Owner Split up !

[Duane Anderson]

Will try this again, since I just "lost" the prior message re the above.
Owner's A and B have been long time 50/50 business partners and have decided to go their separate ways. My client is a C corporation and rents equipment to a related S corporation (Not my client) which is also being split. Owner A is retaining certain assets in the business and Partner B is getting cash and his list of equipment, which are valued at agreed upon values close to market value of each piece of equipment. The business has equity so the cash distribution to both can be a capital distribution, but the assets "sold" to Owner B are subject to reporting as a sale and subject to capital gains taxes for the corporation.....Assets are virtually fully depreciated since they have been profitable and we have taken Section 179 depreciation each year for several years

Just wanted to confirm the above and get your comments, since I do not see this very often...Thanks,,,,,,Duane Anderson

[Roland Slugg]

Hello Duane. I wanted to reply to your post, but I couldn't understand the facts, and additional reads only confused me more. Perhaps another visitor here will understand everything better and post an accurate and helpful reply. If not, a restating of the facts might help. Here is what I didn't understand:

(1) Is the C Corp being liquidated, with A getting cash and B getting certain assets (and perhaps some cash as well)?
(2) If not, are some of the assets being sold to B, or is he taking them out as a liquidating dividend to him alone?
(3) What does the S Corp (not your client) have to do with this? I did not understand how that other corp fits into this.

I can tell you this much, though: If the C Corp sells some or all of its assets, it will not produce capital gain unless they are capital assets. If they are depreciable assets, then the gain will be ordinary income under §1231 due to §1245 depreciation recapture.

[Duane Anderson]

Re Owner Split Up - Clarificatiion

#1...No, not being liquidated...Owner A is keeping the company and will be 100% owner and the assets they agreed on will stay in the C corp....He is also getting some cash....Owner B is getting his agreed assets and also some cash. So could be a liquidating dividend but the value of the assets as agreed is higher than the book equity.
#2...See #1...The equipment the C corp rents in capital assets and has been depreciated over the last several years using Sec 179.
#3...Just wanted you to know the income of the C corp is primarily derived from the S corp (same owners for both before the split)

Thanks,,,Hope this helps...Duane Anderson

[Golden Rocket]

C Corp Capital Gains

If I understand the foregoing, I don't see where a C Corp can ever benefit from the preferable capital gains rate if the price sold exceeded its original cost. Equipment recapture is going to be ordinary income anyway. On a separate issue, if most of the income is derived from renting this stuff to the S corp, I wonder what purpose what really served by the C Corp to begin with instead of individual ownership. Should the C corp continue to exist?

What am I missing?

[Duane Anderson]

Re Owner Split Up - Clarificatiion

If I understand the foregoing, I don't see where a C Corp can ever benefit from the preferable capital gains rate if the price sold exceeded its original cost. Equipment recapture is going to be ordinary income anyway. On a separate issue, if most of the income is derived from renting this stuff to the S corp, I wonder what purpose what really served by the C Corp to begin with instead of individual ownership. Should the C corp continue to exist?

What am I missing?

The first S corp is a WA corporation and builds and remodels houses.....The second S corp is an AL corp and has large construction projects for a fish company in AL....The equipment included originally in the first S corp was transferred to a new WA C corp with an April 30 year end and rents the equipment to the second S corp....And of course, I was not aware of this until the attorney set it all up.....All three company's were owned 50/50 by partner A and B....A will continue as owner of the C corp and the second S corp...virtually all the assets were owned by the C corp and since A and B split, the assets of the C need to be split which they have done...So I guess the C corp will have to pay the taxes on the agreed upon prices...Virutally all the equipment is fully depreciated since we usually took 179 depreciation on the current year additions over the last several years...Thanks,,,Duane Anderson