Stepped up basis for Scorp

[Harvey Lucas]

Taxpayer and spouse own a small local moving company.

There are two trucks, both cost about $10,000, but they have been depreciated out and the basis is zero on both.

The company has been operated as an Scorp for 15 years.

Stock account on balance sheet is $1000.

AAA shows zero since they take out any profit at the end of each year.

They have always taken a reasonable salary.

Yesterday, the Taxpayer died.

They live in a community property state so the spouse is entitled to stepped up basis.

There is another local moving company that is willing to buy the business for $100,000.

I am assuming that stepped up basis would apply to the value of the stock in the Scorp, that is to say, if she sells her stock in the Scorp for $100,000 she will have no gain and no loss since the stepped up basis rules say that her basis is the FMV at the time of death, and if the business is sold a few days after death then it is reasonable to say that the actual sale price to an unrelated party is the best indicator of FMV.

So my question is this....the buyer does not want to buy the stock in the Scorp, instead, he wants to buy the assetts of the business for $100,000.....$10,000 would be allocated to the two old trucks and $90,000 for goodwill.

So if it is a sale of assets it seems that the corporation will have a $100,000 gain (because the corporation does not get stepped up basis) that will pass thru on a K1 to spouse on a 2014 1120S.

How do we get the benefit of the stepped up basis on the Corporation stock?

Thanks,
Harvey Lucas

[TXEA]

The benefit of the stepped up basis in the stock will offset the final liquidating distribution from the S-Corp.

The AAA will become $100,000 (10,000 from sale of truck and 90,000 from LTCG).

They will have $100,000 in the bank.

The above is your balance sheet.


Then assuming they liquidate the corporation, they will have a basis of:

100,000 AAA
100,000 Capital Stock

Total basis $200,000

The liquidating distribution will be $100,000 (this will be proceeds) and reported in the appropriate box of Form 1099DIV.

The basis is $200,000

Loss is 100,000

The loss will offset 90,000 of LTCG from Goodwill plus the extra $3,000 allowed. The rest c/f unless there exist other gains to offset.

Note Below - VERY IMPORTANT

It is extremely important that this be timed where the S-Corp liquidates in the same year otherwise the tax on the capital gain will take place in one year (and all the resulting tax paid) and the loss in another year (read this as $3,000 per year allowed). In other words, you want to match that loss in the same tax year that the gain takes place inside the S-Corp, and the only way to do that is to liquidate the S-corp in the same tax year as the sale of its assets.

[Harvey Lucas]

Thank you TXEA

[Nashville]

Allocation of Assets

Where does Form 8594 fit in this picture?

Does not the sale proceeds need to be allocated amongst the truck and other existing assets? I am acknowledging that the corporation is not being sold (only its assets), but does not a sale of an operating business require the Form 8594 allocations?

[TXEA]

Yes, both the buyer and seller must allocate the purchase price and file the form. Assuming the only assets are the delivery vehicles, then should be an easy thing to do. My response was based on the assets listed by Mr. Lucas.