PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Harrison Wexford, Partner, Calderwood & Harkness LLP Megan Chu, Associate, Calderwood & Harkness LLP
CC: Sandra K. Liu, General Counsel, Crestline Packaging Solutions LLC Priya Mehta, CFO, Crestline Packaging Solutions LLC
FROM: Leonard Cross, Partner (Tax), Calderwood & Harkness LLP
DATE: May 28, 2025
RE: Tax Structure Analysis — Asset Purchase of Substantially All Assets of Allegheny Valley Packaging, Inc. by Crestline Packaging Solutions LLC
MATTER NO.: 1006-00006
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I. EXECUTIVE SUMMARY
This memorandum sets forth our analysis of the key federal and state tax implications arising from the proposed acquisition by Crestline Packaging Solutions LLC ("Crestline" or "CPS") of substantially all of the assets of Allegheny Valley Packaging, Inc. ("AVP") for an aggregate purchase price of One Hundred Eighty Million Dollars ($180,000,000). The transaction is structured as an asset purchase, governed by New York law, and is not a stock acquisition. As discussed in detail below, this structural choice carries significant tax consequences for both the Buyer and the Seller, the most prominent of which are addressed herein.
We have been asked to evaluate the following principal tax issues in connection with the proposed transaction:
1. Purchase Price Allocation Under IRC §1060. The allocation of the $180,000,000 purchase price among the various classes of acquired assets under the residual method prescribed by Internal Revenue Code ("IRC" or the "Code") §1060 and the applicable Treasury Regulations, including the interplay between Buyer's preference for maximizing allocations to depreciable and amortizable assets and Seller's preference for capital gains treatment on pass-through income.
2. Pennsylvania Bulk Sale Notice and Tax Clearance Requirements. The obligation to notify the Pennsylvania Department of Revenue of the bulk sale at least sixty (60) days prior to closing and to obtain a tax clearance certificate as a condition to closing, together with the successor liability risks attendant to non-compliance.
3. Pennsylvania Realty Transfer Tax. The imposition of the Pennsylvania Realty Transfer Tax on the transfer of the Butler and Meadville real properties, estimated at approximately $360,000 based on a preliminary real property allocation of $18,000,000.
4. Pre-Closing Sales and Use Tax Exposure. The approximately $420,000 in potential sales and use tax exposure across Pennsylvania, Ohio, and West Virginia for tax periods 2021 through 2024, as identified during due diligence.
5. AVP's S-Corporation Status and Pass-Through Treatment. The treatment of AVP as an S-corporation under IRC §§1361–1379, the pass-through of gain to the Horvath family shareholders, the character of gain on the various asset classes, and the potential applicability of the built-in gains tax under IRC §1374.
6. Inapplicability of IRC §338 Elections. Confirmation that because the transaction is structured as an asset purchase rather than a stock purchase, no election under IRC §338(g) or §338(h)(10) is required or applicable. The asset purchase structure already provides Crestline with a stepped-up tax basis in all acquired assets.
7. State Tax Nexus Considerations for Crestline Post-Closing. The additional state tax nexus that will be created for Crestline through the acquisition of AVP's Pennsylvania facilities and operations, and the need for a comprehensive multistate nexus study.
Principal Conclusions. Based on our analysis, and subject to the limitations and qualifications set forth in Section XII below, we conclude that: (a) the asset purchase structure is tax-efficient for Crestline and provides a stepped-up basis in all acquired assets equal to the allocated purchase price; (b) timely filing of the Pennsylvania Bulk Sale Notice and receipt of the tax clearance certificate are critical to avoid successor liability; (c) the Pennsylvania Realty Transfer Tax obligation of approximately $360,000 (split equally between Buyer and Seller) is a manageable closing cost; (d) the identified $420,000 sales/use tax exposure should be fully addressed through Seller indemnification and, where possible, pre-closing resolution or holdback; (e) Seller's S-corporation status results in pass-through treatment to the Horvath shareholders, and the potential built-in gains tax under §1374 must be confirmed as inapplicable through verification of the S-election date; (f) no §338 election is needed; and (g) Crestline must register as a foreign LLC in Pennsylvania and should undertake a multistate nexus study promptly following the closing.
A detailed summary of all recommendations and action items appears in Section XI.
II. TRANSACTION OVERVIEW
A. Parties. Buyer. Crestline Packaging Solutions LLC is an Ohio limited liability company, organized under the laws of the State of Ohio. Its Employer Identification Number is 84-3291047, and its Ohio Secretary of State Filing Number is 4287653. Crestline's principal executive offices are located at 4100 Commerce Parkway, Suite 800, Akron, Ohio 44308. Crestline is a portfolio company of Ridgeway Capital Partners Fund III, LP, which serves as its indirect parent and equity sponsor.
Seller. Allegheny Valley Packaging, Inc. is a Pennsylvania corporation that has elected S-corporation status for federal income tax purposes under IRC §1361. AVP's Employer Identification Number is 25-1784632, and its Pennsylvania Department of State Entity Identification Number is 6519847. AVP's headquarters and principal manufacturing facility are located at 250 Industrial Boulevard, Butler, Pennsylvania 16001. AVP operates in the corrugated containers, folding cartons, and specialty packaging segment and maintains two manufacturing plants in Pennsylvania.
Seller's Shareholders. AVP is owned by three members of the Horvath family. The current ownership is as follows:
Gerald W. Horvath is the founder and Chairman of AVP. Patricia A. Horvath is his spouse. Michael G. Horvath is their son and currently serves as AVP's Vice President of Operations. As discussed in Section VII, the S-corporation structure means that gain recognized by AVP on the asset sale will flow through to these shareholders in proportion to their respective ownership interests.
Sponsor. Ridgeway Capital Partners Fund III, LP (EIN 83-2107594), a Delaware limited partnership, is the indirect parent and equity sponsor of Crestline. Ridgeway Capital Partners Fund III, LP will provide a $50,000,000 equity contribution in connection with the closing of the transaction, as described below.
