"Stuart A. Bronstein" <spamtrap[at]lexregia.com> wrote:
- quote -

Which includes the gain from the phantom sale of all its
assets at FMV.

- quote -

This is correct but it still leaves them with the same two
levels of tax they would have if the corporation just sold
the asset to the thrid party.

See my other post on this.

Drew Edmundson, CPA
Cary, NC

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"Stuart A. Bronstein" <spamtrap[at]lexregia.com> wrote:
- quote -

I agree. I never said the ultimate sale to the third party
was taxable to the corporation. It is reportable on the
stockholder's return.

- quote -

I agree with this statement. What you are missing is the
two levels of tax are the same whether the corporation sells
the assets, pays the tax and then distributes or the
corporation distributes the assets and then the stockholder
sells them.

Lets take some numbers. I will ignore transaction costs
and assume there is no state income tax. FMV of corporate
assets is $1,000,000. $300,000 of this is cash. Corporate
basis in assets is $300,000, the cash. Stockholder's basis
in her stock is $50,000. This is what happens:

1) The distribution of the assets to the shareholder are
treated as a sale by the corporation. Gain of $700,000 that
the corporation owes tax on. For simplicity lets use a 35%
flat rate so $245,000 of tax. So the corporation distributes
an asset worth $700,000 and remaining cash of $55,000.

2) The $755,000 liquidating distribution is treated as in
exchange for the stock. Cpaital gain of $705,000. Tax at
15% is $105,750.

3) Stockholder sells asset for $700,000 and has basis of
$700,000. No additional tax.

There are still two levels of tax. The $245,000 paid by the
corporation and the $105,750 paid by the individual. When
all is said and done the stockholder has $649,250 left.
Obviously the actual cash will be less due to transaction
cost and if state income tax is owed.

Beyond the tax the biggest problem is usually that the
corporation doesn't have the cash to pay the tax caused by
the liquidation.

Now lets take the same numbers and assume the asset is sold by the
corporation directly to the third party.

1) Corporate gain is still $700,000 and same tax of $245,000
is due leaving cash of $755,000.

2) The $755,000 is distributed in a liquidating distribution
and tax is owed on the $705,000 gain. Tax is $105,750 at
15%.

So the shareholder is still left with $649,250. No change.

My point is that liquidating immediately prior to sale
doesn't change the tax nor does it change the amount of
money ultimately in the stockholder's pocket.

Drew Edmundson, CPA
Cary, NC

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"Drew Edmundson" <drewsbeagles[at]hotmail.com> wrote:
- quote -

ah, yes. No wonder the buyers don't want to get stuck with
the sellers' tax burden.

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Drew Edmundson <drewsbeagles[at]hotmail.com> wrote:
- quote -

Sorry, but I don't see it. The spin-off is taxable,
certainly. But when the assets are then sold the
corporation isn't taxed on that sale, because it isn't a
party to it and doesn't receive anything from it.

The shareholders are taxed on the spin-off, but their basis
in what is received is increased to market value, which is
what they receive on the sale of the assets, so no
additional tax there.

Stu

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David Woods <davidwoods[at]verizon.net> wrote:
- quote -

Right. So if the corporation is dissolved the corporation
has taxable income only on what it's earned to date. The
shareholders will have a capital gain in the amount of the
sale price. But their basis in the property received from
the corporation would have a basis of fair market value
(§301(d)), so when they actually consummate the transaction
there is no additional tax on money received from the sale.

Stu

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sethb[at]panix.com (Seth Breidbart) wrote:
- quote -

Better for the OP. Not for you. The corporation will still
owe tax on the $3,000,000 gain on liquidation. I am
assuming that excluding the gain on liquidation the
corporation has broken even so the federal corporate tax is
about $1,020,000. Ignoring state taxes and transaction
costs the corporation will have $2,980,000 to distribute to
you. You will have a short-term capital loss of $920,000
($2,980,000-$3,900,000). I have no idea how long it will
take you to use it up.

So ignoring the tax savings from your ST capital loss you
are out $920,000.

