C Corp Situation

[Donanita]

New Client has a C Corp. Business was auto repair.Client(sole shareholder) retired eight yrs ago and had two buildings the Corp owned.One was sold and the only income has been from the sale of building on installment method.Client"s bookkeeping has been kept on the back of his checkbook as the expenses were for property taxes & insurance on the building that was left and only wrote two checks a yr. That building was sold this year so Corp has no assets except for 3 CD's and interest is rolled into principle.
Question is the client wants to dissolve the Corp.Sale his stock for the CD's.Can the installment sale be carried to his personal tax return is Corp is dissolved?

[Unregistered]

no

No no no general utilities doctrine

[Donanita]

So

they will have to maintain a C Corp until installment is completed?

[Bees Knees]

No no no general utilities doctrine

Wrong: Yes it can.


IRC Section 453(h) USE OF INSTALLMENT METHOD BY SHAREHOLDERS IN CERTAIN LIQUIDATIONS

(1) RECEIPT OF OBLIGATIONS NOT TREATED AS RECEIPT OF PAYMENT

(A) IN GENERAL

If, in a liquidation to which section 331 applies, the
shareholder receives (in exchange for the shareholder's stock)
an installment obligation acquired in respect of a sale or
exchange by the corporation during the 12-month period beginning
on the date a plan of complete liquidation is adopted and the
liquidation is completed during such 12-month period, then, for
purposes of this section, the receipt of payments under such
obligation (but not the receipt of such obligation) by the
shareholder shall be treated as the receipt of payment for the
stock.

[Bees Knees]

What the cited code section says is that if a shareholder receives an installment sale obligation in exchange for stock, the shareholder does not pay tax on the whole thing upon liquidation. The taxpayer continues to recognize gain under the installment sale as payments are received.

Installment sales are one of the rare exceptions to the rule that requires gain recognition all at once when stock in a corporation is liquidated.

[Unregistered]

No no no general utilities doctrine

I believe Congress repealed the General Utilities Doctrine in TRA 1986

New York Enrolled Agent

[OldJack]

What the cited code section says is that if a shareholder receives an installment sale obligation in exchange for stock, the shareholder does not pay tax on the whole thing upon liquidation. The taxpayer continues to recognize gain under the installment sale as payments are received.

Installment sales are one of the rare exceptions to the rule that requires gain recognition all at once when stock in a corporation is liquidated.

Bees, I disagree from the standpoint of the C-corp. The C-corp will recognize gain on the distribution based upon IRC§453B (quoted below). True, under IRC§453(h) the "shareholder receiving liquidation" will not recognize gain until the installment is collected because the individual is receiving an uncollected note.

-STATUTE-
(a) General rule
If an installment obligation is satisfied at other than its face
value or distributed, transmitted, sold, or otherwise disposed of,
gain or loss shall result to the extent of the difference between
the basis of the obligation and -
(1) the amount realized, in the case of satisfaction at other
than face value or a sale or exchange, or
(2) the fair market value of the obligation at the time of
distribution, transmission, or disposition, in the case of the
distribution, transmission, or disposition otherwise than by sale
or exchange.

any gain or loss so resulting shall be considered as resulting from
the sale or exchange of the property in respect of which the
installment obligation was received.

[Bees Knees]

Bees, I disagree from the standpoint of the C-corp. The C-corp will recognize gain on the distribution based upon IRC§453B (quoted below). True, under IRC§453(h) the "shareholder receiving liquidation" will not recognize gain until the installment is collected because the individual is receiving an uncollected note.

Yes I agree...I was only considering the tax issue to the shareholder. However, keep in mind that the tax the C corp pays on the liquidation is taken from the funds that would otherwise be paid to the shareholder upon liquidation, thus reducing the gain the sharheolder will incur upon liquidation.

[OldJack]

Yes I agree...I was only considering the tax issue to the shareholder. However, keep in mind that the tax the C corp pays on the liquidation is taken from the funds that would otherwise be paid to the shareholder upon liquidation, thus reducing the gain the sharheolder will incur upon liquidation.

Gees Bees... Its no fun when you agree with me. I responded because someone said "No no no general utilities doctrine" and you responded "Wrong: Yes it can."

Oh well, I guess I misunderstood your post and thought you were implying there would be "no double tax". At any rate, the poster has the correct answers now that proves the old rule-of-thumb for a small business, "you should never put real estate/building into a C-corp", unless someday you want to pay tax twice.

[Gretel]

Gees Bees... Its no fun when you agree with me.

Wow, if both of you agree on an issue any auditor better shuts up.

[Donanita]

Thanks

Bees & Old Jack. Now I can let the client know their options.They have also ask about election of S-Corp but will still come back to built in captial gains from a C-Corp

[Bees Knees]

They have also ask about election of S-Corp but will still come back to built in captial gains from a C-Corp

The interesting thing is that if this were an S corporation distributing the installment sale note to the shareholder upon liquidation, the S corporation would not have to recognize gain under Section 453B(h). The gain is passed through and realized by the shareholder as the installment payments are received. Another reason for electing S status if you are going to sell stuff under the installment sale method.

[Donanita]

S-Corp

Client will probably elect S-Corp and liquidate in the future as after this year the only income will be around $1500 from the installment and there are no expenses and no payroll since Client no longer works. Well, there is the expense for tax prep.Forgot about my fee.

[OldJack]

The interesting thing is that if this were an S corporation distributing the installment sale note to the shareholder upon liquidation, the S corporation would not have to recognize gain under Section 453B(h). The gain is passed through and realized by the shareholder as the installment payments are received. Another reason for electing S status if you are going to sell stuff under the installment sale method.

Gees Bees... I have to disagree again. The S-corp still would have to recognize full gain and pass the full gain through to the shareholder. Its the old story of the shareholder putting his backhoe into the S-corp tax-free and wanting to take it back out without tax which is not possible. Disposal of S-corp assets to shareholders is at fair-market-value. A S-corp and a shareholder are 2 separate legal entities for recognition of income with only the shareholder paying the tax for both. Code 453B(h) is clearly only for the shareholder. The S-corp gain passed to the shareholder would increase the shareholders basis and there would be no gain (or little) when proceeds were actually collected by the shareholder.

[OldJack]

Client will probably elect S-Corp and liquidate in the future as after this year the only income will be around $1500 from the installment and there are no expenses and no payroll since Client no longer works. Well, there is the expense for tax prep.Forgot about my fee.

You should think twice about electing S-corp in this case. It will probably just complicate your tax prep as the installment note is valued at fair-market-value and built-in gain determined on date of S-corp election. Therefore, each year you collect the installment the S-corp is going to have to calculate the built-in-gains tax (1120S tax line 22b from 1120S-schD.Part III) and the S-corp pay the built-in gains tax (in lieu of C-corp tax) from S-corp cash, as well as flow the income to the shareholder as S-corp income (1040 Sch-E, pg2) for the shareholder to pay personal income tax (the double tax).