Instructions for Form 8594 |
2006 Tax Year |
Instructions for Form 8594 - Main Contents
This is archived information that pertains only to the 2006 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale
if goodwill or going
concern value attaches, or could attach, to such assets and if the purchaser's basis in the assets is determined only by the
amount paid for the
assets.
Form 8594 must also be filed if the purchaser or seller is amending an original or a previously filed supplemental Form 8594
because of an increase
or decrease in the purchaser's cost of the assets or the amount realized by the seller.
Generally, both the purchaser and seller must file Form 8594 and attach it to their income tax returns (Forms 1040, 1041,
1065, 1120, 1120S, etc.)
when there is a transfer of a group of assets that make up a trade or business (defined below) and the purchaser's basis in
such assets is determined
wholly by the amount paid for the assets. This applies whether the group of assets constitutes a trade or business in the
hands of the seller, the
purchaser, or both.
If the purchaser or seller is a controlled foreign corporation (CFC), each U.S. shareholder should attach Form 8594 to its
Form 5471.
Exceptions.
You are not required to file Form 8594 if any of the following apply.
-
A group of assets that makes up a trade or business is exchanged for like-kind property in a transaction to which section
1031 applies. If
section 1031 does not apply to all the assets transferred, however, Form 8594 is required for the part of the group of assets
to which section 1031
does not apply. For information about such a transaction, see Regulations sections 1.1031(j)-1(b) and 1.1060-1(b)(8).
-
A partnership interest is transferred. See Regulations section 1.755-1(d) for special reporting requirements. However, the
purchase of a
partnership interest that is treated for federal income tax purposes as a purchase of partnership assets, which constitute
a trade or business, is
subject to section 1060. In this case, the purchaser must file Form 8594. See Rev. Rul. 99-6, which is on page 6 of Internal
Revenue Bulletin 1999-6
at
http://www.irs.gov/pub/irs-irbs/irb99-06.pdf, and Regulations
section 1.1060-1(b)(4).
Generally, attach Form 8594 to your income tax return for the year in which the sale date occurred.
If the amount allocated to any asset is increased or decreased after the year in which the sale occurs, the seller and/or
purchaser (whoever is
affected) must complete Parts I and III of Form 8594 and attach the form to the income tax return for the year in which the
increase or decrease is
taken into account.
If you do not file a correct Form 8594 by the due date of your return and you cannot show reasonable cause, you may be subject
to penalties. See
sections 6721 through 6724.
Trade or business.
A group of assets makes up a trade or business if goodwill or going concern value could under any circumstances attach
to such assets. A group of
assets can also qualify as a trade or business if it qualifies as an active trade or business under section 355 (relating
to distributions of stock in
controlled corporations).
Factors to consider in determining whether goodwill or going concern value could attach include:
-
The presence of any section 197 or other intangible assets (but the transfer of such an asset in the absence of other assets
will not be a
trade or business);
-
Any excess of the total paid for the assets over the aggregate book value of the assets (other than goodwill or going concern
value) as
shown in the purchaser's financial accounting books and records; or
-
A license, a lease agreement, a covenant not to compete, a management contract, an employment contract, or other similar agreements
between
purchaser and seller (or managers, directors, owners, or employees of the seller).
Consideration.
The purchaser's consideration is the cost of the assets. The purchaser's consideration is the amount realized.
Fair market value.
Fair market value is the gross fair market value unreduced by mortgages, liens, pledges, or other liabilities. However,
for determining the
seller's gain or loss, generally, the fair market value of any property is not less than any nonrecourse debt to which the
property is subject.
Classes of assets.
The following definitions are the classifications for deemed or actual asset acquisitions.
Class I assets are cash and general deposit accounts (including savings and checking accounts) other than certificates of deposit held
in banks, savings and loan associations, and other depository institutions.
Class II assets are actively traded personal property within the meaning of section 1092(d)(1) and Regulations section 1.1092(d)-1
(determined without regard to section 1092(d)(3)). In addition, Class II assets include certificates of deposit and foreign
currency even if they are
not actively traded personal property. Class II assets do not include stock of target affiliates, whether or not actively
traded, other than actively
traded stock described in section 1504(a)(4). Examples of Class II assets include U.S. government securities and publicly
traded stock.
