Installment Gain when corporation closes down

[MariaMc]

I have a client with a regular corporation that sold her breakfast diner to her daughter. Sale was for $ 200,000 and recorded on 2018 tax return on an installment gain basis but no money was received in 2018 or 2019 and with Covid this year, no money to be received in 2020 either. Mother says daughter will start making payments as things improve and that she is good for it. However, corporate renewal with the state was not done and corporation is dissolved and bank account closed. Is the taxpayer required to keep corporation active and file tax returns each year until she collects on money or can she just transfer the installment gain to her personal tax return going forward ? There were never any formal documents written up but the sale was reported as an installment gain on the 2018 corporate tax return. Should we just file a final corporate tax return and remove the installment gain and she can just file on her personal tax return for the gain ?

[MariaMc]

The other factor is that she has approx $ 7000 in general business credit carryforwards that haven't been used so maybe I should recommend that she reinstate the corporation with the state and keep filing tax returns so that once she starts receiving payments she can use up the credit against taxes due ? Seem like what she would pay each year for corporate tax filings and state renewals would negate the benefit of using the tax credit.

[Uncle Sam]

Just exactly what did the mother sell to the daughter? Her corporate stock of the business, or certain assets of the corporation?
On which tax return was the installment sale reported - the mother's or the corporation's?
From what you described above - only certain assets were sold, and the corporation was still intact but there were no corporation filings for a few years - which could possibly indicate that the corporation was dissolved by the state by proclamation.
The way you've stated the facts a number of important facts are unclear.

[MariaMc]

Sale of assets of the corporation. Installment sale was reported on corporation in 2018 but no moneys received. There is a note receivable on the Balance sheet for $ 200k with a deferred gain of approx $70,000.
Yes, the state dissolved the corporation from lack of renewal in 2019.

[ATSMAN]

I understood that at least one payment must be received after the sale for it to be considered an installment sale. Op states that $0 has been received so far?

They may need to amend the 1120?

[Uncle Sam]

So your opening statement "sold her diner to her daughter" was misleading.
Then I suggest you get the corporation reinstated and keep it open until installment sale has been received. There should be a provision in the sale contract of repossession upon non-receipt of installment debt.
TTB P. 6-15 and 6-16 as well as 6-24 - 6-26 dealing with Repossessions. Also P 6-16 on Installment Sale to Related Party.

[MariaMc]

They did report $ 41,628 recapture of depreciation under Form 4797 gain in 2018 but that was for $ 60,000 portion of sale attributed to sale of fixed assets. That was part of the $ 200,000 sale but Note still shows as $ 200,000 so no money received. I didn't do the 2018 tax return.

I have seen this happen before. People sell their small business but they don't want to keep corporation open to receive payments. I just want to do the right thing especially since this is an 1120, not 1120S. I'm thinking I'm going to tell her to reinstate the corporation.

[ATSMAN]

They did report $ 41,628 recapture of depreciation under Form 4797 gain in 2018 but that was for $ 60,000 portion of sale attributed to sale of fixed assets. That was part of the $ 200,000 sale but Note still shows as $ 200,000 so no money received. I didn't do the 2018 tax return.

I have seen this happen before. People sell their small business but they don't want to keep corporation open to receive payments. I just want to do the right thing especially since this is an 1120, not 1120S. I'm thinking I'm going to tell her to reinstate the corporation.

Your facts keeps on changing with each post. Did the seller receive $60,000 for the sale of assets on which depreciation was recaptured?

If I were you, I would NOT touch this client until I knew exactly what was going on. Fortunately you are dealing with open tax years so amendments may be the best route to fix the problems.

[MariaMc]

Why would I want to amend the 2018 tax return ? It is true that she is still owed $ 200,000. A reputable CPA firm prepared last year's tax return so I'm fairly certain that it was properly prepared. They broke down the sale into the different categories of assets on the form 8594. I'm not really concerned with 2018, just going forward.

[JON]

Recapture of depreciation on 1245 is taxed in year of sale it cannot differ that as part of the installment sale. Is the "diner" trying to, going to, OPEN or has it been OPEN? Related party rules probably have to be applied, but if no additional income realized does it do anything?? Purchased assets - does the daughter not have a new entity to do the purchase..

[Lion]

I'm still confused (not unusual when entities are involved). Did the daughter buy a diner from a corporation. Or, did the daughter buy her mother's stock in a corporation? Or, a different transaction altogether?

[MariaMc]

Strictly an asset sale from mother's llc , being taxed as corporation , to daughter's llc (disregarded entity). Yes, recapture was reported as taxable income in 2018 (year of sale). Daughter essentially took the business over and it is running.

[TaxGuyBill]

In my opinion, corporate returns need to continually be filed until the Installment Sale is done. Just because the corporation was dissolved with the State does NOT mean it is dissolved for income tax purposes (although dissolving it with the State could possibly lose any legal protective benefits).

For S-corporations and Partnerships, there is a provision that the income can be reported on the the personal tax return if the corporation is done. However, that is usually used as an "oops, I missed something after I filed the Final return". Perhaps it could be used in this type of situation, but between that this is an ongoing known income, and the fact it is a C-corporation makes me suspect it would not apply.

If there are credits that can be used, I would think that both you and the client would WANT to continue to file a corporate return.

[MariaMc]

That was my thinking but it's good to hear from another person's experience and knowledge. Thank you.

[Burke]

The 2018 return was probably marked "Final." However, I have done subsequent Trust and Estate tax returns in cases where a prior return is marked as such with no resulting problems from the taxing authorities, usually when additional income is realized. Whether this would work with a Corporation, I cannot say. Since the OP states the 1245 recapture was reported in 2018, I am assuming the Corporation paid the tax on the gain? It is properly reported in the year of sale, whether or or not any monies were received. I am assuming the daughter is claiming depreciation on her LLC as a result of the note she is obligated to pay? I am of the opinion that the Corp needs to be reinstated at least for state purposes, and the resulting annual fees would have to be paid at the very least. You might advise the mother to get some legal advice of how to transfer this note from the corporation to her personally to see if that would be a solution. A liquidating distribution? And since you state "no formal documents were drawn up" lets hope at least there is a legal written note for payment. If not, this will never stand up under contract law or for IRS treatment as a sale, installment or otherwise.