Explore the significance of tax due diligence in stock acquisitions to avoid unexpected tax liabilities and legal disputes. Learn from a real case scenario where a buyer faced post-closing tax debts and legal battles due to inadequate tax assessment.
“Trust, but verify.” Old Russian proverb.
M&A Stories
January 29, 2021
Introduction:
When purchasing a business’s equity, like a corporation or an LLC, you’re also taking on their unpaid tax responsibilities. This blog explores the importance of tax due diligence in stock acquisitions.
The Situation:
In a recent case, a business buyer was assured by the seller that all taxes were settled before signing a stock purchase agreement. However, after the deal closed, the buyer was hit with substantial tax debts dating back to years before. This led to a legal dispute and added costs.
Understanding the Case:
The buyer acquired a corporation that specialized in placing software engineers. The seller assured them that all taxes were up to date. After the deal was sealed, the buyer discovered unpaid taxes dating back to before the purchase.
Legal Actions:
This situation ended up in a Florida federal district court as a lawsuit. The buyer accused the seller of misrepresenting the tax situation. Although the fraud claim survived dismissal attempts, it incurred additional legal expenses for the buyer.
Consequences:
Now, the buyer faces the burden of preparing for a trial to seek reimbursement from the seller for the pre-closing tax debts and legal fees.
This case is referred to as SYRAINFOTEK, LLC v. SAKIRROLA, Case No. 8:20-cv-797-T-33CPT, United States District Court, M.D. Florida, Tampa Division, (June 3, 2020).
Takeaway:
When purchasing a company’s equity, you’re not only getting its assets but also its tax obligations, including federal, state, and local taxes like income, sales, use, employment, and property taxes. Uncovered liabilities can lead to legal battles and unexpected costs.
Minimizing Risks:
To prevent such issues, it’s crucial to conduct tax due diligence. This involves a thorough review of the different taxes a business might owe and the various jurisdictions in which it operates. The goal is to uncover potential tax liabilities before closing the deal.
Conclusion:
Buying a business’s equity means assuming its tax responsibilities. To avoid unpleasant surprises and legal battles, buyers should perform tax due diligence to identify potential tax issues before finalizing a stock acquisition.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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