B. Structure and Consideration
The transaction is structured as an asset purchase pursuant to which Crestline will acquire substantially all of the assets of AVP. The aggregate purchase price is $180,000,000, payable in cash at closing, subject to the following adjustments and mechanics:
(a) Escrow. Nine Million Dollars ($9,000,000), representing 5% of the purchase price, will be deposited into escrow at closing with a third-party escrow agent (to be designated in the Asset Purchase Agreement ("APA")), to secure Seller's indemnification obligations under the APA.
(b) Net Working Capital Adjustment. The purchase price is subject to a customary post-closing true-up based on Net Working Capital as of the Closing Date. The target Net Working Capital is $12,400,000, with a collar of plus or minus $250,000 (i.e., no adjustment is made if actual Net Working Capital falls within the range of $12,150,000 to $12,650,000). Amounts outside the collar result in a dollar-for-dollar adjustment.
(c) Additional Adjustments. The purchase price is also subject to customary adjustments for Indebtedness (estimated at approximately $14,200,000 for AVP's revolving credit facility with Merchants & Traders Bank), Transaction Expenses of the Seller, and Cash on hand at AVP as of the Closing Date.
Financing. The acquisition will be financed through a combination of debt and equity:
(a) Debt. An incremental term loan in the amount of $130,000,000 under Crestline's Existing Credit Agreement, dated as of November 15, 2021 (as amended from time to time), with Pinnacle National Bank, N.A. serving as Administrative Agent (Reference No. PCL-2025-04-1187).
(b) Equity. A $50,000,000 equity contribution from Ridgeway Capital Partners Fund III, LP, the indirect parent and equity sponsor of Crestline.
Timing. The estimated Closing Date is July 31, 2025. The Outside Date (i.e., the date after which either party may terminate the APA if closing has not occurred) is September 30, 2025. The transaction is subject to customary conditions to closing, including receipt of the Pennsylvania tax clearance certificate discussed in Section IV below, accuracy of representations and warranties, and absence of any material adverse effect.
C. Acquired Assets and Excluded Assets
Acquired Assets. Crestline will acquire substantially all of the assets of AVP, including:
(a) Real Property. AVP's two manufacturing facilities: (i) the Butler plant, located at 250 Industrial Boulevard, Butler, Pennsylvania 16001, consisting of approximately 285,000 square feet of manufacturing and office space situated on approximately 22.5 acres; and (ii) the Meadville plant, located at 1480 Conneaut Lake Road, Meadville, Pennsylvania 16335, consisting of approximately 110,000 square feet of manufacturing space situated on approximately 8.2 acres. Both properties will be conveyed by special warranty deed.
(b) Tangible Personal Property. All machinery, manufacturing equipment, vehicles, furniture, fixtures, and other tangible personal property used in AVP's business, including corrugating lines, flexographic printing equipment, die-cutting equipment, specialty coating application systems, and warehouse and material handling equipment.
(c) Inventory. All raw materials (including linerboard, corrugating medium, specialty coatings chemicals, and adhesives), work-in-process, and finished goods inventory on hand as of the Closing Date.
(d) Assumed Contracts. Approximately 47 contracts, including customer supply agreements, vendor contracts, equipment leases, and service agreements.
(e) intellectual Property. All patents, trademarks (other than the corporate name), trade secrets, proprietary formulations for specialty chemical-resistant coatings and food-grade packaging, customer lists, technical data, and other intellectual property assets. The corporate name "Allegheny Valley Packaging, Inc." is excluded from the Acquired Assets but will be subject to a six-month transitional license to permit orderly rebranding.
(f) Goodwill and Going Concern Value. All goodwill, going concern value, and other intangible assets associated with AVP's business.
Excluded Assets. The following categories of assets are excluded from the acquisition:
(a) Cash and cash equivalents of AVP as of the Closing Date;
(b) All tax refunds and tax credits attributable to pre-closing tax periods;
(c) AVP's corporate minute books, stock transfer records, and other corporate governance records;
(d) All insurance policies maintained by AVP;
(e) The corporate name "Allegheny Valley Packaging, Inc." (subject to the transitional license referenced above).
Excluded Liabilities. Crestline will not assume any of the following liabilities of AVP:
(a) Pre-closing indebtedness, including approximately $14,200,000 outstanding under AVP's revolving credit facility with Merchants & Traders Bank, which will be repaid at closing from the purchase price proceeds;
(b) All pre-closing tax liabilities of AVP, including any liabilities for income taxes, sales and use taxes, employment taxes, and any other taxes attributable to periods ending on or before the Closing Date;
(c) Product liability claims arising from products manufactured or shipped by AVP prior to the Closing Date;
(d) Underfunded pension obligations, estimated at approximately $3,100,000;
(e) All of Seller's Transaction Expenses incurred in connection with the sale.
III. PURCHASE PRICE ALLOCATION UNDER IRC §1060
A. Legal Framework
Section 1060 of the Internal Revenue Code governs the allocation of consideration in an "applicable asset acquisition." An applicable asset acquisition is defined as any transfer (whether direct or indirect) of assets constituting a trade or business where the transferee's basis in such assets is determined wholly by reference to the consideration paid for the assets. See IRC §1060(c); Treas. Reg. §1.1060-1(b)(1).
The proposed transaction clearly qualifies as an applicable asset acquisition. Crestline is acquiring substantially all of the assets of AVP's corrugated container, folding carton, and specialty packaging business, which constitutes an active trade or business. Crestline's basis in the acquired assets will be determined entirely by reference to the consideration paid (i.e., the $180,000,000 purchase price, as adjusted). No portion of the transferee's basis is determined by reference to the transferor's basis (as would be the case in a tax-free reorganization or contribution).
