2013 Morning Q1C - liquidity requirement

CFA Level III
#1

Why isn’t the taxes due immediately on the gain of the sale of the business is not liquidity requiremnet?

#2

Is it becaue it can be paid directly from the proceeds of the sale?

#3

I would assume that’s why.

#4

Good question I had the same issue when I solve it but then remembered that you will get the proceed net of tax so no need to have tax(liquidity set aside).

#5

I even didn’t think about that till I read the answer.

#6

I made the same mistake… have you seen any other questions that actually do require you to set aside the capital gains tax as a liquidity requirement? Or should we just always exclude it and assume that it is not a liquidity requirement?

#7

if it is an unrealized capital gain that gets taxed annually it will trigger a liquidity event

#8

I think you really have to exclude it - I made the same mistake.

Here’s my reasoning:

If you count the taxes as a liquidity requirement, you’d also have to count the proceeds as a liquidity event, which would mean that because you have $x million from proceeds, there are no liquidity requirements, because the $x million can cover it.

See what I mean?

#9

yep I like it, good reasoning

bah theres one of these little interpretation issues in almost every IPS question which throws me