CBB Legal & Regulatory Compliance 3 — Questions and Answers
Question 1: Under IRS rules, when a business is sold as an asset sale, which form must buyer and seller file to report the allocation of purchase price among asset classes?
- Form 1099-MISC
- Form 8594 (Correct answer)
- Form 4797
- Schedule K-1
Correct answer: Form 8594
IRS Form 8594 (Asset Acquisition Statement) must be filed by both buyer and seller showing the agreed purchase price allocation.
Question 2: Which type of business sale structure generally allows the buyer to receive a stepped-up tax basis in the acquired assets?
- Stock purchase
- Merger by absorption
- Asset purchase (Correct answer)
- Reverse triangular merger
Correct answer: Asset purchase
An asset purchase allows the buyer to allocate the purchase price to individual assets, receiving a stepped-up basis for depreciation purposes.
Question 3: What is the primary legal concern a broker must address when a business being sold holds a liquor license?
- The license is always transferable with the business automatically
- Liquor licenses are state-regulated and typically require separate approval for transfer (Correct answer)
- FINRA must approve the license transfer
- The broker must hold a liquor license to market the business
Correct answer: Liquor licenses are state-regulated and typically require separate approval for transfer
Liquor licenses are granted by state agencies and almost always require a separate application and approval for any ownership transfer.
Question 4: Environmental due diligence in a business sale often involves a Phase I Environmental Site Assessment. What does a Phase I assessment primarily involve?
- Soil and groundwater sampling
- A records review and site reconnaissance without physical sampling (Correct answer)
- Remediation cost estimates
- EPA permit transfers
Correct answer: A records review and site reconnaissance without physical sampling
A Phase I ESA is a non-invasive review of historical records, regulatory databases, and a site walkthrough to identify potential contamination concerns.
Question 5: When representing a seller, a business broker's fiduciary duty includes all of the following EXCEPT:
- Loyalty to the seller's interests
- Confidentiality of seller information
- Disclosing all known material defects to the buyer
- Negotiating the lowest possible price for the buyer (Correct answer)
Correct answer: Negotiating the lowest possible price for the buyer
Negotiating the lowest price would benefit the buyer, not the seller — this is opposite to a seller's broker's fiduciary duty.
Question 6: Which federal law prohibits unfair methods of competition and unfair or deceptive acts in commerce, empowering the FTC to take action?
- The Clayton Act
- Section 5 of the FTC Act (Correct answer)
- The Robinson-Patman Act
- The Sarbanes-Oxley Act
Correct answer: Section 5 of the FTC Act
Section 5 of the FTC Act broadly prohibits unfair or deceptive acts or practices and gives the FTC broad enforcement authority.
Question 7: In a stock sale, who typically assumes the historical liabilities of the business?
- The seller retains all liabilities
- The buyer assumes the liabilities of the entity as-is (Correct answer)
- The escrow agent absorbs liabilities
- The state government assumes liabilities
Correct answer: The buyer assumes the liabilities of the entity as-is
In a stock sale the buyer acquires the entity itself, including all existing and contingent liabilities that the entity carries.
CBB Legal & Regulatory Compliance 3
Under IRS rules, when a business is sold as an asset sale, which form must buyer and seller file to report the allocation of purchase price among asset classes?