S-Corp Assets liquidated to Shareholder

[DMICPA]

S-corp for 11 yrs, sole shareholder. Liquidates, distributed assets at FMV on 1099-L so taxpayer had a basis in these. Assets were office equipment $3,000 and used small truck $5,500 and cash $9,000

Taxpayer now starts a sole proprietorship.

Assets were recorded on opening proprietorship books at FMV.

Question:

What depreciation method(s) are available on the office equipment? Since the assets are new to the taxpayer, you could argue that Sec. 179 on the office equipment could be used. However, since the assets came from a related party, I am not certain that 179 would be allowed. When in doubt and to be safe I was just going to use SL 5 yrs but a Section 179 deduction could save the taxpayer some self employment tax.

The truck would be under the 280F rules so the depreciation would be limited no matter what I did.

Any thoughts on this? I have check Pub.534, The Tax Book, and prior posts but did not find any clear guidance.

[Koss]

Basis

The following text is from page 17 of IRS Publication 946, How to Depreciate Property:

Property Acquired by Purchase

To qualify for the section 179 deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify.

Property is not considered acquired by purchase in the following situations.

1. It is acquired by one member of a controlled group from another member of the same group.

2. Its basis is determined either—

a. In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or

b. Under the stepped-up basis rules for property acquired from a decedent.

3. It is acquired from a related person.

It is not entirely clear to me whether the S corp and the sole shareholder are related persons in this context. But even if they are not considered related persons, it appears that your client's assets are disqualified from Section 179 because the basis is determined by its adjusted basis in the hands of the person from whom it was acquired.

In your original post, you asserted that the "taxpayer had a basis in these" assets. But I don't think that's technically accurate. The assets in question were the property of the S corp. The S corp had a basis in the assets prior to the liquidation.

It is certainly true that your client now has a basis in the assets, in his capacity as a sole proprietor. But his current basis is determined by the adjusted basis of the S corp.

The S corp is "the person from whom it was acquired." The S corp's basis is used to determine the sole proprietor's basis. And this means it does not qualify for Section 179.



FYI: Pub. 534 deals only with assets placed in service prior to 1987, which may explain why you couldn't find an answer there. The sole prop placed the assets in service in 2009. Pre-1987 rules are not applicable.

BMK

[Bees Knees]

Not entirely correct. Maybe yes, maybe no

It is certainly true that your client now has a basis in the assets, in his capacity as a sole proprietor. But his current basis is determined by the adjusted basis of the S corp.

The S corp is "the person from whom it was acquired." The S corp's basis is used to determine the sole proprietor's basis. And this means it does not qualify for Section 179.

The basis of the S corporation is not used to determine the sole proprietor’s basis. In a liquidation of corporation assets, the shareholder is taxed on the liquidation at FMV. In a liquidation, the shareholder is said to have exchanged his/her stock for the FMV of the asset received. Gain or loss is the difference between the shareholder’s basis in stock, and the FMV of the asset received. The corporation’s basis in the asset is irrelevant.

It is not entirely clear to me whether the S corp and the sole shareholder are related persons in this context.

TTB page 9-15 says:

If property is purchased from a related party,
and related party rules would result in the disallowance of losses
under IRC Sections 267 or 707(b), the property does not qualify
for a Section 179 deduction. [Reg. §1.179-4(c)]

IRC Section 267(b)(2) says an individual is related to a corporation if that individual owns more than 50% of the value of the outstanding stock of the corporation.

The WebCD then links the cited reg to this statement:

a purchase of property from a corporation by a taxpayer who owns, directly or indirectly, more than 50 percent in value of the outstanding stock of such corporation does not qualify as a purchase under section 179(d)(2);

Thus, since acquiring an asset through a corporate liquidation is said to be a purchase of the asset by means of exchanging stock for the FMV of the asset, then the section 179 deduction is not allowed under the related party rules provided the shareholder owned more than 50% of the stock prior to the liquidation. If the shareholder did not own more than 50% of the stock prior to liquidation, the Section 179 deduction is allowed.

[DMICPA]

Basis of Liquidated assets

Thank you so much for all your help. I had a feeling that the 179 deduction would not be allowed since there are related party implications.

I agree with Bees Knees in that the liquidation value is determined at the FMV of the assets at the liquidation date. The taxpayer pays tax on this value. therefore the taxpayer has a tax basis in these assets.

As to the Truck, since the FMV of the truck was $5,500, it seems to me that the truck costs could be accounted for as either cents per mile or actual cost. Normally, if you use the actual cost method you cannot switch to the standard mileage as I recall. Since this is a new entity, no election has been made as to the method and the standard mileage in this case exceeds the actual costs. In the S-corp., the actual cost method was utilized but I see no rule that says one must continue the same actual cost method in the case of a corporation liquidation. If it was a section 351 issue, you would be required to use the same method but this is a different issue. If you were to use actual costs and compute depreciation, you would use a five year life and it would be considered listed property and subject to limitations.

I am going to use the standard mileage.

Thank you again