Bert and Ernie are both 50% shareholders in their small business. Ernie is losing passion and interest in the business, and is going to cut ties and explore other opportunities. Ernie and has agreed to sell his 50% to Bert based on an agreed upon valuation of the company. There has already been a legally binding verbal and handshake agreement, with witnesses, on the value and method of payment.

However, Ernie has created a contract with the details discussed in the verbal/handshake agreement, with the demand for extra money to cover taxes added in. Instinct tells me that this was a shady attempt by Ernie to trick Bert into paying Ernie's taxes on the capital gains. In the little market participation I have experienced, this does not feel right.

Is there any precedence for additional money to be provided from the buyer to the seller to cover the seller's taxes?

  • C'mon man. A handshake agreement? It may be legal but is it enforceable? Ernie will ask for the moon. Bert must tell him to FO with that nonsense. The parties will eventually negotiate a deal...or not. It's all a matter of what the market (Bert) will bear. If Ernie finds that Bert will not buy with taxes included, then Ernie has a decision to make. – acpilot Dec 12 '18 at 1:42
  • FWIW, I am neither Bert or Ernie, lol – Conner Johnston Dec 13 '18 at 23:15

No. The business has a price, and the taxes are the responsibility of the buyer. It basically IS a shady way to raise the business price ("Oh, I meant without taxes, so pay more money to cover my taxes"). Simple as that.

Now, it is not unheard of that the seller covers taxes (AND debt), but in those cases

  • this is still considered part of the payment and
  • it is agreed upon beforehand.

This is how you may buy a company for 1 USD (and agree to cover 10 million in debt, most likely IN the company), while paying in cash only 1 USD. But this is obviously not the case here and Ernie's personal tax situation is not Bert's issue.

  • 2
    Did you mean "the taxes are the responsibility of the seller" and "it is not unheard of that the buyer covers taxes"? – nanoman Dec 12 '18 at 8:50
  • So in the case that the taxes are to be considered to be "part of the payment" (since the value of the payment is set-in-stone): Bert can pay Ernie for Ernie's shares, the agreed upon amount, and taxes can be considered part of the payment? For example, if tax is 50%, and Bert is paying $100 to Ernie for 50%, Ernie would originally have to pay $50 in taxes; however, if the taxes are considered "part of the payment", then Ernie will have to pay $33.34 in taxes ($33.34 being 50% of $66.66 of capital gain)? – Conner Johnston Dec 13 '18 at 23:18
  • Except that in this case it seems someone wants to get a NET 50$, so the taxes have to be added on top (as well as taxes on the taxes etc.). As I said - this is an attempt to extort more money (i.e. raising the price). – TomTom Dec 14 '18 at 7:31

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