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cbassociate2017

Tx bonus paid by Seller in carve-out

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We represent Buyer in a carve-out transaction.  The subsidiary that we are buying is the legal employer of its employees, but HR functions are centralized at parent level.  Several employees of sub who are coming to buyer will receive retention bonuses post-closing, paid by the Seller.  The legal question is whether, where the services are not provided (and have not been provided) directly to seller but to PHS and the consolidated group is being split by the transaction, which is the proper entity to conduct payroll withholding on payments made after the closing?

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I would run this one by an attorney.  If your client is the buyer, I don't see how they can withhold if they never have the money in the first place (I take your statement that the bonus will be "paid by the Seller" very literally and narrowly).  What do they care if the withholding is done or not?  Sure they might want to make sure the employees get paid, but there are other ways to verify the payment.  As far as the IRS is concerned, I'll doubt they will care as long as somebody does the withholding and deposits, the payment is reported, and the taxes are paid.  

This is kind of like a staff leasing company situation.  The services are performed for somebody else, but the staff leasing company pays and does the tax withholding.

 

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I've had a similar scenario that resulted in the seller (sold sub's parent) paying the buyer the amount of the bonuses (plus employer-side FICA, all treated as a purchase price adjustment) and having the buyer pay the bonuses to the employees. The buyer withheld/reported as it was the employer and payor. The process was explicit in the purchase agreement. 

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Your facts are murky and their clarification may impact the answer to your question(s).  Is buyer buying the equity of the subsidiary entity, or only its assets and thereafter hiring its employees?  What do you mean by a "carve-out" transaction?  (I've worked on acquisitive transactions for 35 years but I don't think I ever heard that term used.)  What is "PHS"?

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