Sale Of Corp Assets-still Active

[LAURIEC]

I have a c-corp who sold all assets of business. Is still an active corp.
Inventory was one of items sold. I did not show the 200k as ending inventory
on return because he no longer has any. I did show the 200k as part of gross
sales on Sch D so as to match the 8594, with cost basis same. Or should
cost basis be the beg inv. amount? any comments are appreciated.

[veritas]

Hi Laurie,

I would not put inventory on Sch D since it is not a capital asset. I would either show in gross receipts or as we have always done credit purchases.

[S T]

Cog

Wouldn't you Credit Sales and Debit Cost of Goods. Reflected on 1120 page 1 and 2 - not Schedule D.

Sandy

[jimmcg]

Sale of inventory results in ordinary income. Treat it as a sale of inventory.....Record sale and cost of merchandise sold.

[OldJack]

Liquidating sale of inventory should be reported on form 4797 as the sale of business assets. It was not a "sales income" in the ordinary course of business and therefore the cost is not "cost of sales" either. The entire gain from the sale of assets on the financial statement should be reported as a net gain in the category of other income/loss or extra ordinary income/loss.

[veritas]

You know Oldjack I suspect you are correct and that we have been reporting the sale of inventory incorrectly for years. Now my question is do you credit cost of goods for the basis of the inventory sold to report on 4797? I'm thinking of a sole prop. If you didn't then SE tax would be incorrect?

[S T]

Likewise

So Old Jack, can you provide us with an accounting lesson, and how we are to correctly treat the sale of inventory on "Sale of Assets" for business.

Sandy

[OldJack]

When business assets are disposed of (inventory liquidated/sold in total) NOT in the normal course of business operations they are reported as a sale of business assets as ordinary income on form 4797 the same as would the sale/disposition of any business equipment/asset. The sale price is compared to the cost price to determine ordinary taxable gain on form 4797. Cost of goods sold is not charged/expensed with the cost of the inventory as the sales account is likewise not credited with the extraordinary sale. Thus, with a sole-proprietorship, the sale/disposition not in the course of normal business operations is reported on form 4797 and the net profit/loss is therefore not subject to SE tax.

[OldJack]

So Old Jack, can you provide us with an accounting lesson, and how we are to correctly treat the sale of inventory on "Sale of Assets" for business.

Sandy

Well Sandy I am not a teacher but here is the transaction I would expect.

10,000 Credit - Other/extraordinary income with some title such as "disposal/sale of assets"

10,000 Debit - Cash or Accounts receivable due from purchaser

5,500 Debit - Other/extraordinary Income with cost of inventory to net sale v. cost in other income or you could just have an Other/extraordinary Expense if you didn't want the financial statement to show net.

5,500 Credit - Zero Inventory asset account or Cost of sales if purchases were expensed direct in the case of not maintaining an inventory asset account.

Result is zeroing the inventory account (5,500) and recognizing extraordinary net income of 4,500 on form 4797 (sale price 10,000 cost 5,500) and on the profit and loss statement.

If you are concerned about the beginning/ending balance on the tax return cost of sale section, you show offset amount in the withdrawal line resulting in zero inventory and zero cost of sales. Of course if you had some normal sales you would have a normal cost of sales that did not include this withdrawal of inventory.

Did that cover what you needed?

[Black Bart]

Say Jack,

inventory liquidated/sold...NOT in the normal course of business operations... they are reported...on form 4797...not subject to SE tax.

Couldn't you soften the blow a little bit when you're dropping these H-bombs? Like Veritas, I've been doing it the "other" way for years and have cost a dozen guys some SE (maybe those zealots screamin' for that C-230 test are right) over the years. Now you've come along with this blasphemous pronouncement that it (C-Se treatment) just "ain't so."

I don't remember exactly where I got my marching orders on this subject, but it seems like everyone I ever talked and everything I ever read about it said to go C-SE (kind of like any/all advisors would probably say black's black, white's white, and why are we even talking about it?) It's always seemed like one of those things that was so obvious and self-evident -- understood to be C -- that it just oozes out of one's tax pores and was beyond debate.

Couldn't ya just give us even a pub reference or something (to show me)? I hate to throw in the towel and just declare ignorance/incompetence without a struggle. Is there a clearly-defined line at which one crosses over from ordinary business operation into "not in the normal course of business operations"-hood? If you shut the front door and lock it; does that do it? Or what?

