From: Chinonso Nwogu, Tax Advisor
Date: January 3, 2014
RE: Tax Consequences and Compliance of Assets Acquisition
On December 1, 2012, Environmental Solutions Inc., (“Environmental”) offered to buy Joel Freedman’s (“Freedman”) company, Advanced Technologies. After discussing the offer with his attorney, he accepted to sell his company on August 1, 2013. On August 15, 2013, attorneys from both companies signed a letter of intent to acquire Advanced Technologies assets and liabilities for $5million. On September 30, 2013, the letter of intent was presented and approved by Environmental Solution’s board of directors. On October 15, 2013, the acquisition was completed and closed.
Freedman …show more content…
Per IRC 117, to determine whether the gain or loss from the sale of a business is ordinary or a capital gain, Advanced Technologies must first classify each individual asset sold as either (I) capital assets (IRC § 1231 Assets); or (II) property used in trade or business; or (III) Other property (ordinary income assets) such as inventory or stock in trade.7 Aaron Williams v. George McGowan 152 F.2d 570 (CA-2, 1945) held that the sale of a sole proprietorship cannot be treated as a unified “capital assets” because each assets of a sole proprietorship under its classification is not a capital asset. Assets like Account Receivables and Inventory are considered ordinary income assets and the gains and losses realized are treated as either ordinary gain or loss.8
Capital Assets are defined as any asset that is a personal or real property with a value greater than or equal to the capitalization threshold for certain classified asset with an estimated life of more than one year.9 Building, patent and goodwill should be classified by Advanced Technologies as capital assets. Each individual asset based on the classification listed above is allocated using the fair market value realized. An ordinary income asset is classified as a “noncapital asset” and any realized amount from the sale