- quote -

David Woods, EA, ChFC, CLU wrote

- quote -

Clearly a sale of the stock is the way to go if you assume
that you will get the same sales price for a stock sale as
an asset sale. In reality, an informed buyer will almost
always pay less for stock than assets if there is an
unrealized gain. Additionally, contingent liabilities of
the corporation such as potential litigation, federal and
state tax audits, and other contingent liabilities will be
assumed by the buyer of stock, whereas the buyer of the
assets doesn't subject himself to that exposure. So your tax
consequences will be better, but you'll probably have to
significantly reduce the sales price to get there.

That said, if you can get the same price either way,
definitely sell stock.

Another possibility - if you can make an S election now and
wait a few years before selling, you can reduce or eliminate
the double taxation. If you wait 10 years, the built-in
gain goes away completely. If you sell before 10 years, you
will only have double taxation of the amount of the gain as
of the effective date of the S election. Any appreciation
that occurs after the effective date of the election is only
taxed once.

As others have said, C corporations are almost never a good
place to hold real estate. There's really no way to get the
sales proceeds out to the shareholders without double
taxation.

Brian Bivona, CPA

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- quote -

S corporation status is out of the question at this point:
the Built-In-Gains tax would wipe out any advantage.

Reality check #2: real estate held by a C corporation is a
bad idea (but you knew that). Liquidating the corporation
without actually selling the real estate will result in a
terrible tax burden with no cash to pay for it. Thus, unless
all 5 want to sell it, the only realistic option left is for
those who want to hold on to buy out the shares of the other
two (outside the corporation). The value of the minority
interests would be the after-corporate-tax proceeds in a
deemed sale, possibly adjusted for minority discount (though
equity might suggest not doing the latter).

The minority interest would be, approximately:
Deemed sale of 40% of building $240,000
Deemed tax (assume 40%) (90,000)
Value $150,000

Another reality check: Can the remaining 3 people come up
with that kind of dough without selling the building and
liquidating the company? Is an installment sale of the
minority stock a possibility?

Another possibility: corporation buys out minority interest,
taking out a mortgage on the property if necessary to raise
the cash.

In either of these cases, the minority shareholders would
have capital gains on the buyout, assuming they aren`t
related to the remaining shareholders.

--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: tom[at]tomhealycpa.com, since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772

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"Linda Dorfmont" <DORFMONT[at]aol.com> wrote:

- quote -

Who in their right mind would invest in real estate in a C
Corp? Tell them to prepare for double taxation. Electing S
Corp status will not help because of the built-in gains tax.

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"Linda Dorfmont" <DORFMONT[at]aol.com> wrote:

- quote -

Linda,

S-status won't help you with the BIG. You are correct that
a stock sale is probably better than a sale of the assets to
the other shareholders.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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Linda Dorfmont wrote:

- quote -

My recollection is that if they sell the property and then
dissolve the corporation, it will be treated as a sale of
stock, and the difference between what the shareholders
receive and their basis will be capital gain.

- quote -

That seems to be to be the best way to handle it as well.

Stu

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I am once again trying to prove that I don't know
everything. (That's why we call it practice). This is
probably a CPA problem, but I will appreciate any advice
from any of you experts out there. Here are the facts.

Several years ago 5 people got together with $10,000 each,
formed a C Corporation and bought a small shopping center.
They (C-Corp.) borrowed from the seller the additional
$50,000 purchase price and over the years made about $6,500
in improvements. The land value is $36,000 and the bldg. and
impr. are fully depreciated = basis $36,000.

One of the S/H wants to sell and another is going along with
the idea. The seller S/H says he has an offer for $900,000.
(Yeah, right. Let's see it in writing.) A couple of years
ago they all tried to sell the thing for $600,000 but got no
interest. The mini-mall across the street, which is larger,
is selling for $675,000. The non-seller S/Hs have offered to
buy out the seller S/Hs, price to be determined by an
appraisal (reality check).

We know what the capital gain and recapture of depreciation
will be when the corporation sells the whole building. The
question is how do the S/Hs get their share of the money out
and what are the tax consequences? Each S/H's capital
account is the $10,000 s/he contributed. I suggested that
they elect S treatment before selling the building but this
deal must be considered and responded to within the next 2
weeks. The Corp. will stay a C and they plan to dissove it
if the whole building sells.

The other mess is what if the 3 non-seller S/Hs buy out the
sellers? The sellers will want to get their money out. I
suggested a sale of stock rather than complicate the
building title. The sellers would want to get out of the
Corp. anyway.

Please respond directly to me, as well as posting, since I
need to write all this up and do the proforma tax returns of
the 3 non-sellers (if they get dragged into selling) and be
ready for a meeting next week.

Linda Dorfmont E.A, CFP ,CSA
DORFMONT[at]aol.com

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