Classification: Moderately Material
Section: Representations and Warranties of Seller
Negotiation Time: Moderate
Transaction Costs: Expensive
Major Impact: Risk Management


What is This? The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading. Here, the Seller provides information regarding tax-related matters of the Business.

The Middle Ground: The content in this section is based on the assumption that the Business is organized as a stand-alone C Corp that does not operate outside the United States. With that in mind, the typical tax representations include:

(1) All the Seller’s Tax Returns for any pre-Closing period are true and complete, have been, or will be, timely filed, and all related payments have been, or will be, paid by their respective due dates;

(2) Seller has withheld and paid each Tax required to be withheld in connection with its employees, independent contractors, customers, or any other party and has complied with reporting and backup withholding provisions of applicable law;

(3) No extensions or waivers of statutes of limitations have been requested or provided in connection with the Taxes payable by Seller;

(4) Seller has fully paid all deficiencies asserted and/or assessments made against it by any taxing authority;

(5) Seller is not a party to any Action by any taxing authority and there are no pending or threatened Actions of that nature in connection with the Business;

(6) There are no Tax-related Encumbrances upon any of the Purchased Assets nor, to Seller’s knowledge, is any taxing authority in the process of imposing such Encumbrances;

(7) Seller is not a “foreign person” as defined in Treasury Regulation §1.1445-2; and

(8) Seller is not, and has never been, party to or a promoter of a “reportable transaction” within the meaning of Code §6707A(c)(1) and Treasury Regulations §1.6011 4(b).

Additional tax-related representations may be required depending on the nature of the Business (e.g. if the Business engages in “safe harbor lease” transactions), so both parties should consult a tax expert to determine which representations should be included in the Agreement.

Purpose: Tax-related liabilities are generally part of the Excluded Liabilities in an asset purchase, so the purpose of this section is to ensure that all such liabilities, including those that may be imposed in the future based on the Seller’s pre-Closing actions or inaction, stay with the Seller. Including specific tax-related representations also gives the Buyer a better understanding of the Seller’s past behavior in terms of its desire and ability to comply with legal requirements. That information can be a valuable source of risk assessment for the Buyer, and it becomes especially important if the Seller will remain actively involved in the Business following the sale.

Buyer Preference: The Buyer wants these representations to survive for 60 days after expiration of the applicable statute of limitations for enforcement of tax deficiencies. It also wants the representations to remain as broad as possible to cover all taxes owed or paid by the Seller, although, for the sake of clarity, it may want to specifically list as examples the tax categories it is most concerned about (e.g. sales tax for an e-commerce business). The representation regarding withholding tax is not a necessity in this section, but is generally preferred by the Buyer because it provides specific information about withholding taxes that may not otherwise be disclosed (because the “Withholding Tax” provision is not typically accompanied by related Disclosure Schedules). The Buyer also wants to exclude knowledge qualifiers in representations (5) and (6) if it can do so without giving up something of greater significance. Lastly, the Buyer may want to consult a tax expert who is familiar with the Business to determine whether additional representations should be included.

Seller Preference: The Seller can narrow these representations by limiting them to “Taxes (and Tax Returns) with respect to the Business” rather than referencing the Taxes (and Tax Returns) of the Seller. The Seller may also seek knowledge and/or materiality qualifiers where it would make sense to do so. A more aggressive approach would be to limit the Tax Returns to Income Tax Returns, but most Buyers will resist this since income taxes are not the only source of tax liability for businesses. If the representations would not be completely accurate as written, the Seller will want to include a corresponding section in the Disclosure Schedules rather than risk breaching its representations. Much like the Buyer, the Seller may want to consult with a tax expert regarding the scope of the representations to ensure that it is not taking responsibility for any liability that should be taken on by the Buyer.

Differences in a Stock Sale Transaction Structure: These representations are more critical for the Buyer if the transaction is structured as a stock sale because, in that context, the Buyer inherits the Seller’s tax liabilities. That means the Buyer would be managing much more risk and, consequently, would need to include more extensive representations than those listed here.


We want The Middle Ground to be an ongoing dialogue for and resource to the lower middle market M&A community. The outline above is generally applicable, but there is always specific case law and nuance around certain industries that can be useful in helping buyers and sellers come together. If you are a lawyer or deal professional, we encourage you to add your perspective below.