Form 8594 (Asset Acquisition Statement)

Section 1060 and the residual method are the source of the form and its seven classes.

The Form 8594 instructions require both parties to file when a group of assets that makes up a trade or business changes hands and the buyer's basis is set only by the price paid. A group is a trade or business if goodwill or going concern value could attach under any circumstances; signs include intangibles, a price above book value, or a lease, license or covenant not to compete between the parties.

The price is allocated by the residual method in order: Class I cash and deposit accounts, then Classes II through VI up to each asset's fair market value, with whatever is left going to Class VII. The classes in brief:

• Class I: cash and general deposit accounts. Class II: actively traded personal property, certificates of deposit and foreign currency.
• Class III: accounts receivable and assets marked to market. Class IV: inventory.
• Class V: everything not in another class, generally including land, buildings, furniture, fixtures, vehicles and equipment.
• Class VI: section 197 intangibles other than goodwill, such as licenses, permits and covenants not to compete. Class VII: goodwill and going concern value.

A worked example shows the form covering only the part of a sale the exchange does not.

Hypothetical: you sell a restaurant business with its building for $2,000,000. The contract allocates $1,400,000 to land and building, $150,000 to kitchen equipment, $50,000 to a liquor license and $400,000 to goodwill. Section 1031 now applies only to real property, so you exchange the land and building through a qualified intermediary.

Under the instructions and Reg. section 1.1060-1(b)(8), the like-kind real property and the money treated as paid for it are excluded from section 1060. Your Form 8594 reports the remaining $600,000: equipment in Class V, the license in Class VI and goodwill in Class VII. The equipment gain is taxable in the year of sale, see section 1245 recapture. The example uses rounded figures; your CPA can rerun it on your actual basis.

It bites when buyer and seller want opposite allocations, because the written agreement binds both.

A seller who is exchanging usually wants more of the price on the real estate, where gain can be deferred, and less on equipment. A buyer often wants the reverse, because equipment is depreciated faster. Section 1060(a) makes a written agreement on the allocation, or on any asset's value, binding on both sides unless the IRS determines it is not appropriate, so settle the split in the contract.

If the price changes after the year of sale, whoever is affected files a supplemental Form 8594 for the year the change is taken into account. Failing to file a correct form by the return due date without reasonable cause can bring penalties under sections 6721 through 6724. Property-specific splits are covered in selling a restaurant building and moving from business owner to passive investor.