Section 1060(a) requires that, in an applicable asset acquisition, the consideration paid by the purchaser be allocated among the acquired assets using the residual method prescribed by IRC §338(b)(5). Under the residual method, the purchase price is allocated among the acquired assets in accordance with the asset class hierarchy set forth in Treasury Regulation §1.338-6. The purchase price is first allocated to assets in Class I, then to Class II, then to Class III, and so on through Class VII, with each class receiving an allocation equal to the fair market value of the assets in that class (but not in excess of the remaining unallocated purchase price). Any purchase price remaining after allocation to Classes I through VI is allocated to Class VII (goodwill and going concern value) as a residual.
The relevant regulatory provisions governing this allocation are set forth in Treasury Regulation §1.1060-1(a) through (e), which cross-reference the class definitions in Treasury Regulation §1.338-6(b) and the valuation methodology in Treasury Regulation §1.338-7.
B. Asset Classes Under Treasury Regulation §1.338-6
The seven asset classes and their application to the AVP acquisition are described below:
Class I — Cash and Cash Equivalents. Class I includes cash and general deposit accounts (including checking and savings accounts other than certificates of deposit). As noted in Section II.C above, cash and cash equivalents are Excluded Assets and will not be transferred to Crestline at closing. Accordingly, no portion of the purchase price will be allocated to Class I assets.
Class II — Actively Traded Personal Property, Certificates of Deposit, and Foreign Currency. Class II includes certificates of deposit, actively traded personal property as defined in IRC §1092(d)(1) (e.g., U.S. government securities, publicly traded stock and securities), and foreign currency. Based on our review of AVP's assets, it does not appear that AVP holds any significant Class II assets. Any immaterial Class II assets, if identified, will receive an allocation at fair market value.
Class III — Accounts Receivable, Mortgages, and Credit Card Receivables. Class III includes accounts receivable, mortgages, and credit card receivables. AVP maintains trade accounts receivable in the ordinary course of its business, which are included in the Net Working Capital calculation. The fair market value of these receivables (net of any allowance for doubtful accounts) will be allocated to Class III. Because these receivables reflect amounts owed for products already sold by AVP, the face value net of appropriate reserves will generally serve as the starting point for fair market value, though adjustments may be appropriate depending on the aging profile and collectibility assessment as of the Closing Date.
Class IV — Inventory. Class IV includes stock in trade or other property of a kind that would properly be included in inventory if on hand at the close of the taxable year, or property held primarily for sale to customers in the ordinary course of the trade or business. AVP maintains substantial inventories of corrugated containers, folding cartons, specialty coatings raw materials (including chemical-resistant coating compounds and food-grade packaging substrates), adhesives, linerboard, corrugating medium, work-in-process, and finished goods. The allocation to Class IV is significant because gain attributable to inventory is treated as ordinary income to the Seller (and, given AVP's S-corporation status, flows through as ordinary income to the Horvath shareholders). See IRC §1221(a)(1). As discussed in Section III.C below, this creates a tension between Buyer's and Seller's interests with respect to the allocation.
Class V — All Assets Not in Classes I–IV, VI, or VII. Class V is a broad residual category that includes all assets not falling within any other class. In the context of this transaction, Class V encompasses:
(a) Tangible personal property: all manufacturing equipment, machinery, corrugating lines, flexographic printing equipment, die-cutting equipment, specialty coating application systems, forklifts, vehicles, office furniture and fixtures, computer hardware, and other tangible personal property at the Butler and Meadville plants;
(b) Real property: the Butler plant and land (285,000 sq. ft. on 22.5 acres) and the Meadville plant and land (110,000 sq. ft. on 8.2 acres); and
(c) Certain intangible assets not falling within Class VI or VII: to the extent any intangible assets do not constitute IRC §197 intangibles, they would be classified in Class V.
The allocation to Class V tangible personal property is particularly significant for Buyer because these assets are eligible for depreciation under the Modified Accelerated Cost Recovery System ("MACRS") and may qualify for bonus depreciation under IRC §168(k) (to the extent still available under current law) or the IRC §179 expensing election. The real property allocation within Class V is relevant for purposes of the Pennsylvania Realty Transfer Tax analysis set forth in Section V below.
Class VI — IRC §197 Intangibles Other Than Goodwill and Going Concern Value. Class VI includes all IRC §197 intangibles as defined in IRC §197(d), other than goodwill and going concern value. In this transaction, Class VI assets are expected to include:
(a) Customer lists and customer relationships;
(b) Trade names and trademarks (other than the excluded corporate name "Allegheny Valley Packaging, Inc.," which is an Excluded Asset);
(c) Proprietary formulations for specialty chemical-resistant coatings and food-grade packaging;
(d) Patents and patent applications;
(e) Non-competition agreements with Gerald W. Horvath and Michael G. Horvath (discussed further below);
(f) Other §197 intangible assets identified during the valuation process.
Section 197 intangibles are amortizable by the Buyer on a straight-line basis over a 15-year period beginning in the month of acquisition. The allocation to Class VI is therefore favorable to Buyer from a tax perspective.
Class VII — Goodwill and Going Concern Value. Class VII includes goodwill and going concern value. Under the residual method, any portion of the purchase price remaining after allocation to Classes I through VI is assigned to Class VII. Given the premium paid for AVP's business (relative to the estimated fair market value of the identifiable tangible and intangible assets), a substantial portion of the purchase price is expected to be allocated to Class VII. Like Class VI intangibles, goodwill and going concern value are amortizable under IRC §197 over a 15-year period.
C. Preliminary Allocation Considerations
At this stage of the transaction, the purchase price allocation has not been finalized, and independent appraisals have not yet been obtained. However, certain preliminary considerations are noteworthy and will inform the allocation negotiation with Seller's counsel:
Estimated Real Property Allocation. Based on publicly available property records, preliminary internal estimates, and discussions with the deal team, we estimate that the aggregate fair market value of the real property (both the Butler plant and the Meadville plant) is approximately $18,000,000. This figure is relevant for purposes of computing the Pennsylvania Realty Transfer Tax, as discussed in Section V below. The final real property allocation will be established through independent appraisal.