Drew Edmundson, CPA
Cary, NC

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~Gil Faver" <Rowdy'sboss[at]ND.com> wrote:
- quote -

In addition to my prior reference you should see Sections
301 and 311.

Drew Edmundson, CPA
Cary, NC

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"Gil Faver" <Rowdy'sboss[at]ND.com> wrote:
- quote -

See sections 331 and 336. The spin off is a taxable sale by
the corporation and taxable income to the shareholders. So
double tax still applies.

Drew Edmundson, CPA
Cary, NC

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"Stuart A. Bronstein" <spamtrap[at]lexregia.com> wrote:
- quote -

Apparently it has been too long. General Utilities was
overruled by Congress 20 years or so ago. The liquidation
will be treated, at the corporate level, as a sale at FMV
off all the assets to the shareholders. At the individual
level the shareholders will owe tax on the FMV of the assets
as a liquidating dividend. So tax is still paid twice.

See Sections 331 and 336,among others.

Drew Edmundson, CPA
Cary, NC

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"Stuart A. Bronstein" <spamtrap[at]lexregia.com> wrote:
- quote -

You're kidding right? Even on liquidation a corporation
recognizes gain or loss on the distribution of property to a
shareholder. That of course has nothing to do with the fact
that a redemption of a shareholder's interest in his stock
is still a taxable event based on the fair market value of
the property he receives in the liquidation.

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

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<gthrph[at]charter.net> wrote:

- quote -

For concreteness, assume the assets are worth (book and
market) $1 million, and the buyer is offering $4 million for
the business.

Sell the business (everything) to me for $3.9 million in a
stock sale. You pay long term capital gains. I'll dissolve
the business and sell all the assets to the buyer for $4
million. I have $100,000 in income (short term capital
gain, or ordinary income if doing this sort of thing is a
business). That should be better for you than having the
corporation sell all the assets (and pay tax on the profit),
then dissolving it and distributing the cash (and pay tax on
the profits).

Seth

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<gthrph[at]charter.net> wrote:

- quote -

what if you spin the business out of the C corp to the
shareholders as a partnership, and then later sell to a
third party?

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thrph[at]charter.net wrote:

- quote -

Perhaps the Martin Ice Cream case will be a good place to
start your research - 110 TC 189.

http://ustaxcourt.gov/InOpHistoric/MARTIN.TC.WPD.pdf

Read it very carefully because it is very fact sepcific.
For example if you and your fellow owners have covenants not
to compete with your existing corporation then the goodwill,
etc. is the corporations not yours.

Drew Edmundson, CPA
Cary, NC

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"gthrph[at]charter.net" <gthrph[at]charter.net> wrote:

- quote -

There are actually some things you can do. One thing is to
dissolve the corporation right away. That way you'd avoid
double taxation and recognize capital gain on most if not
all of what you receive.

I've been through this kind of thing before and remember
there are approaches that can be taken, but it's been a
while and don't remember a lot of details. But all is not
lost!

Stu

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I actually have hired a lawyer and 2 different accounting
firms- my interest was to see if there was any further
knowledge to be gained from this ange(internet). Guess not.
I realize this is a complicated matter with way too much
"gray area". I am a right or wrong person and am looking for
a definitive yes you can do that or no you cannot do that.
What I am finding out is that someone will pay taxes either
the buyer or the seller no matter what you do.

gary

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"gthrph[at]charter.net" <gthrph[at]charter.net> wrote:

- quote -

It is too simple. Hire an accountant AND an attorney
yesterday.

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

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<gthrph[at]charter.net> wrote

- quote -

The goodwill is an asset of the company, not a separate
asset that can be owned and sold by any individual owner.

--
Paul Thomas, CPA
paulthomascpapc[at]bellsouth.net

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I am part owner of a c corp. My partners and I have an
oppurtunity to sell but the buyer refuse to do a stock sale.
Since the value of the assets amounts to less than 25% of
the entire purchase price we would like to assign the
remaining 75 % as good will and have the buyer pay us
outside of the corporation or individually. The have told us
that they do not care who they pay. Is this reasonble and
will it allow us to pay a lower tax rate. It seems a little
to simple to me

GTH

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