The IRS, the court noted, cited no authority requiring legal fees to be allocated under the fair-market-value limitations of Section 1060 when the parties have stipulated the cost of each asset, as was the case here. Moreover, the court could locate no such authority. The court observed that Section 1060 is meant to prevent abuse when there is no agreement between the parties concerning how much of the purchase price is allocated to which category of assets.
The IRS equated the term “consideration” in Section 1060 to basis. Legal fees incurred in the acquisition of a capital asset are added to the basis of the capital asset with respect to which the fees are incurred. The agency, therefore, argued that WCM’s basis, including fees, had to be allocated under the fair-market-value limitations of Section 1060.
But the Tax Court disagreed. Here, the parties had stipulated the cost of each asset, and accordingly, in the court’s view, Section 1060 did not apply.
The court concluded that “the legal fees should be allocated proportionately to the assets with which they are associated.” The legal fees allocated to fixed assets were amortizable over seven years and the legal fees allocated to inventory were allowable as cost of goods sold. Only the legal fees allocable to goodwill had to be recovered under Section 197′s elongated (15-year) recovery period.1
Contributor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com.
1 This decision pertained to a transaction that predated the regulations issued under Section 1060. Those regulations, which affect applicable asset acquisitions occurring after March 15, 2001, provide that “in the case of an applicable asset acquisition, sellers and purchasers must allocate the consideration under the residual method” (see Regulation Section 1.1060-1(a)(1)). Moreover, the regulations provide that under the residual method the amount allocated to an asset cannot exceed the fair-market value of that asset at the beginning of the day after the acquisition date (see Regulation Section 1.338-6(c)(1)). In addition, the regulations provide that if, in connection with an applicable asset acquisition, the seller and purchaser agree in writing as to the allocation of any amount of consideration to, or as to the fair market value of, any of the assets, such agreement is binding on them (see Regulation Section 1.1060-1(c)(4)). This latter provision does not explicitly exempt the parties from the strictures of the residual method of allocation and, presumably, the amount so allocated pursuant to the written agreement to any such asset cannot exceed its fair market value. Further, the regulations expressly provide that no adjustment is made to the amount allocated to any individual asset for “general costs” associated with the applicable asset acquisition “as a whole” or with groups of assets included therein. These latter amounts, the regulations direct, are taken into account only indirectly through their effect on the total consideration to be allocated. Accordingly, given the specificity of the regulations, it is unclear that the court would have rendered a similar decision had the applicable asset acquisition under scrutiny occurred after the effective date of the regulations. We think it is highly unlikely that the court would have rendered such a similar decision.