Appraisals. It is essential that Crestline engage a qualified independent appraiser to prepare valuation reports for: (i) the real property (Butler — 22.5 acres, 285,000 sq. ft.; Meadville — 8.2 acres, 110,000 sq. ft.); (ii) the tangible personal property, including manufacturing equipment and machinery at both plants; and (iii) the intangible assets, including customer relationships, proprietary formulations, and trade names. These appraisals will form the evidentiary foundation for the purchase price allocation and will be critical in the event of IRS examination.
Buyer's Allocation Preferences. From Crestline's perspective, it is advantageous to maximize the allocation to depreciable and amortizable assets. Specifically, Crestline benefits from higher allocations to:
(a) Class V tangible personal property, which is eligible for MACRS depreciation (with recovery periods of 5, 7, or 15 years depending on the asset type) and, to the extent available, bonus depreciation or §179 expensing; and
(b) Class VI §197 intangibles and Class VII goodwill, which are amortizable over 15 years on a straight-line basis.
Seller's Allocation Preferences. The Horvath family shareholders, as the ultimate recipients of AVP's gain on the asset sale (through S-corporation pass-through), have different tax incentives with respect to the allocation. In general, the Seller benefits from higher allocations to assets that generate capital gains (e.g., goodwill, going concern value, and land) and lower allocations to assets that generate ordinary income (e.g., inventory and accounts receivable). The areas of particular tension between Buyer and Seller in the allocation negotiation include:
(a) Inventory (Class IV): Allocation to inventory generates ordinary income for the Seller's shareholders. The Horvath family will prefer to minimize the inventory allocation, while Crestline's tax preference on inventory is generally neutral (inventory is a cost-of-goods-sold item rather than a depreciable asset).
(b) Covenant-Not-to-Compete Payments: Consideration allocated to the covenants not to compete entered into by Gerald W. Horvath and Michael G. Horvath is treated as ordinary income to the individual recipients. This income is not pass-through income from the S-corporation; rather, it is personal ordinary income to Gerald and Michael individually. The recipients will therefore prefer to minimize the allocation to these covenants. From Crestline's perspective, amounts allocated to non-competition agreements are §197 intangibles amortizable over 15 years, which is beneficial but no more so than other §197 intangible allocations.
(c) Depreciable Assets Subject to Recapture: To the extent that AVP has claimed depreciation on its manufacturing equipment and real property, the gain on those assets will be subject to IRC §1245 or §1250 depreciation recapture, which converts a portion of the gain to ordinary income. The Seller's shareholders may therefore prefer lower allocations to heavily depreciated assets.
Non-Competition Agreements. The APA contemplates that Gerald W. Horvath and Michael G. Horvath will each enter into non-competition agreements in connection with the closing of the transaction. The consideration allocated to these covenants is ordinary income to the respective recipients and is deductible and amortizable by Crestline under IRC §197 over a 15-year period. The allocation to the non-competition agreements must be separately stated on IRS Form 8594 and must be supported by reasonable valuation evidence.
Consulting Agreement. Separately, the transaction contemplates that Michael G. Horvath will enter into a consulting agreement with Crestline (or a subsidiary thereof) to provide transitional operational consulting services for a period following the closing. Payments under the consulting agreement are compensation income to Michael G. Horvath and are deductible by Crestline as ordinary and necessary business expenses under IRC §162. These payments are not part of the §1060 purchase price allocation but should be clearly documented as separate from the purchase price.
D. IRS Form 8594 Filing Requirements
Both the Buyer and the Seller are required to file IRS Form 8594 (Asset Acquisition Statement Under Section 1060) with their respective federal income tax returns for the tax year in which the closing occurs. See IRC §1060(b); Treas. Reg. §1.1060-1(e). Given the anticipated Closing Date of July 31, 2025, the Form 8594 will be due with the parties' 2025 federal income tax returns (i.e., 2025 calendar year returns for AVP and its shareholders, and Crestline's return for its taxable year that includes the Closing Date).
The APA is expected to require that the purchase price allocation be agreed upon by the parties within ninety (90) days following the Closing Date. This timeline is customary and provides adequate time for the completion of independent appraisals and negotiation of the final allocation schedule.
Recommendation. We recommend that Crestline engage Hargrove Thornton LLP (engagement partner: Steven M. Raines) or another qualified independent appraiser to prepare valuation reports supporting the allocation. These reports should cover the real property, tangible personal property (including manufacturing equipment at both the Butler and Meadville plants), and identifiable intangible assets. The appraisals should be completed in draft form within sixty (60) days of closing to allow thirty (30) days for negotiation with Seller's representatives.
Consistent Reporting. It is important that Buyer and Seller file consistent purchase price allocations on their respective Forms 8594. If the parties file inconsistent allocations, each is required to disclose the inconsistency to the IRS, which significantly increases the likelihood of audit scrutiny. Accordingly, the APA should require the parties to report the agreed allocation on their respective tax returns and to refrain from taking positions inconsistent with the agreed allocation absent a change in applicable law or a final determination by a court or tax authority.
E. Action Items
1. Retain a qualified independent appraiser for real property and tangible personal property valuations at both the Butler and Meadville plants.
2. Coordinate with Hargrove Thornton LLP (Steven M. Raines) on the inventory valuation methodology and on the valuation of identifiable intangible assets as of the Closing Date.
3. Prepare a draft allocation schedule for inclusion as an exhibit to the APA, or as a separate post-closing agreement to be executed within ninety (90) days following the Closing Date.
4. Negotiate allocation principles and preliminary ranges with Seller's counsel (Nathan R. Feldstein, Broadmoor Strauss & Kline LLP) and Seller's accountants (Pendleton & Sawyer CPAs LLP) during the APA negotiation phase, with the goal of reaching agreement on methodology and general parameters prior to signing.
