C-Corp asset sale; salary exp vs dividend

[RJM]

A C-Corp service corporation, 4-owner medical practice, sold all assets to a hospital system. The $300,000 gain on sale of assets..... can this be paid out as salary instead of dividending the capital gains on dissolution? Because it is a service corp taxed at a flat 35%, the owners will pay less tax if paid out as salary instead of a liquidating dividend with 35% at the corp and 15% more at the personal level.

I have not heard of any requirement that the gain on asset distribution must result in paying tax on the gains at the corporate level, but it seems to be related to the "reasonable compensation" and "return on invested assets" issues which the IRS sometimes invokes. So I was hoping someone with more experience on this topic could offer some sage advice..... -Bob

[Bees Knees]

I wouldn't try to do all of it, but you can do some.

Each shareholder/employee is paid a bonus on top of their normal salary. The bonus is due to the successful work they did in selling their business. A business doesn't just appreciate in value on its own. It is the hard work of key employees that allows the business to grow until it is eventually a marketable commodity itself.

[RJM]

Thanks Bees...

Have a meeting with the docs in a few hours, and will discuss the "return on assets" issue, as a potential audit issue. But I have seen several dissolutions made with salary and bonus reducing all corporate gains to 0, and have never seen a followup audit. So..... will ask them if they want to split the difference. -Bob

[Roland Slugg]

Why settle for half a loaf?

So..... will ask them if they want to split the difference.

I wouldn't. Without access to all relevant data ... such as the profit and salary history for the past several years ... I can't say with certainty, but I would be strongly inclined to advise my clients to pay all the additional income out to themselves as salary. The business is worth its selling price because of the owners' current and past personal services, not because of significant appreciation in the business assets. I'm assuming, of course, that those assets DO NOT include real estate. If there is real estate, my advice might be different.

[RJM]

Thanks Roland ...

It is always good to hear from you. I am an old fan from the old ATX board.

When I met with the docs, they decided to be very aggressive, but still to pay a token amount of gains tax at the corp level. I will revisit this with them again before closing the corp to see if they want to eliminate the dividends entirely. -Bob