Transfer of Assets to another Corporation

[geekgirldany]

Customer has a S-Corporation that he has been running two businesses out of. One business was building houses and the other was flying hot air balloons. Towards the end of 2005 he started a new S-Corporation for the hot air balloons. No money was made in the new corporation. All income was in the existing s-corp and was reported so on 2005 return. The home building will be over with in 2007. He will leave the "old" s-corporation open though. The new hot air balloon s-corp started being used in 2006 and made a profit. So it was actively used in 2006.

My question is.. he has several assets in the other s-corp (not the new balloons s-corp) that are directly related to the hot air balloons. Some are depreciated out while others are still depreciating. I believe I should transfer these assets over to the new balloons s-corp. How do I or can I transfer the assets over to the new s-corp? Would the transfer be at book value?

NATP research stated that this would be a taxable event because a Plan of Reorganization was not done on the old corporation. The new corporation would have been formed as a Qualified subchapter S subsidiary, with the old corporation being the shareholder. But that can not be done now so assets would be distributed to the shareholder at FMV and tax paid. Then the shareholder would do a 351 Transfer to the new corporation.

I would like the board members opinion. I have never encountered such a situation.

Thank you for any help

[Uncle Sam]

Hot Air

If the house building will stop in 2007, why not have the Hot Air Balloon company actually purchase the fixed assets at FMV, report a gain or loss on the house corporation, and start new depreciation for the hot air balloon corp?
You're looking to dissolve the old corporation, aren't you?
What purpose would there be in keeping it open once the building activity stops?
Yes- you're right- since the building corp won't be buying the hot air balloon corp, there is no SubS subsidiary issue.

[Bees Knees]

If the house building will stop in 2007, why not have the Hot Air Balloon company actually purchase the fixed assets at FMV, report a gain or loss on the house corporation, and start new depreciation for the hot air balloon corp?
You're looking to dissolve the old corporation, aren't you?
What purpose would there be in keeping it open once the building activity stops?

The goal is to transfer the assets under a tax free transfer from one corporation to the other. Not to pay tax on the transfer just so you can start depreciation all over again.

Ways to make this a tax free transaction is to keep the old corporation operating with the assets it owns. That means either operating the hot air balloon company through the corporation that owns the hot air balloon assets, or have the company that owns the hot air balloon assets rent the equipment to the corporation that does operate the business.

The other way would be under one of the corporate reorganizations mention in TTB, page 18-17. It does not sound, as NATP pointed out, that your client qualifies for any of these.

Another way would have been through a QSub. Again, as NATP pointed out, it does not sound as if your client qualifies.

This is a good example of why starting up new corporations without any kind of tax planning can get you in trouble down the road when you want to end one business and start something new. Without the right planning, the transaction becomes a taxable event. It also illustrates the advantage of starting up your new business as an LLC rather than a corporation. The single owner gets the same liability protection as an S corporation, without the negative tax consequences if and when the business ends.

[geekgirldany]

NATP did mention a Plan of Reorganization but said it was too late to do this. I just tried to keep their response short in my original post.

He wants to keep the "old" corporation open in case he wants to go back to building houses again. He didn't tell me until tax time that he had started a new corporation for the hot air balloons. And on my part I did not know about transferring the assets from one corporation to another would cause this. I didn't know a Plan of Reorganization could be done to avoid the tax. I guess this Plan of Reorg. could not be done now? The old corp renting the equipment might be the only way for them not to pay the tax.

[JON]

Transfer Q sub

Q Subs have been around for less than 10 years. I think, guess, that somehow through transfers you can get a Q Sub from two separate Ss with the same ownership, but I could be wrong there. You need an attorney.

The other tax free transfers have a there if ands and buts, but most have to show a business reason and a few other hurdles, including I think length of time in business for one of them.