5. Ensure that the APA includes a covenant requiring both parties to report consistent allocations on their respective IRS Forms 8594.
IV. PENNSYLVANIA BULK SALE NOTICE AND TAX CLEARANCE REQUIREMENTS
A. Statutory Requirements
The Pennsylvania Tax Reform Code of 1971 (72 P.S. §7240) provides that when a person sells or transfers a business, or the stock of goods of a business, in bulk, the purchaser must notify the Pennsylvania Department of Revenue ("PA DOR") at least sixty (60) days prior to the date of the sale or transfer. The purpose of this requirement is to protect the Commonwealth's interest in collecting unpaid state taxes owed by the seller. Taxes covered by the bulk sale notice provision include, but are not limited to, corporate net income tax, capital stock/foreign franchise tax, sales and use tax, employer withholding tax, and other taxes administered by the PA DOR.
Critically, the failure to provide timely notice to the PA DOR can result in the imposition of successor liability on the buyer for the seller's unpaid tax obligations. This successor liability arises by operation of law and is not limited to the purchase price paid. The bulk sale notice process is therefore a compliance imperative for any asset acquisition in Pennsylvania.
B. Application to the Transaction
The proposed asset purchase of substantially all of AVP's assets unquestionably constitutes a bulk sale under Pennsylvania law. Crestline is acquiring the entirety of AVP's operating business — its real property, manufacturing equipment, inventory, contracts, intellectual property, and goodwill — and AVP will cease operations following the closing. This is precisely the type of transaction the bulk sale notice requirement was designed to address.
Accordingly, Crestline must file a Bulk Sale Notice with the PA DOR at least sixty (60) days prior to the Closing Date. Based on the estimated Closing Date of July 31, 2025, the Bulk Sale Notice must be filed no later than approximately June 1, 2025. The Notice must identify:
(a) The Seller: Allegheny Valley Packaging, Inc., EIN 25-1784632, PA DOS Entity ID 6519847;
(b) The Buyer: Crestline Packaging Solutions LLC, EIN 84-3291047;
(c) A description of the transaction, including the nature and general categories of assets being transferred; and
(d) The expected closing date and a request for the issuance of a tax clearance certificate.
C. Tax Clearance Certificate
Upon receipt of the Bulk Sale Notice, the PA DOR will review the Seller's tax filing and payment history and will issue either: (a) a clearance letter confirming that the Seller has no outstanding tax liabilities to the Commonwealth; or (b) a notice identifying outstanding tax liabilities that must be satisfied before clearance can be issued.
Receipt of the tax clearance certificate (or, alternatively, the establishment of an appropriate escrow or holdback arrangement for identified liabilities) is a condition to closing under the APA. If the PA DOR identifies outstanding tax liabilities of AVP, such liabilities are classified as Excluded Liabilities under the APA, and the Seller is obligated to satisfy them at or prior to closing, either through direct payment or through a deduction from the Seller's closing proceeds.
It is important that we coordinate closely with Seller's counsel (Broadmoor Strauss & Kline LLP) and Seller's accountants (Pendleton & Sawyer CPAs LLP) to ensure that AVP's Pennsylvania tax filings are current and complete. Any deficiencies in AVP's filings could delay the issuance of the clearance certificate and, in turn, delay the closing. Seller's counsel has represented that AVP is current on all Pennsylvania tax filings, but we will verify this independently through the clearance process.
D. Filing Mechanics and Timeline
Calderwood & Harkness LLP (Leonard Cross coordinating, with support from Megan Chu) will prepare and file the Pennsylvania Bulk Sale Notice with the PA DOR. The critical dates are as follows:
If the tax clearance certificate has not been received by the Closing Date, the parties should consider alternative arrangements, including: (a) a closing escrow or holdback in an amount sufficient to cover any reasonably estimated outstanding tax liabilities, with disbursement contingent upon receipt of clearance; or (b) a delay of the closing until clearance is obtained, provided that the Outside Date of September 30, 2025 is not exceeded. We recommend building appropriate flexibility into the closing mechanics to accommodate potential delays in the PA DOR's processing of the clearance request, which can occasionally take longer than the sixty-day notice period.
V. PENNSYLVANIA REALTY TRANSFER TAX
A. Applicable Tax
The Commonwealth of Pennsylvania imposes a Realty Transfer Tax ("RTT") on the transfer of real property or interests in real property located within the Commonwealth. The tax is imposed pursuant to 72 P.S. §8101-C et seq. and is triggered by the recording of a deed or other document evidencing a transfer of real property. In addition to the state-level RTT, Pennsylvania counties and municipalities may impose local transfer taxes.
The combined state and local RTT rate is generally 2% of the value of the real property transferred, consisting of 1% imposed by the Commonwealth and 1% imposed by the local taxing jurisdiction (county and/or municipality). However, local rates vary by jurisdiction, and the specific rates applicable to Butler County (where the Butler plant is located) and Crawford County (where the Meadville plant is located) should be confirmed with local counsel or the applicable county recorder of deeds. For purposes of this memorandum, we have assumed a combined rate of 2% pending confirmation of the applicable local rates.
The RTT applies to the transfer of the two AVP real properties that are included in the Acquired Assets:
(a) Butler Plant: 250 Industrial Boulevard, Butler, Pennsylvania 16001 — approximately 285,000 square feet of manufacturing and office space on approximately 22.5 acres; and
(b) Meadville Plant: 1480 Conneaut Lake Road, Meadville, Pennsylvania 16335 — approximately 110,000 square feet of manufacturing space on approximately 8.2 acres.
Both properties will be conveyed to Crestline by special warranty deed at closing.
