Purchase price adjustment
- Purchase price adjustment
Purchase Price Adjustments capture the change in value of an asset typically between the negotiation and closing.
Example
Antonio purchased property from Shylock for $50,000. At closing, Antonio paid $10,000 to Shylock and executed a promissory note payable to "Shylock or order" for $40,000. Following the closing, Antonio approached Shylock, upset that the property was in fact worth only $42,000. After a few weeks of negotiations, the parties agreed to reduce the amount of the promissory note to $32,000. [ Samuel A. Donaldson, "Federal Income Taxation of Individuals: Cases, Problems and Materials", 2nd Edition (St. Paul: Thomson/West, 2007), 113-14.]
Federal Tax Implications
A "Purchase Price Adjustment" is not included as gross income under the U.S. tax code. [ See IRC § 108(e)(5)(A). ] The adjustment between the parties is merely re-setting the amount of the purchase price. Additionally, the price adjustment has to exist between the seller and the buyer (no third parties can be involved). [ "Ibid."]
References
Wikimedia Foundation.
2010.
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