Navigate around Goodwill

[Snaggletooth]

An owner decides to sell his business, comprised of typical assets (inventory, receivables, prepaids, fixed equipment etc.). He and the buyer must complete an agreed-upon 8894 which essentially forces the buyer to classify certain types of income to be associated with the assets and establishes the dreaded non-deductible goodwill (15 yrs). Also removes much of the capital-gain treatment for the seller.

Along comes a brilliant tax planner. (Stretch your imagination and pretend it is me)

Owner within one year of the sale decides to incorporate. Buyer then purchases 100% of the controlling stock. Result? Seller gets capital gain treatment for the entire amount of the sale, and buyer simply continues to depreciate corporate equipment and operate with more deductibility than before the arrival of the brilliant tax planner.

What's wrong with this? IRS would have a cow right there on the spot and disallow under some citation that I'm not aware of. However, a variant of this plan is done tax-free with corporate mergers involving fat Fortune 500 companies all the time and IRS doesn't meddle.

I ask again, what's wrong with this?

[Roland Slugg]

I ask again, what's wrong with this?

Nothing. Well, except for the fact that no buyer would ever agree to it.

[TXEA]

This issue has been addressed by the courts in the context of the "Step Transaction Doctrine". However, most cases deal with some type of an agreement in place to sell the stock at the time of the transfer.

I would make sure that there has been no attempt to sell the business at or around the time of the 351 transfer and then wait a while.

Then, you will have to find someone willing to buy the stock (which will likely prove difficult unless to a long-time employee).