Reporting sale of assets and assumption of liabilities / Report Where?

[bbrownatl]

Any insight into how I report the assumption of the liabilities? It does not qualify as Sec. 351. Reporting the disposition of the PP&E is ok, it is all the other assets and liabilities. Any insight appreciated.

Much thanks,
Brian

[Roland Slugg]

First I must admit that I'm not sure I understand the question. So my reply is based on the assumption that the question was: "A taxpayer sold all the assets of his business, the buyer paying cash and assuming all or some of the liabilities. How do I report the asset sales and the assumption of liabilities on the seller's return?"

The GROSS selling price needs to be allocated to the following three broad categories of assets sold, and it is best if the amounts allocated are asset-specific and become part of the buy-sell agreement:

(1) Depreciable assets, (2) inventory (if any), and (3) capital assets, such as goodwill, client lists, etc.

(1) The depreciable assets (FF&E/PP&E) are reported on F-4797.
(2) The inventory (if any) is reported as "sales" right along with all of the business's other ordinary sales.
(3) Capital assets, such as goodwill, client lists, etc., are reported on Schedule D.

Liabilities are ignored. The assumption of liabilities just reduces the amount of cash received by the seller. If the liabilities were not assumed, the seller would receive more cash then use that additional cash to pay the liabilities, resulting in the same final outcome.

[bbrownatl]

Asset/Liab. Contribution to another entity

Roland, thanks for you input. To clarify, the client has several entities of which they contributed all at once all the assets and liabilities to a single new entity. My thought is that the removal of the assets/liab will produce a gain or loss. If a gain, they that is recognized as a "Investment in NewCo" with no gain on the tax return. If a loss, they it is recognized on the tax return. My question is then how to show this on the return since technically no cash was received or disbursed. I assume still per the way you described in your response. Again, much thanks for your you input.

Brian

[Gary2]

If this is a new entity, how can it not qualify as either 351 or 721 (depending on the nature of the entity)?

What is the form and tax treatment of the all the entities, and the client's ownership percentages before and after?

[bbrownatl]

Three c-corps one s-corp

Gary, three c-corps and one s-corp. Each of the four entities will own 25% of the new entity. Yes, Sec. 351 would apply so no gain but for those entities where the liabilities exceed the assets, the entity does not have any basis and thus would report the excess liab. as a loss, right?

[bbrownatl]

Per TTB, gain/loss treatment

Per TTB, this is what I'm referring to above. Just clarifying the treatment and where to record.

Assumption of liabilities in a section 351 exchange. In most areas of tax law, liability relief is treated the same as if cash had changed hands. However, in a section 351 transfer, a corporation can assume liability without triggering gain if the liability is less than the contributor’s adjusted basis [IRC §357(a)]. The shareholder’s basis in stock is reduced by the amount of liability transferred.

If the liability assumed by the corporation is more than the contributing shareholder’s adjusted basis, the excess is treated as gain.

Example #1: Alan transferred property to a corporation in a section 351 exchange. The property’s FMV was $20,000, and Alan’s adjusted basis in the property was $8,000. The property was subject to a liability of $6,000, which was transferred to the corporation.

The section 351 exchange qualifies. Alan’s basis in the stock received is $2,000 ($8,000 adjusted basis of property contributed minus $6,000 liability transferred).

Example #2: Assume the same facts as in Example #1, except the property was subject to a liability of $10,000. Because Alan’s adjusted basis in the property was $8,000, he would report a gain of $2,000 on the transaction. Alan’s basis in the stock received would be $0.