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Tax News
Refunds in Asset Purchase Agreements
March 23, 2011
Administrative Actions
Recently the Service issued CCA 2010100811334240.  While the ruling does not offer any new law, it is a good reminder of the often ignored practical and legal considerations surrounding tax refunds in acquisition agreements.  In this ruling the parties entered into an asset purchase agreement. The parties thoughtfully addressed tax refunds in the agreement.  The APA clearly listed “tax refunds” as assets sold.   Thus, the parties were one step ahead of a lot of other buyers and sellers who do not address refunds at all and leave the issue in the air altogether.  The parties apparently also thought of how they will proceed about collecting any refunds. Buyer’s attorney had a Form 2848 Power of Attorney to receive any refunds due to the seller.  At some point refunds were due for taxes that were paid by the seller on account of refund claims filed by the seller.  The attorney requested that the refund be issued in the buyer’s name and sent to the attorney.  

The IRS had a problem with this.  It pointed out that generally the Service issues refunds to the person who made the overpayment and the claimant of the refund. Although the seller sold most of its assets after filing its refund claim, the sale was not sufficient to make the purchaser the owner of the refund.  Moreover, the IRS issued the refund only after all available offsets were made against other federal liabilities of the seller. Lastly, it didn’t issue the refund to the attorney but the seller.  The reason was that the attorney’s Form 2848 did not properly list the period at issue on the form.

I am a firm believer that refunds should be very carefully considered by investment funds in acquisition agreements, whether stock, asset, or partnership interest.  The money at stake could be significant and planning for possible refunds in advance could prevent later headaches.  So what didn’t the parties consider? Well, maybe they did not consider the possibility that these refunds will actually go to the seller. It seems that they did not consider the possibility that these refunds could be subject to offsets.  Lastly, while they drafted a power of attorney, they did not fill it in properly.  What could have the buyer done differently? Hopefully the buyer received some kind of an indemnity pursuant to which it could recoup any offsets to the refunds.  The buyer could have also made sure that the 2848 form covered all the available pre-closing periods. It is a challenge to think about every little thing that can go wrong in a deal, but taking a mental note of these kind of rulings is helpful to solve some of these issues before it is too late. The CCA is attached below. CCA_2010100811334240// (function() { var scribd = document.createElement("script"); scribd.type = "text/javascript"; scribd.async = true; scribd.src = "/javascripts/embed_code/inject.js?1300910718"; var s = document.getElementsByTagName("script")[0]; s.parentNode.insertBefore(scribd, s); })();
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Tags: asset purchase agreements, Form 2848, refunds, tax refunds