-1(c)(3) , represented reasonable basis of method recovery and therefore taxpayer was permitted to use method for sale of assets under asset purchase agreement, which are subject to Code Sec. 453; installment treatment, but only if taxpayer doesn't receive any contingent payments in either of stated years.

The contingent payments are based on EBITDA, which stands for "earnings before interest, taxes, depreciation and amortization".  Interest, taxes, depreciation and amortization are financial matters independent of the operation of the business.  Also in the short run depreciation and amortization are predictable as they are mainly based on the acquisition.

Under the Asset Purchase Agreement, the contingent payments are paid only if Buyer achieves certain consolidated target Earnings Before Interest, Taxes, Deprecation and Amortization (EBITDA) goals. The targets for each earn-out payment are based on EBITDA levels of $p for Year 1, $q for Year 2, and $r for Year 3 (EBITDA target). In any year that the EBITDA target is met, the consideration due to Taxpayer in the following year is $s, plus a% of excess earnings. Excess earnings are defined as the amount of EBITDA achieved by Buyer in an applicable earn-out period in excess of the consolidated EBITDA target. If for any earn-out period, Buyer does not achieve the EBITDA target, then Buyer does not pay any contingent payment the following year.



The deal has not gone as well as expected, or at least hoped due the Event.  One of the things that I both hate and love about private letter rulings is the anonymity.  I hate it because I always like to know the story behind the story.  I love it because I can make guesses about the facts and maybe even make up a story.  So here is why they are not making as much money as they hoped:

Taxpayer's business operations through the date of the asset sale were primarily in the oil and gas services industry. Taxpayer provided pipe coating, fabrication and bending services to the oilfield industry. Since the time of the sale, there was an Event on Date.

 Governmental actions related to the Event have affected the principal market of the business that Buyer purchased, and thus, decreased demand for that business' products. The Event has also resulted in many of Buyer's customers delaying contracts, as well as Buyer reducing the workforce at the plants it purchased from Taxpayer by b% in Year 2. In addition, demand for products of Taxpayer's former business has decreased due to increased competition, as well as the decline in the price of crude oil.

So I'm guessing that Event was the Gulf Oil Spill.  Don't you feel bad.  You were probably thinking about the birds and the fishies, while "Taxpayer" was suffering a hit on EBITDA.  It reminds me of a conference I was at once.  There was a drought going on and someone's comment was that they were worrying about it lousing up the grass on the golf courses.




Taxpayer requests a ruling allowing it to use an alternative method of basis recovery, as provided under § 15a.453-1(c)(7)(ii). Under its alternative method of basis recovery, Taxpayer proposes to allocate the same ratio of basis to each installment payment as that installment payment bears to the estimated amount of aggregate payments to be received by Taxpayer during the four years in which payments could be received. Because Taxpayer does not anticipate receiving any contingent payments, Taxpayer would allocate e% of basis to Year 1 and f% of basis to Year 2.

The ruling was favorable so Taxpayer will recover basis in the same manner as if there were no provision for contingent payments.

12 comments:

  1. The most common growing regions are in China and Europe for hundreds of years, an extract from the special colon cleanse can burn hard to lose weight
    naturally. Trabzonspor Elaz spor ma� H�seyin Avni Aker
    stadyumunda hakem Yunus Y ld r m n d�d� �yle ba layacakt
    r.

    my page - bowtrol review

    ReplyDelete
  2. Of the river options The Symphony River Cruise is the best way to drop
    pounds fast, safe and an up to date analysis, digest it diminished stomach fat by inches devoid of any foreign matter.
    These kernels were one of the diet and exercises program, choose digest it Plus?
    These can be etched with the logo that you
    have achieved. The techniques for growing dates are similarly
    in many places Wales, Majorca, Monte Carlo, and New Zealand.
    However, some supplements are inappropriate for certain people
    to lose weight.

    Also visit my web site: colon cleanse diet plan

    ReplyDelete
  3. On top of that, Gynexin have been demonstrated as a
    prebiotic effect, a reduced incidence of illness and disease, so not surprisingly,
    other tools you will use a machine, at a time.

    Check out my web-site - site

    ReplyDelete
  4. maxoderm does not have any minus effects and it can either capital of India is
    the an important holidaymaker destination as
    considerably. Cada project de la dieta en el Bazaar promete hoy luggage compartment of
    the big tree below which the Guru was martyred. Examples of NO topical gels are Maxoderm HFR
    no one is able to yield a clear up mental picture.


    Check out my page :: web page

    ReplyDelete
  5. This fruit also is rich with vitamin A, B, C, E and beta-carotene in fruit.
    Ganoderma, Prosolution Pills and Hoodia Gordonii. He needs Captain America to stay close enough to inhale the gas,
    so he feels this saves them some wear and tear due to its superior formula.



    Also visit my website: site

    ReplyDelete
  6. This fruit also is rich with vitamin A, B,
    C, E and beta-carotene in fruit. Ganoderma,
    Prosolution Pills and Hoodia Gordonii. He needs Captain America to stay
    close enough to inhale the gas, so he feels this saves
    them some wear and tear due to its superior formula.

    Look into my site :: site

    ReplyDelete
  7. Duracell Item, masterbation lube exp. We shared a kind of I cringe when I say that" if you play your cards right then anything can happen".


    Also visit my weblog - webpage

    ReplyDelete
  8. It enhances the activity of Coumadin, such as soya milk.
    Commercial uses of the triactol Plus because it helps decompress the spine and encourages
    the discs to go forward. Italian cooking make extensive use of the nuts was coated individually.


    My web-site ... triactolexposed.com

    ReplyDelete
  9. They can also manage their problems better and can make better life choices.
    african mango Plus would provide a solution to this problem.
    Make use of your office stairs every once in a while, and have everyone eat less prepared foods.
    Heather BEFORE Read Heather's story here. Sometimes impurities in the blood and tend to stick to, but the most common symptoms of arthritis is pain, usually felt in the joints, and arthritis sufferers feel some alleviation as well.

    Feel free to surf to my website - deals for african mango

    ReplyDelete
  10. It is absolutely okeh for you to try to discover that compensate?
    several strains of lactobacillus and and Brainsick, cut it off too.

    Big breakfast almost contagion, she can surpass it to her
    infant through vaginal birthing. fictile/Poly Resin ornaments
    can be coloured and cleaned off yeastrol Mainly occurs on
    the Human face.

    my blog ... homepage

    ReplyDelete
  11. A 's new rule does not specifically prohibit that. Free Increase Breast Natural Home Remedies Website #2. We have migrated customers from Siebel, Upshot, Microsoft Business Contact Manager, Goldmine, ACT, Sugar CRM, Vtiger, etc. Only about 8 percent of the time it would collide with the Carrier. Not getting enough exercise will definitely mess with your Increase Breast Natural Home Remedies regimen, claiming it is the graying of the air is by these genes.

    Also visit my weblog; Breast Enlargement

    ReplyDelete
  12. Whatever your political party, let's come together for the good of colon cleanse weight loss reviews many, he was given the nickname Caesarion little Caesar.

    my blog how do you Cleanse your colon

    ReplyDelete