C Corp Situation

[Donanita]

Old Jack

your right,best to leave well enough alone as the C-Corp tax is only at the lowest tax rate and if dividends are distributed to client it should't increase their tax liab.very much.

[OldJack]

your right,best to leave well enough alone as the C-Corp tax is only at the lowest tax rate and if dividends are distributed to client it should't increase their tax liab.very much.

Well Donanita... You probably should calculate the overall liquidation taxes and think about liquidating the C-corp. The reason is that the C-corp is most likely going to be determined and subject to be a Personal Holding Company ( PHC) since it is only going to have the installment note income in future years. That would make the C-corp pay regular C-corp tax 15%-35%±, plus additional PHC tax of 15% with the shareholder also paying 15% on dividends. Not a good thing.

edit: well it is true that if all the income each year was paid out as taxable dividends that payout would probably keep the C-corp from having the additional PHC tax.

[Bees Knees]

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.

I don't know where you made up that rule.

Code Section 453B(h) says:

"If an installment obligation is distributed by an S corporation in a complete liquidation, and receipt of the obligation is not treated as payment for the stock by reason of Section 453(h)(1), then, except for purposes of any tax imposed by subchapter S, no gain or loss with respect to the distribution of the obligation shall be recognized by the distributing corporation."

Before you just go off and find any little thing to argue with me about, you could at least first look up the citation.

[Bees Knees]

In this case, it is true that converting to an S corp won't help, because you would have the built in gains tax to deal with.

I was talking about forming the corporation first as an S corporation, and then incurring an installment sale. Under those rules, the S corp does not have to deal with the gain recognition treatment upon liquidation, because the code says it is passed through to the shareholder upon liquidation.

[OldJack]

I don't know where you made up that rule.

Code Section 453B(h) says:

"If an installment obligation is distributed by an S corporation in a complete liquidation, and receipt of the obligation is not treated as payment for the stock by reason of Section 453(h)(1) , then, except for purposes of any tax imposed by subchapter S, no gain or loss with respect to the distribution of the obligation shall be recognized by the distributing corporation."

Before you just go off and find any little thing to argue with me about, you could at least first look up the citation.

Well... I should have read the code to fully understand its meaning. I have done a quick read of §453(h)(1) that has to be passed before your non-recognition, but I am not sure I understand it so I am quoting it below.

Am I reading this correct? It looks like that installment note has to not have been originally dated during the official liquidation adoption date (as properly and timely filed by IRS form 966, "Corporate Dissolution & Liquidation). Or, is it the other way around. Anyway, it would appear in either case that not "ALL" installment notes of an S-corp could fit under your general tax-free distribution rule for an S-corp to not recognize the income as taxable. Seem strange that you would think the tax effect of this issue could be considered "any little thing" to correct you on. You should also read all codes that apply before arguing with me, after all I am not suppose to know what I am doing as its not my job. Maybe you should try being nice.

(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.

[Unregistered]

Bees

IF the corporation has a liquidation plan before the installment sale you may be right. If the installment note is before the plan of liquidation th egina is triggered at the corprate level.