Purchase price adjustment

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.

Federal Tax Implications

A Purchase Price Adjustment is not included as gross income under the U.S. tax code. 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).

References

References

1. Samuel A. Donaldson, ''Federal Income Taxation of Individuals: Cases, Problems and Materials'', 2nd Edition (St. Paul: Thomson/West, 2007), 113-14.
2. See IRC § 108(e)(5)(A).
3. ''Ibid.''