Purchase Price Allocation – You Only Get One Bite at the Apple
A recent tax court decision highlights the dangers associated with not adequately addressing purchase price allocation in an asset purchase agreement. In the 1990’s Peco Foods, Inc. acquired through asset purchase agreements two poultry process plants. In each agreement Peco Foods memorialized the asset allocation among various assets. A few years later, they performed a cost segregation study and realized the purchase price allocation in the asset purchase agreements left $5,258,754 of accelerated depreciation on the table for 1998 through 2002.
Peco Foods attempted to change its accounting methods to take advantage of the accelerated depreciation. Unfortunately for Peco Foods, neither the IRS nor the Tax Court agreed, determining that the written asset purchase agreement superseded an attempt to later implement the residual method of Code Section 338(b)(5). Peco Foods Inc. et. al., TC Memo 2012-18.
Don’t overlook something as simple as purchase price allocation on the front end. Make sure that you and your advisors fully understand the impact of the purchase price allocation before closing on the acquisition.