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Sales price adjustments and the claim-of-right doctrine.

Publication: The Tax Adviser
Publication Date: 01-OCT-02 		Format: Online - approximately 1391 words
Delivery: Immediate Online Access

Article Excerpt
Business asset sales are complex transactions, commonly completed over more than one tax year and requiring payments over several years. Taxpayers report income as they receive money or other property. However, when they are confronted with sales price adjustments, many things can and do happen. This item focuses on the claim-of-right doctrine and adjustment(s) that result from claim(s) about the representations and warranties made as part of the sale of a business.

Sellers normally must indicate that they are in compliance with all contract terms or that all sales and use taxes owed are paid or recorded. Because of the seller's ability to know that 100% of all the contract terms for every contract are being met (including verbal modifications), it is understandable that some claims for sales price adjustment may arise. The same may apply to other issues (nexus for state tax purposes, product warranties, etc.).

When sellers face a proposed adjustment to an unpaid sales price or a demand of repayment in a subsequent year, the tax treatment may be cloudy. The first issue is how to handle the adjustment. The adjustment should be applied to the overall sales price and not to the installment note's or other obligation's unpaid balance. Of course, the "adjusted...

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