This is an odd situation with several complications that I would really appreciate some advice on the angles.
C-corporation is an engineering company in a community property state. The primary shareholder and engineer passed away in 2009, with his wife inheriting the company and receiving a step-up in basis of the stock to FMV. Since then, their son, another engineer, has been running the company. Effective 1/1/15, the son is forming a new S-corporation to buy the company from his mother, including around $500K for goodwill. There will be no C-corporation activity after the sale. We have been considering the sale as a sale of assets with the company paying tax on the income and then paying dividends to the mom. Some items I have been considering are:
1. If the dad was still alive, we could have him sell his personal goodwill (not transferred to the corporation) to the new S-corporation and avoid double taxation (ala the Martin Ice Cream case). Could his wife be considered to have inherited the personal goodwill and treat this sold the same way?
2. Revenue Procedure 2011-35 talks about a corporation purchasing the stock of another corporation and electing to treat the acquisition as a purchase of assets. Would it be possible for the S-corporation son to buy the C-corporation stock from his mother at the stepped-up basis and then depreciate the underlying assets? I don't see anything stating both corporations have to be C-corporations. This would result in no tax at the C-corporation level and capital gains to the mom.
3. If we go the route discussed above, it seems it would be better for the company to buy back stock from the mom (as treasury stock) instead of paying everything as a dividend. This would allow her to use her stepped up stock basis to pay less capital gains tax.
4. Is it worth considering whether the company can liquidate and distribute all its assets to the mom and then have her sell the assets to the new S-corporation? It seems to me that this would be collapsed by the IRS since the only reason to do this is potential tax savings.
C-corporation is an engineering company in a community property state. The primary shareholder and engineer passed away in 2009, with his wife inheriting the company and receiving a step-up in basis of the stock to FMV. Since then, their son, another engineer, has been running the company. Effective 1/1/15, the son is forming a new S-corporation to buy the company from his mother, including around $500K for goodwill. There will be no C-corporation activity after the sale. We have been considering the sale as a sale of assets with the company paying tax on the income and then paying dividends to the mom. Some items I have been considering are:
1. If the dad was still alive, we could have him sell his personal goodwill (not transferred to the corporation) to the new S-corporation and avoid double taxation (ala the Martin Ice Cream case). Could his wife be considered to have inherited the personal goodwill and treat this sold the same way?
2. Revenue Procedure 2011-35 talks about a corporation purchasing the stock of another corporation and electing to treat the acquisition as a purchase of assets. Would it be possible for the S-corporation son to buy the C-corporation stock from his mother at the stepped-up basis and then depreciate the underlying assets? I don't see anything stating both corporations have to be C-corporations. This would result in no tax at the C-corporation level and capital gains to the mom.
3. If we go the route discussed above, it seems it would be better for the company to buy back stock from the mom (as treasury stock) instead of paying everything as a dividend. This would allow her to use her stepped up stock basis to pay less capital gains tax.
4. Is it worth considering whether the company can liquidate and distribute all its assets to the mom and then have her sell the assets to the new S-corporation? It seems to me that this would be collapsed by the IRS since the only reason to do this is potential tax savings.