B. Tax Base and Estimated Liability
The RTT is computed on the higher of: (i) the actual consideration allocated to the real property in the transaction; or (ii) the fair market value of the real property. In the context of this asset purchase, the consideration allocated to the real property for RTT purposes will be informed by, and generally consistent with, the purchase price allocation under IRC §1060 (as discussed in Section III above).
Based on preliminary estimates, the aggregate fair market value of the two properties is approximately $18,000,000. This figure is subject to refinement through independent appraisal and the final purchase price allocation process. The estimated RTT liability is calculated as follows:
It is important to note that the real property allocation reflected on the deeds at closing may differ from the final purchase price allocation under IRC §1060 if the §1060 allocation is not completed until after closing. We recommend that the allocation reflected on the deed transfer tax statements be based on the best available estimate at the time of closing and be consistent with the preliminary allocation used in the §1060 analysis. If the final allocation results in a material change to the real property value, an amended transfer tax filing may be required.
C. Allocation of Tax Between Parties
Under the terms of the APA, the Pennsylvania Realty Transfer Tax is to be split equally between Buyer and Seller. Based on the estimated total liability of $360,000, each party's estimated share is:
• Buyer's share: $180,000
• Seller's share: $180,000
These amounts will be reflected in the Closing Funds Flow Memorandum and will be deducted from the Seller's closing proceeds or paid separately by each party at closing, as directed by the settlement agent.
D. Filing Requirements
The RTT is collected at the time the deeds are recorded with the applicable county recorders of deeds. Realty Transfer Tax Statements (Pennsylvania Form REV-183) must accompany each deed submitted for recording. The Form REV-183 requires disclosure of the consideration paid for the real property, the applicable tax rate, and the amount of tax due.
Great Lakes Title & Escrow Inc. (the title company engaged for the transaction) and Sentinel Title Insurance Corporation (the title insurer) will coordinate the preparation and filing of the deed recording documents, including the REV-183 forms, and the payment of the RTT at the time of recording. Crestline's closing team should confirm all recording fees and tax amounts with Great Lakes Title & Escrow Inc. prior to the Closing Date.
Exemption Analysis. We have reviewed the statutory exemptions from the Pennsylvania RTT, including exemptions for transfers between certain related entities and transfers involving entities that are wholly owned by the transferor. None of these exemptions appear applicable to the present transaction, which is an arm's-length purchase between unrelated parties. Accordingly, the full RTT will apply.
VI. SALES AND USE TAX EXPOSURE — PRE-CLOSING PERIODS
A. Due Diligence Findings
In the course of financial due diligence conducted by Hargrove Thornton LLP and legal due diligence conducted by Calderwood & Harkness LLP, a potential sales and use tax exposure of approximately $420,000 was identified across three jurisdictions — Pennsylvania, Ohio, and West Virginia — for tax periods 2021 through 2024. The exposure arises from two primary issues: (i) AVP's inconsistent collection and remittance of sales tax on certain categories of products, particularly specialty coating products that may not qualify for applicable exemptions; and (ii) AVP's failure to accrue and remit use tax on certain out-of-state purchases of equipment and supplies.
While the total estimated exposure of $420,000 is not material relative to the $180,000,000 purchase price, it is significant enough to warrant protective provisions in the APA and, ideally, pre-closing resolution by the Seller.
B. Jurisdictional Breakdown
Pennsylvania. The largest component of the identified exposure relates to AVP's Pennsylvania sales tax obligations. Specifically, AVP appears to have relied on the manufacturing exemption under 72 P.S. §7204(1) to avoid collecting sales tax on sales of certain specialty coating products. Upon review, it appears that some of these products — particularly those sold to customers for non-manufacturing applications — may not qualify for the manufacturing exemption. The estimated Pennsylvania sales tax exposure is approximately $260,000, inclusive of estimated interest and penalties.
Ohio. AVP has not historically been registered for sales or use tax in Ohio. However, AVP has purchased manufacturing equipment and supplies from out-of-state vendors that were shipped into Pennsylvania without the collection of sales tax. Under Pennsylvania's use tax provisions, AVP was obligated to self-assess and remit use tax on these purchases. Additionally, to the extent AVP had any distribution activities involving Ohio, use tax obligations may have arisen under Ohio law. The estimated Ohio use tax exposure is approximately $95,000.
West Virginia. AVP has historically shipped products to customers in West Virginia, and our review indicates that AVP had sufficient contacts with West Virginia to establish sales tax nexus in that state. Notwithstanding this nexus, AVP did not register with the West Virginia State Tax Department, did not collect West Virginia sales tax on taxable sales to West Virginia customers, and did not remit any West Virginia sales tax. The estimated West Virginia sales tax exposure is approximately $65,000, inclusive of estimated interest and penalties.
C. Protective Provisions in the APA
The APA contains several provisions designed to protect Crestline from successor liability and economic loss arising from AVP's pre-closing sales and use tax obligations:
Excluded Liabilities. All pre-closing tax liabilities, including sales and use tax obligations for periods ending on or before the Closing Date, are expressly designated as Excluded Liabilities under the APA. Crestline does not assume any responsibility for these obligations.
Tax Representations and Warranties. The Seller has made representations and warranties in the APA concerning compliance with all applicable tax laws, including sales and use tax obligations in all jurisdictions where AVP has or had filing obligations. These tax representations survive the closing until sixty (60) days after the expiration of the applicable statute of limitations (including any extensions), which provides Crestline with an extended indemnification window for tax claims.
Specific Indemnification. The Seller has agreed to indemnify Crestline for the identified $420,000 sales and use tax exposure, subject to the terms of the general indemnification provisions of the APA. We recommend that this specific indemnification be structured as a special indemnity (i.e., not subject to the general indemnification basket or cap) to ensure full recovery.
