Sale of practice - C corp or Indiv?

[KJ Judd]

Doctor is operating as a C corporation. She is selling her sole practitioner practice to a medical group in 2007 and will be going to work for them as employee in 2008. Purchase price approx. $105k for practice, fixed assets & patient lists etc.

We're looking at tax saving ideas. I advised her to have more of the purchase price allocated to patient list/goodwill taxable at LTCG rates than fixed assets (depr. recapture ordinary). Now after I'm off the phone with her, I'm questioning myself.

Is the patient list/goodwill purchase reportable on the C corp. at regular rates rather than on her individual tax return where she can use LTCG rates? Or do I need to get further information on how the agreement is being structured? Thanks!

[Bird Legs]

Question

Could she just sell her stock in the corp. to the group? Probably not but thought I would ask anyway.

[KJ Judd]

Nope. I asked. There are some issues from prior years lingering and the medical group doesn't want to structure that way.

[Bird Legs]

How about this

Have the owner take a distribution of all the assets and liabilities, if possible, and then have her sell them to the group. Of course, by doing this, she may have some income to report on her 1040.
If this cannot be done, then there is nothing else to do except report the sale of the assets on the 1120.
This would not take care of the goodwill-patient list.
How about a quick dissolution prior to sale?
Just thinking out loud here.

[veritas]

If the corporation sells the assets

they will be taxed at the corporate rate, goodwill/patient list and equipment is taxed the same. Once the sale is complete then the shareholder will be faced with getting the income out from the corporation. If you dissolve the corporation the difference between the net proceeds and the stock basis will be taxed at the individual capital gains rate. So you could take a double hit.

Sometimes a noncompete is sold seperately between the shareholder and the purchaser outside the corporation to avoid the double tax. Since she is going to work for the purchaser that probably isn't an option.

I have also seen an instance where the purchaser bought a minority position in the corporation which would be a stock sale taxed at a favorable rate. The tangible assets are purchased seperately at fair market value such as equipment and inventory.

You aren't talking a huge amount here so you might just do an asset sale at the corporate level and pay the Doctor a large salary/bonus to reduce or eliminate any corporate tax. Also you could setup a pension plan and contribute as much as possible.

Are there presently earnings and profits retained by the corporation prior to the sale?

[JON]

Goodwill

what good does it do in a C Corp. If she was retiring you could have her sell "her" goodwill separately. That has beeen done. She has to liquidate the corporation and that will get her the long term treatment upon liquidation. Get a salary out of there to get rid of current year income including gains on equipment and goodwill. Why get taxed 4 times-2 at federal and 2 at state.

[KJ Judd]

Thanks for the thoughts.

She already has maxed out a solo 401k plan. There will be some receivables trickling in for another year or two so she's planning on keeping the corporation operating to collect those. Plus she has an outstanding judgement from someone who embezzled from her years ago that she's still trying to collect. I think we need to keep the corp open for that, correct?

Retained earnings is about $21,200. I'll have to review the differences between that and E&P because I only do a couple C corps. I took over this client last year and the prior accountant was quite lax on keeping track of things like that.

There is also $33k in NOL carryover available. In the past she's done salary sufficient to bring the C corp down to no taxable income.

She was wondering about doing an installment sale or having the payment deferred from Nov 2007 to Jan 2008. My initial thoughts were it wouldn't generate a significant difference.

[Roland Slugg]

Doing a quick liquidation won't do any good. The assets liquidated will be treated as if sold by the corporation at their FMVs. A liquidation will also make it impossible to keep the coproration open in order to collect on that judgment, use the NOL., and perhaps use the corp for another business or income producing activity.

A better plan, IMO, would be to go ahead and sell the assets. If the seller can arrange an installment sale, as you suggested, that would be good. That will defer some of the tax one additional year, and it will also create income in the subsequent year, making it easier to justify paying a salary to the shareholder in that next year.

The non-comp agreement is a viable option for a chunk of the selling price. It just has to restrict the seller to working for the one medical group she's going to work for.

Finally, the patient list and goodwill are assets of the corp, so their sale should be reported on the corp's return, not her own.

[JON]

Liquidation

is after the sale of assets and winding down. If you have NOLs make sure you use them up-get her salary to a point where no or little corporate taxes are paid. When everything is is done you should end up with few assets except for cash (AR will be collected). If she is going to work for the buyer-covenent not to compete seems meaningless, but could be used to get some income outside the corp. A lot of these purchases are formula related, and I think your alternatives are limited, but with NOL and her continued salary just limit the amount of corporate tax you pay.

[les grans]

Who's selling what???

Once upon a time, in another millenium, there was a court case, the name of which was an *ice cream* company [the name eludes me now], but the value of the case was that it established that an individual - the proprietor, the officer, the shareholder - *may* own the intangibles of an incorporated business. The corporation is *not* where the goodwill and many of the other valuable intangible reside. They are with the individual, and when the individual - not the corporation - sells them (1) there's only one level of taxation, and (2) it can be a long-term capital gain to the individual. The offer to sell a professional practice should be designed - if it can - to take advantage of this "fact" - I put that word in quotes quite intentionally, since I think there's something not-too-certain about this treatment of the intangibles, despite the favorable precedent in the ice cream company case.

Les

[veritas]

Another option

is the new practice could have paid her a higher compensation in her new position spread out over time.

[KJ Judd]

Thanks for all the input! I don't know what I'd do without all of you!

Les, if you or anyone else, remember the name of that case, I'd love to have a look at it. This taxpayer is more aggressive.

I'll mention the higher compensation option, but it is a very large corporate medical association (numerous hospitals, clinics, etc.) I got the impression that they have formulas for calculating purchase price & compensation offered. I'll check with her.

[les grans]

Martin Ice Cream Co.

Martin Ice Cream Co. v. Commissioner, 110 T.C. No. 18 (1998).

Google this: income tax corporation selling case ice cream shareholder individual capital gain. And please don't rely on this case with one eye closed and one hand tied behind your back. Read the other points of view on the case and caveat caveat caveat...