Class III assets are assets that the taxpayer marks-to-market at least annually for federal income tax purposes and debt instruments
(including accounts receivable). However, Class III assets do not include:
-
Debt instruments issued by persons related at the beginning of the day following the acquisition date to the target under
section 267(b) or
707;
-
Contingent debt instruments subject to Regulations sections 1.1275-4 and 1.483-4, or section 988, unless the instrument is
subject to the
noncontingent bond method of Regulations section 1.1275-4(b) or is described in Regulations section 1.988-2(b)(2)(i)(B)(2);
and
-
Debt instruments convertible into the stock of the issuer or other property.
Class IV assets are stock in trade of the taxpayer or other property of a kind that would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in
the ordinary course of its
trade or business.
Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets.
Note.
Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business (defined
earlier) are
generally Class V assets.
Class VI assets are all section 197 intangibles (as defined in section 197) except goodwill and going concern value. Section 197
intangibles include:
-
Workforce in place;
-
Business books and records, operating systems, or any other information base, process, design, pattern, know-how, formula,
or similar
item;
-
Any customer-based intangible;
-
Any supplier-based intangible;
-
Any license, permit, or other right granted by a government unit;
-
Any covenant not to compete entered into in connection with the acquisition of an interest in a trade or a business; and
-
Any franchise (including a sports franchise acquired after October 22, 2004), trademark, or trade name.
However, the term “section 197 intangible” does not include any of the following:
-
An interest in a corporation, partnership, trust, or estate;
-
Interests under certain financial contracts;
-
Interests in land;
-
Certain computer software;
-
Certain separately acquired interests in films, sound recordings, video tapes, books, or other similar property;
-
Interests under leases of tangible property;
-
Certain separately acquired rights to receive tangible property or services;
-
Certain separately acquired interests in patents or copyrights;
-
Interests under indebtedness;
-
Professional sports franchises acquired before October 23, 2004; and
-
Certain transactions costs.
See section 197(e) for more information.
Class VII assets are goodwill and going concern value (whether or not the goodwill or going concern value qualifies as a section 197
intangible).
Allocation of consideration.
An allocation of the purchase price must be made to determine the purchaser's basis in each acquired asset and the
seller's gain or loss on the
transfer of each asset. Use the residual method for the allocation of the sales price among the amortizable section 197 intangibles
and other assets
transferred. See Regulations section 1.1060-1(c). The amount allocated to an asset, other than a Class VII asset, cannot exceed
its fair market value
on the purchase date. The amount you can allocate to an asset also is subject to any applicable limits under the Internal
Revenue Code or general
principles of tax law.
Consideration should be allocated as follows.
-
Reduce the consideration by the amount of Class I assets transferred.
-
Allocate the remaining consideration to Class II assets, then to Class III, IV, V, and VI assets in that order. Within each
class, allocate
the remaining consideration to the class assets in proportion to their fair market values on the purchase date.
-
Allocate consideration to Class VII assets.
If an asset in one of the classifications described above can be included in more than one class, choose the lower
numbered class (e.g., if an
asset could be included in Class III or IV, choose Class III).
Reallocation after an increase or decrease in consideration.
If an increase or decrease in consideration that must be taken into account to redetermine the seller's amount realized
on the sale, or the
purchaser's cost basis in the assets, occurs after the purchase date, the seller and/or purchaser must allocate the increase
or decrease among the
assets. If the increase or decrease occurs in the same tax year as the purchase date, consider the increase or decrease to
have occurred on the
purchase date. If the increase or decrease occurs after the tax year of the purchase date, consider it in the tax year in
which it occurs.
For an increase or decrease related to a patent, copyright, etc., see Specific Allocation, later.
Allocation of increase.
Allocate an increase in consideration as described under Allocation of consideration. If an asset has been disposed of, depreciated,
amortized, or depleted by the purchaser before the increase occurs, any amount allocated to that asset by the purchaser must
be properly taken into
account under principles of tax law applicable when part of the cost of an asset (not previously reflected in its basis) is
paid after the asset has
been disposed of, depreciated, amortized, or depleted.