Recommendation. We recommend that the Seller resolve the outstanding sales and use tax liabilities prior to closing, to the extent practicable. If pre-closing resolution is not feasible, the parties should consider one or more of the following alternatives: (a) a specific closing holdback or escrow in the amount of $420,000 (or a higher amount with a cushion for interest, penalties, and professional fees) to secure payment of the identified liabilities; (b) a dollar-for-dollar reduction of the purchase price at closing; or (c) reliance on the Seller's general indemnification obligations under the APA, backstopped by the $9,000,000 escrow fund.
D. Buyer's Post-Closing Risk
In a properly structured asset purchase, the buyer generally does not succeed to the seller's pre-closing sales and use tax liabilities, provided that the buyer has complied with all applicable bulk sale notice and tax clearance requirements. As discussed in Section IV above, the Pennsylvania Bulk Sale Notice and Tax Clearance Certificate process is designed to identify and resolve AVP's outstanding Pennsylvania tax liabilities prior to closing. Provided that Crestline obtains the PA DOR tax clearance certificate, Crestline's risk of successor liability for AVP's Pennsylvania sales and use tax obligations should be mitigated.
However, the analysis is somewhat more complex with respect to Ohio and West Virginia. We recommend the following additional steps:
(a) Ohio: Review whether Ohio imposes bulk sale or successor liability provisions analogous to Pennsylvania's. If so, consider filing a bulk sale notice or requesting a tax clearance certificate from the Ohio Department of Taxation.
(b) West Virginia: Similarly, review whether West Virginia imposes successor liability on the purchaser of a business's assets for the seller's unpaid sales and use taxes. If applicable, request a clearance certificate from the West Virginia State Tax Department.
In all events, the APA should include specific tax indemnity language covering any successor liability claims that may be asserted against Crestline by any state or local taxing authority for AVP's pre-closing sales and use tax obligations, regardless of whether such claims arise under bulk sale statutes, successor liability doctrines, or any other legal theory.
VII. AVP'S S-CORPORATION STATUS AND TAX TREATMENT OF THE SALE
A. S-Corporation Pass-Through Treatment
AVP is a Pennsylvania corporation that has elected to be treated as an S-corporation for federal income tax purposes under IRC §§1361–1379. As an S-corporation, AVP is generally not subject to federal income tax at the corporate level (subject to certain exceptions, including the built-in gains tax discussed in Section VII.C below). Instead, AVP's items of income, gain, loss, deduction, and credit pass through to its shareholders and are reported on their individual federal income tax returns.
In the context of the proposed asset sale, AVP will recognize gain or loss on the disposition of each asset transferred to Crestline. The aggregate gain will be the difference between the amount realized (i.e., the purchase price allocated to each asset under IRC §1060) and AVP's adjusted tax basis in each asset. Because AVP is an S-corporation, this gain will flow through to the Horvath family shareholders on a pro rata basis in accordance with their respective ownership interests:
Each shareholder will report his or her share of the gain on Schedule K-1 (Form 1120-S) and will include the gain on his or her individual Form 1040 for the taxable year in which the closing occurs. The tax consequences to the Horvath shareholders are, of course, primarily a matter for the Seller's tax advisors (Pendleton & Sawyer CPAs LLP) to address. However, an understanding of these consequences is relevant to our negotiation strategy on the purchase price allocation, as the character and magnitude of the Seller's tax liability directly affect the Horvath family's after-tax proceeds and, consequently, their negotiating posture on allocation issues.
B. Character of Gain
The character of the gain recognized by AVP on the sale of its assets depends on the nature of each asset sold and the purchase price allocation. The following is a summary of the character treatment applicable to each major asset class:
Inventory (Class IV). Gain on the sale of inventory is treated as ordinary income under IRC §1221(a)(1), which excludes stock in trade and property held primarily for sale to customers from the definition of a capital asset. This treatment applies to AVP's finished goods, work-in-process, raw materials, and all other inventory items.
Accounts Receivable (Class III). To the extent that AVP realizes amounts in excess of the face value of its accounts receivable, such excess is ordinary income. Where the receivables are collected at face value, no gain or loss is recognized; if collected at less than face value (e.g., due to write-offs or allowances), the shortfall may generate an ordinary loss.
Depreciable Real and Personal Property (Class V). The gain on the sale of depreciable property is subject to special recapture rules. For personal property (machinery, equipment, vehicles, furniture, and fixtures), IRC §1245 requires that gain be treated as ordinary income to the extent of all prior depreciation deductions claimed with respect to such property. For depreciable real property (the Butler and Meadville buildings), IRC §1250 requires recapture as ordinary income of the excess, if any, of accelerated depreciation over straight-line depreciation. Any remaining gain on §1245 or §1250 property, after recapture, is treated as §1231 gain. Net §1231 gain for a taxable year is treated as long-term capital gain, provided that net §1231 gains exceed net §1231 losses (including the §1231 lookback rule of IRC §1231(c)).
Land (Class V). Land is not depreciable and is therefore not subject to depreciation recapture. Gain on the sale of land held for use in AVP's trade or business is §1231 gain, which, as noted above, is treated as long-term capital gain if net §1231 gains exceed losses.
Goodwill and Going Concern Value (Class VII). Goodwill and going concern value that are self-created (as opposed to purchased) generally have a zero tax basis. Accordingly, the entire amount allocated to goodwill and going concern value in the purchase price allocation will be recognized as gain. For an S-corporation selling a trade or business, goodwill generated by the business is treated as §1231 property, and gain on its sale is §1231 gain — long-term capital gain, absent §1231 netting considerations.
Covenants Not to Compete. Amounts allocated to the non-competition agreements with Gerald W. Horvath and Michael G. Horvath are not part of the S-corporation's asset sale. Rather, the non-competition covenants are entered into by the individuals directly, and the consideration received is ordinary income to each individual. See IRC §§61, 197(f)(9). These amounts are not passed through AVP's S-corporation return; instead, they are reported directly on the individuals' personal returns. From Crestline's perspective, the amounts paid under the non-competition agreements are §197 intangibles, amortizable over 15 years.
