The Vendor of a Business May Have a Significant Amount

The vendor of a business may have a significant amount of assets that are used under the provisions of capital leases. In most situations, any existing leasing arrangements can be transferred in the process of selling a business. Further, some leased properties may have experienced significant increases in value (e.g., a long-term lease on office space in a market where such space has become scarce). In such circumstances, a long-term lease may be of significant value to the purchaser of a business. Despite the presence of such values, it is not uncommon for leases to be ignored in the purchase agreement and, as a consequence, in the allocation of tax values for the purchasing company. This, in effect, means that the value of these leases ends up as a component of purchased goodwill.
Discuss the tax consequences, to both the purchaser and the vendor, of not specifying the value of any long-term capital leases in the agreement of purchase and sale of a business.