Allocation of decrease.
Allocate a decrease in consideration as follows.
-
Reduce the amount previously allocated to Class VII assets.
-
Reduce the amount previously allocated to Class VI assets, then to Class V, IV, III, and II assets in that order. Within each
class,
allocate the decrease among the class assets in proportion to their fair market values on the purchase date.
You cannot decrease the amount allocated to an asset below zero. If an asset has a basis of zero at the time the decrease
is taken into account
because it has been disposed of, depreciated, amortized, or depleted by the purchaser under section 1060, the decrease in
consideration allocable to
such asset must be properly taken into account under the principles of tax law applicable when the cost of an asset (previously
reflected in basis) is
reduced after the asset has been disposed of, depreciated, amortized, or depleted. An asset is considered to have been disposed
of to the extent the
decrease allocated to it would reduce its basis below zero.
Patents, copyrights, and similar property.
You must make a specific allocation (defined below) if an increase or decrease in consideration is the result of a
contingency that directly
relates to income produced by a particular intangible asset, such as a patent, a secret process, or a copyright, and the increase
or decrease is
related only to such asset and not to other assets. If the specific allocation rule does not apply, make an allocation of
any increase or decrease as
you would for any other assets as described under Allocation of increase and Allocation of decrease.
Specific allocation.
Limited to the fair market value of the asset, any increase or decrease in consideration is allocated first specifically
to the patent, copyright,
or similar property to which the increase or decrease relates, and then to the other assets in the order described under Allocation of
increase and Allocation of decrease. For purposes of applying the fair market value limit to the patent, copyright, or similar
property, the fair market value of such asset is redetermined when the increase or decrease is taken into account by considering
only the reasons for
the increase or decrease. The fair market values of the other assets are not redetermined.
For an original statement, complete Parts I and II. For a Supplemental Statement, complete Parts I and III.
Enter your name and taxpayer identification number (TIN) at the top of the form. Then check the box for purchaser or seller.
Part I—General Information
Line 1.
Enter the name, address, and TIN of the other party to the transaction (purchaser or seller). You are required to
enter the TIN of the other party.
If the other party is an individual or sole proprietor, enter the social security number. If the other party is a corporation,
partnership, or other
entity, enter the employer identification number.
Line 2.
Enter the date on which the sale of the assets occurred.
Line 3.
Enter the total consideration transferred for the assets.
Part II—Original Statement of Assets Transferred
Line 4.
For a particular class of assets, enter the total fair market value of all the assets in the class and the total allocation
of the sales price. For
Classes VI and VII, enter the total fair market value of Class VI and Class VII combined, and the total portion of the sales
price allocated to Class
VI and Class VII combined.
Line 6.
This line must be completed by the purchaser and the seller. To determine the maximum consideration to be paid, assume
that any contingencies
specified in the agreement are met and that the consideration paid is the highest amount possible. If you cannot determine
the maximum consideration,
state how the consideration will be computed and the payment period.
Part III—Supplemental Statement
Complete Part III and file a new Form 8594 for each year that an increase or decrease in consideration occurs. See Reallocation after an
increase or decrease in consideration, on page 2, and When To File, on page 1. Give the reason(s) for the increase or decrease in
allocation. Also, enter the tax year(s) and form number with which the original and any supplemental statements were filed.
For example, enter “2004
Form 1040.”
Paperwork Reduction Act Notice.
We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give
us the information.
We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax.
You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless
the form displays a valid
OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may
become material in the
administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by
section 6103.
The time needed to complete and file this tax form will vary depending on individual circumstances. The estimated burden for
individual taxpayers
filing this form is approved under OMB control number 1545-0074 and is included in the estimates shown in the instructions
for their individual income
tax return. The estimated burden for all other taxpayers who file this form is shown below.
Recordkeeping |
11 hr.
|
Learning about the law or the form |
2 hr., 34 min.
|
Preparing and sending the form to the IRS |
2 hr., 52 min.
|
If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would
be happy to hear from
you. You can write to the IRS at the address listed in the instructions for the tax return with which this form is filed.
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