Consulting Agreement Payments. Payments to Michael G. Horvath under the consulting agreement are ordinary compensation income to Michael, reportable on Form W-2 (if treated as an employee) or Form 1099-NEC (if treated as an independent contractor). These payments are deductible by Crestline as ordinary and necessary business expenses under IRC §162.
C. Built-In Gains Tax (IRC §1374)
Section 1374 of the Code imposes a corporate-level tax on an S-corporation's "net recognized built-in gain" during the "recognition period" following a conversion from C-corporation status to S-corporation status. The recognition period is currently five (5) years, as established by IRC §1374(d)(7) (as amended by the Protecting Americans from Tax Hikes Act of 2015). The built-in gains ("BIG") tax is imposed at the highest corporate tax rate (currently 21%) and is applied to the net recognized built-in gain for each year within the recognition period.
The BIG tax is relevant only if AVP converted from C-corporation to S-corporation status within the five-year period preceding the Closing Date. If AVP has been an S-corporation for more than five years prior to the closing, the recognition period has expired, and no BIG tax would apply.
Investigation Required. We have not yet confirmed the date of AVP's S-election. This information is critical to determining whether the BIG tax is a potential issue for the Seller (and, indirectly, for the transaction pricing). We recommend that Seller's accountants (Pendleton & Sawyer CPAs LLP) be asked to provide documentation of the date of AVP's S-election (Form 2553 and IRS acknowledgment letter) and to confirm whether the recognition period has expired. If the recognition period has not expired, Pendleton & Sawyer should quantify the potential BIG tax liability and its impact on the Horvath family's after-tax proceeds.
While the BIG tax is a Seller-side issue (the tax is imposed at the corporate level on AVP and reduces the amount available for distribution to the Horvath shareholders), it is relevant to our negotiation of the transaction because: (a) the existence of a significant BIG tax liability could affect the Horvath family's willingness to proceed at the agreed-upon purchase price; and (b) Seller's representations and warranties in the APA include representations regarding AVP's tax status and liabilities, and the BIG tax should be accurately reflected in the disclosure schedules.
D. Pennsylvania Personal Income Tax
The Commonwealth of Pennsylvania imposes a flat-rate personal income tax on the taxable income of individual residents. Pennsylvania does not distinguish between ordinary income and capital gains for personal income tax purposes — all categories of income are taxed at the same flat rate. Accordingly, the character of the gain passing through AVP to the Horvath shareholders (ordinary versus capital) does not affect the Pennsylvania personal income tax computation, although it remains critically important for federal income tax purposes.
Gerald, Patricia, and Michael Horvath will each owe Pennsylvania personal income tax on their respective shares of the gain from the asset sale, reported on their Pennsylvania individual income tax returns (Form PA-40) for the year in which the closing occurs.
E. Net Investment Income Tax (IRC §1411)
Section 1411 of the Code imposes a 3.8% Net Investment Income Tax ("NIIT") on the lesser of: (a) net investment income; or (b) the excess of modified adjusted gross income over the applicable threshold amount ($250,000 for married filing jointly, $200,000 for single filers). Net investment income includes, among other items, gain from the disposition of property (other than property held in a trade or business in which the taxpayer materially participates).
Whether the Horvath shareholders are subject to the NIIT on their shares of the gain from the AVP asset sale depends on whether they materially participate in AVP's business. Gerald W. Horvath, as the Chairman and founder, likely materially participates. Michael G. Horvath, as Vice President of Operations, likely also materially participates. The status of Patricia A. Horvath is less clear and would depend on the facts and circumstances of her involvement.
This is not a buyer concern, but we flag it here for completeness, as it may affect the Horvath family's overall tax planning and after-tax expectations.
VIII. INAPPLICABILITY OF IRC §338 ELECTIONS
A. Section 338(g) Election
Section 338(g) of the Code provides that, in the case of a "qualified stock purchase" — i.e., a purchase by a corporation of 80% or more of the stock of a target within a 12-month period — the purchasing corporation may elect to treat the stock purchase as an asset acquisition for federal income tax purposes. The purpose of the §338(g) election is to allow a stock buyer to obtain a stepped-up basis in the target's assets (at the cost of triggering a corporate-level gain recognition event).
This transaction is structured as a direct asset purchase, not a stock purchase. Crestline is not acquiring any shares of AVP's stock. Accordingly, no "qualified stock purchase" is occurring, and IRC §338(g) is, by its terms, inapplicable. No §338(g) election is necessary or available.
B. Section 338(h)(10) Election
Section 338(h)(10) of the Code provides for a joint election by the buyer and seller of stock in an S-corporation (or a member of a consolidated group) to treat a stock sale as an asset sale for federal income tax purposes. The §338(h)(10) election is commonly used in the acquisition of S-corporations because it allows the parties to achieve asset-sale tax treatment (i.e., a single level of tax at the shareholder level and a stepped-up basis for the buyer) while effecting the legal mechanics of a stock transfer.
Again, because this transaction is structured as an actual asset purchase rather than a stock purchase, §338(h)(10) is not applicable and no joint election is necessary. The parties are achieving the same tax result — a stepped-up basis for the buyer in all acquired assets, with gain recognition by the seller at the shareholder level through S-corporation pass-through — directly through the asset purchase structure. There is no need to invoke the §338(h)(10) fiction because the reality already produces the desired tax outcome.
C. Conclusion. No election under IRC §338(g) or §338(h)(10) is required or applicable in connection with this transaction. Crestline obtains the benefit of a stepped-up tax basis in all acquired assets equal to the purchase price as allocated under IRC §1060 through the direct asset purchase structure. This is, in fact, one of the principal tax advantages of the asset purchase structure for Crestline, and it is the structure that provides the most efficient cost recovery for the buyer through depreciation and amortization deductions.
We recommend that the APA include a confirmation that no §338 election is being made in connection with the transaction, to avoid any ambiguity.