Deductibility of withdrawal liability by asset purchaser

[Carol V. Calhoun]

Seller in an asset sale will have multiemployer plan withdrawal liability triggered by the asset sale.  As part of the deal, seller wants to have buyer pay the liability.  However, buyer is questioning whether it can obtain a tax deduction for payment of the liability, or whether that would simply be treated as part of the purchase price of the assets and therefore recovered only via depreciation or sale of the assets.

26 CFR § 1.404(g)-1 provides that a tax deduction is available for withdrawal liability only if the payment satisfies the conditions of section 162 or section 212.  This suggests to me that the deduction is not available if the buyer is paying the seller's liability in order to acquire the assets, because this is not an ordinary and necessary business expense of the buyer.  But I'm having a hard time finding any specific support for this view.

Also, does this mean no one gets a tax deduction for the payment?  The buyer doesn't get one because it's not ordinary and necessary, and the seller doesn't get one because it didn't make the payment?  Or could this be recharacterized as the seller having received the payment from the buyer and then paying the liability, so that the seller could receive a deduction?  (Of course, this would mean that the seller would be deemed to have received more money on the asset sale, but that might be capital gains rather than ordinary income.)

[CuseFan]

Does the asset sale also involve the employees that were covered under the multiemployer plan? Might the transaction be structured such that participation in the plan is transferred to the buyer and it is now the buyer who incurs the withdrawal liability which in turn affords it the tax deduction for satisfaction thereof?

[Tom Veal]

This situation seems analogous to one in which a member of a non-consolidated controlled group makes contributions for employees of other members of the group.  That is construed as a contribution by the first company to the capital of the second, followed by the latter's contribution to the plan (for which it then takes a deduction).  In your case, the buyer's payment of the withdrawal liability would, by analogy, be additional purchase price, and the withdrawing employer would then deduct the payment of withdrawal liability.  Assuming that the negotiated purchase price remains the same, the buyer will acquire more assets than if the seller had paid the liability and will pay more for them.  If the buyer the seller are in the same tax bracket, the buyer will end up in the same economic position as if the seller paid the liability and deducted it.  Of course, their brackets may well differ.

[Effen]

Did the sale already happen?  If not, they might consider structuring the agreement as a 4204 sale in order to avoid the withdrawal.  In a 4204 sale the buyer essentially accepts the seller's history.  The Seller is still partially on the hook for 5 years if the buyer withdraws during that period.  The fund would also need to accept it.