Extract to table

To the extent that earnout payments are properly characterized as additional purchase price, what is the application of Section 483 of the Code to deferred earnout payments made more than one year after the closing date, and what portion of each deferred payment must be treated as imputed (unstated) interest rather than capital gain? Subsidiary Issue 2: Change of Control Acceleration

In contrast, if any seller must remain employed for the earnout to be payable (either in whole or in part), the arrangement begins to resemble a retention bonus

Similarly, any consulting agreements with the Continuing Sellers must be independently valued and separately documented, with consulting fees that reflect fair market value for the services to be rendered

The consulting fees must not be artificially depressed in a manner that suggests the earnout is functioning as deferred consulting compensation, and the earnout payment must not be contingent on the seller's performance of consulting services

Section 483 of the Code provides that, in the case of any payment under a contract for the sale or exchange of property where some or all of the payments are due more than one year after the date of the sale or exchange, the payments shall be treated as including a component of imputed (unstated) interest if the contract does not provide for adequate stated interest

(b) A provision stating that, if any earnout payment were determined to constitute deferred compensation under Section 409A, such payment shall be made within the "short-term deferral" period described in Treasury Regulation Section 1