PLease don't take offense, but I've just gotta plead with your reg-rival, His Exalted Enlightenment--Bees Knees, to argue for the "defense."

Bees -- are you home?

[Black Bart]

Laurie,

Welcome to the board.

I apologize for changing the focus of your thread a bit, but I think Jack's answer about the treatment of this item is relevant to both your C-corp (except for SE) and a 1040 Schedule C .

I imagine several of us have been/will be affected by this and it's a tad upsetting since Jack (the big show-off) usually "knows his stuff."

[Bees Knees]

PLease don't take offense, but I've just gotta plead with your reg-rival, His Exalted Enlightenment--Bees Knees, to argue for the "defense."

Bees -- are you home?

Sorry, I don’t know of any court case or IRS Pub that supports Old Jack’s position. However, I am cautious to argue…in fact, I think I agree.

In the case of a covenant not to compete, the court in Milligan V. Commissioner (9th Cir. 1994) said “payments derived from the cessation of Milligan’s business activity are not subject to self employment tax…” Of course that was in reference to a non-compete agreement, not the sale of inventory.

But when you think about it, the same principal applies when you sell an asset, even if you don’t go out of business. For example, you buy a copy machine for $500 one year, take the Section 179 deduction on it, which reduces self employment tax by $500.

Then you sell it a year later for $500, report the entire amount as a Section 1245 gain on the 4797, which is ordinary income, reported on the front of the 1040. But NO SE tax on the sale.

You reduced SE income when you bought it, but did not increase SE income when you sold it.

The sale of a group of assets that make up a business could be viewed similarly. Income is subject to SE tax when it is derived in the ordinary course of “carrying on of a trade or business.” Selling out is not something you do in the ordinary course of carrying on a trade or business. Selling out is the NOT carrying on of a trade or business. So I am going to agree with Old Jack on this one.

[OldJack]

confused

Well.... of course Bees has a right to agree with me but it just doesn't seem fair that he would go that far. I expect the thing that has confused some folks is that the text books all say it is ordinary income so they automatically think regular income.

[LAURIEC]

CORP active sale of invty/cogs

When business assets are disposed of (inventory liquidated/sold in total) NOT in the normal course of business operations they are reported as a sale of business assets as ordinary income on form 4797 the same as would the sale/disposition of any business equipment/asset. The sale price is compared to the cost price to determine ordinary taxable gain on form 4797. Cost of goods sold is not charged/expensed with the cost of the inventory as the sales account is likewise not credited with the extraordinary sale. Thus, with a sole-proprietorship, the sale/disposition not in the course of normal business operations is reported on form 4797 and the net profit/loss is therefore not subject to SE tax.

Thanks Jack and the others for the replies to my question. I showed sale of invty
as ordinary income; sale price 200k cost 196k (beg inv figure). On COGs I put
zero in end invty. Need to amend ??

[Bees Knees]

I may have to re-think this issue. I am still not sure whether or not the sale of inventory in a complete disposition of a business is subject to self employment tax.

There seems to be no guidance or court citations that specifically address the sale of inventory. Reg. Sec. 1.1402(a)-6 specifically excludes inventory from the application of the rule that says the disposition of a capital asset is not subject to self employment tax. It could be a stretch to compare the treatment of a covenant not to compete with the sale of inventory by someone going out of business. Covenant not to compete payments are generally received and contingent on the taxpayer continually not working. The sale of inventory could be viewed as the last business transaction in carrying on a trade or business, meaning the sale of the inventory would be subject to self employment tax.

OldJack is trying to make the point that the sale of inventory would not be subject to self employment tax because it is not in the ordinary course of a trade or business. But Reg. Sec. 1.1402(a)-6 says, "disposition of property if such property is neither (i) stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, nor (ii) property held primarily for sale to customers in the ordinary course of a trade or business."

Note it isn't just talking about inventory sold to customers in the ordinary course of a trade or business. The regulation also talks about stock in trade of a kind which would properly be includible in inventory if it was on hand at the close of the year.

That indicates to me that it is still treated as inventory, even after you go out of business, thus subject to self employment tax. You would have to first convert the inventory into a capital asset before you could exclude the sale of it from self employment tax under Reg. Sec. 1.1402(a)-6.