In the context of mergers and acquisitions, the buyer can engage in either a stock purchase or an asset purchase. While a stock purchase is typically simpler, the buyer generally assumes the seller’s tax liabilities, although the buyer is typically indemnified for those liabilities. For this reason, many business owners prefer to structure their acquisitions as an asset purchase. However, unless the buyer takes precautionary measures, the buyer can also be liable for certain taxes in an asset purchase, typically referred to as “successor liabilities” because they are liabilities of the successor company (i.e., the buyer).

Nebraska Successor Liability

1. Sales or Use Taxes: In Nebraska, a buyer, as the immediate successor to the seller’s business, can become automatically liable for delinquent sales or use taxes the seller owes.¹ Other provisions and case law also create buyer liability for a seller’s delinquent income tax.²
   Buyers can mitigate risk of an unexpected tax liability in two ways under Nebraska law.³ First, the buyer can withhold a portion of the purchase price that is required to pay the outstanding tax liability, if known. Second, the buyer can require the seller to obtain a receipt from the tax commissioner showing taxes have been paid or a certificate stating that no amount is due, known as a Tax Clearance Certificate. In Nebraska, a certificate of clearance can be obtained by filing a Tax Clearance Application, Form 36, with the Nebraska Department of Revenue.

2. Personal Property Taxes: Personal property taxes are assessed locally and attach to the property, not the owner. If personal property taxes are not timely paid, a lien can attach to the property. As such, buyers should confirm whether personal property assets are subject to a lien. Buyers can perform lien searches for property taxes and review UCC filings for tax liens.
3. Real Property Taxes: The default rule in Nebraska is that the owner of real property as of Dec. 31 is liable for any taxes assessed and levied, but this default rule may be modified by contract.⁴

Iowa Successor Liability

1. Business Taxes: In Iowa, a buyer, as the immediate successor to the seller’s business, is personally liable for any delinquent taxes accrued in the operation of the seller’s business.⁵ Under Iowa law, a purchaser of substantially all the assets of business can have successor liability for sales tax,⁶ fuel tax,⁷ local option tax,⁸ and hotel/motel tax.⁹
   Buyers can mitigate risk of an unexpected tax liability in three ways under Iowa law. The first two ways are similar to Nebraska. First, a buyer can withhold a sufficient portion of the purchase price to pay the amount of delinquent tax.¹⁰ Second, the buyer can request a statement of the amount of unpaid tax the seller owes by filing an Immediate Successor Liability Form 14-109 with the Iowa Department of Revenue.¹¹
   Thirdly, and uniquely to Iowa, a buyer “in good faith” can obtain a certified statement from the seller that no delinquent tax, interest, or penalty is unpaid.¹² Importantly, the statement should specify that all taxes, including, but not limited to, income, sales, and use taxes, have been timely paid by the seller. A certified statement from a licensee, retailer, or seller will not be recognized by the Iowa Department of Revenue as valid unless it includes all of the following:
   • The name of the business being purchased or a description of the stock of goods being purchased.
   • The names of the licensee, retailer, or seller and the prospective purchaser(s).
   • The tax identification numbers of both the licensee, retailer, or seller and prospective purchaser(s). Entities shall include a federal employer identification number (FEIN). Individuals shall include a Social Security number (SSN) or individual tax identification number (ITIN).
   • An attestation signed by the licensee, retailer, or seller attesting that no delinquent tax, interest, or penalty of the retailer is unpaid as of the date of the closing of the sale.¹³
   A certified statement has been taken “in good faith” if the immediate successor, in the exercise of due diligence, had no reason to believe a retailer’s statement was false or no reason to question the truth of the retailer’s statement.¹⁴
2. Personal Property Taxes: Iowa does not assess or tax personal property.
3. Real Property Taxes: Similar to Nebraska, Iowa law generally treats real property taxes as attaching to the real property. When property is transferred, the buyer takes the property subject to any existing liens.¹⁵

Contractual Provisions

Generally, in an asset purchase, the buyer does not assume the liabilities of the seller as it would in a stock purchase. The stated successor liability rules can be an exception to this general rule relating to taxes owed by the seller. Therefore, buyers often try to minimize the impact of successor liabilities using contractual provisions in the purchase agreement.

1. Due Diligence: While not typically part of the purchase agreement, buyers should undertake sufficient and fulsome due diligence of all tax obligations for any open tax period that could be subject to audit. Often, buyers will require that three or six years of tax returns and/or audits be provided and sometimes even added to the disclosure schedules.

2. Representations: Buyer should ensure that seller’s representations in the purchase agreement contemplate the payment of any delinquent taxes assessed by any taxing authority. If the buyer is thereafter liable for any taxes owed, the buyer would have a cause of action for breach of contract against the seller.
3. Covenants: Seller should also covenant that it shall pay any taxes due and owing upon the closing date of the transaction. Again, if the buyer is thereafter liable for any taxes owed, the buyer would have a cause of action for breach of contract against the seller.
4. Indemnification Clauses: In the successor liability context, the buyer and seller can negotiate to minimize the impact of successor liabilities using indemnification clauses. Indemnification allocates risk of losses between parties through a process of negotiation. More importantly, it provides a process by which the buyer can more easily recover against the seller (as compared to a breach of contract claim).
5. Escrow/Holdback: Buyers with any concerns regarding seller’s taxes should also consider holding back a portion of the purchase price for a period of time to help cover any later discovered tax deficiencies. These escrow periods generally match the survival period of the fundamental representations but can extend further.

Conclusion

Buyers should be aware of the potential tax liabilities that can result from an acquisition, even in an asset purchase. Nebraska and Iowa each provide mechanisms for buyers to mitigate risk, including withholding, tax clearance certificates, and good-faith certified statements. Nonetheless, early due diligence and appropriate contractual protections remain essential tools for managing successor liability exposure.