Selling part of business to current SH

[BHoffman]

Will someone help me break this down into bite sized pieces?

Prof. Corp. (PC) has three office locations: A, B, and C; and two 50/50 shareholders (SH). Activities from all locations are filed under one form 1120S.

SH 1 wants to keep A and run that as a separate business without SH 2.

SH 2 wants to keep B and C and run those as separate businesses without SH 1.

They have determined that after all is said and done, SH 2 will end up with $400k from SH 1, so I assume the math works like this: A/2 = B/2 + C/2 + 400k.

They are asking me how to structure the agreement to lessen the tax impact.

I'm having a hard time even getting started with this. Any ideas? I'm having some thoughts, like exchange with boot, whether Sec 351 can apply, how buying/selling stock vs. assets will play out, etc. I know typically sellers want to sell stock, and buyers want to buy assets.

I'd sure appreciate your thoughts.

[Davc]

Will someone help me break this down into bite sized pieces?

Prof. Corp. (PC) has three office locations: A, B, and C; and two 50/50 shareholders (SH). Activities from all locations are filed under one form 1120S.

SH 1 wants to keep A and run that as a separate business without SH 2.

SH 2 wants to keep B and C and run those as separate businesses without SH 1.

They have determined that after all is said and done, SH 2 will end up with $400k from SH 1, so I assume the math works like this: A/2 = B/2 + C/2 + 400k.

They are asking me how to structure the agreement to lessen the tax impact.

I'm having a hard time even getting started with this. Any ideas? I'm having some thoughts, like exchange with boot, whether Sec 351 can apply, how buying/selling stock vs. assets will play out, etc. I know typically sellers want to sell stock, and buyers want to buy assets.

I'd sure appreciate your thoughts.

Thoughts:

351 Only applies to putting assets into a Corp, not taking them out.

Your equation should be A = B + C + 400k.

This looks like a good case for a conflict of interest waiver signed by both parties.

Do you have a detailed list of the values?

An exchange could only occur after a distribution (and deemed sale) of corporate assets.

You're going to need to run the numbers but you may be looking at a distribution (and deemed sale by the corp) of 1/2B and 1/2C to each shareholder followed by SH1 purchasing SH2's stock for 400K & his halves of B & C. The 400K may require adjustment to have both SHs end the transactions with equal value received.

[BHoffman]

Thank you Dave! I was wondering about the distribution/deemed sale. Agree about the conflict of interest waiver. Both SHs and the Corp are my clients.

I've already asked them to inventory the fixed assets per location and have them appraised.

The only difference in your answer that I see is that SH 1 would be purchasing SH 2's stock in A and selling his interest to SH 2 for B and C.

SH 1 wants to end up with Office A. SH 2 wants to end up with Offices B and C.

I guess I'm trying to find out if it's possible to move the assets tax free and pay capital gains tax on the cash received.

[Davc]

I guess I'm trying to find out if it's possible to move the assets tax free and pay capital gains tax on the cash received.

The last half is possible, but you can't get assets out of a corp without a deemed sale. Which is why the 400K needs tweaking. SH2 gets CG treatment on the stock sale and a new depreciation basis in B & C.

[BHoffman]

Check your Private Message Dave

Hi Dave, I just left you a message.

This is way over my head. I believe these reorganizations must take some sort of special study and guided experience. Don't have either.

I referred the client to a very nice CPA firm. One of their partners handles reorganizations. I have worked with him before on other matters.

Thanks so much for your comments. From what I could gather today, this is just too tricky for me.

[veritas]

Sounds like

a reorganization may be in order. Where A is spun off to a another corporation. Then Sh1 buys out Sh2 in a stock sale in the new receiving corporation.

This would avoid distributing assets and recognizing gain. It would give continuty to the business.

The down side is there would be no stepped up basis in the transferred assets for A.