2 S Corps Owned by Same 2 People Same % Want to Merge

Technical topics regarding tax preparation.
#1
DLB  
Posts:
16
Joined:
10-Oct-2018 10:25am
Location:
CO
I have a client that has 2 S Corps, both S Corps owned by the same 2 people (unrelated) and the same ownership % in each S Corp. They want to merge one into the other as of 1-1-20. Nothing will change other than the business activity of S Corp #1 is now absorbed into S Corp #2. I need help/guidance. Never have done this before. I have googled tax free mergers, reorganizations, etc. Seems it falls under Section 368? Seems like it shouldn't be too complicated, but as I research, there are a lot of scenarios! Can someone give me specific guidance on the accurate, most simple way to handle please? Thank you in advance!
 

#2
deniz  
Posts:
336
Joined:
19-Feb-2018 11:33pm
Location:
WA
This is an A reorg.

If you are going to try this you need to find yourself tax treatises covering reorgs. and a good corp atty. This is parking yourself in a tax law library, not TPT.
 

#3
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
What makes you think it fails under 368?

What makes you think this isn't something a lawyer should do?

Yes, it is simple.
 

#4
DLB  
Posts:
16
Joined:
10-Oct-2018 10:25am
Location:
CO
I said I think it falls under 368, not fails. An attorney is involved but I think only to the extent of documentation. I have requested those documents. Thanks for the feedback!
 

#5
deniz  
Posts:
336
Joined:
19-Feb-2018 11:33pm
Location:
WA
Nilodop, are you going to keep us in suspense, why wouldn't it qualify as an A?
 

#6
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
It would qualify as an A (or could easily also be a C). I wasn't saying it doesn't. My eyes deceived me such that I thought OP said it fails under A (he said falls), so I was asking him why it fails. I was being a Keystone cop.
 

#7
DLB  
Posts:
16
Joined:
10-Oct-2018 10:25am
Location:
CO
Can you provide some specific guidance on the process? S Corp #1 has cash, a bit of A/R, some goodwill, a couple of old pressure washers (window cleaning business) a very small loan from shareholder on the balance sheet 12/31/19. Another CPA gave me a copy of a corporate reorganization statement filed by corporation that needs to be used. When listing all property transferred, can I just list the assets at fmv and original cost basis? There are no losses related to the transfer of property. Since the two are combined as of 1-1-20, do I do a final return for SCorp #1 and zero out their balance sheet? Do those balance sheet items from SCorp #1 need to be reflected on SCorp #2 1120S balance sheet as of 12/31/19 or is it ok to bring those in as of 1-1-20? What needs to be done on the 1120S and/or attached to each 1120S to complete the reorganization for taxes is what I need to know from you guys with experience. It doesn't seem like it should be that complicated, but clearly I need to make sure all requirements are covered and done correctly. I could spend hours on the phone with IRS reps that could give me inconsistent guidance, so I know the best place to start is with you guys with experience. Remember, exact same shareholders and ownership in both companies. Thanks!!
 

#8
Posts:
2772
Joined:
22-Apr-2014 1:34pm
Location:
North Carolina
Sounds like S Corp #1 is fairly small with not a lot on the books. I would be tempted to just close it and continue with everything being done through other S corporation. In the end, it would probably be much more simple, and save on tax/accounting fees.
 

#9
deniz  
Posts:
336
Joined:
19-Feb-2018 11:33pm
Location:
WA
My specific advice is either to thoroughly read through BNA Portfolio 771-4th: Corporate Acquisitions — (A), (B), and (C) Reorganizations, Ginsberg & Levin, Mergers Acquisitions and Buyouts, [Ch. 6 Basic Principles of Tax-Free Reorganizations, Ch. 11 Special Considerations in Taxable and Tax-Free Acquisitions Involving S Corporation] or dump it.
 

#10
Posts:
85
Joined:
3-Feb-2019 3:12pm
Location:
Chicago
Seaside CPA wrote:Sounds like S Corp #1 is fairly small with not a lot on the books. I would be tempted to just close it and continue with everything being done through other S corporation.


If you shut down corp #1, the goodwill is taxable. 311(b) gain triggered on liquidation, picked up by shareholder. You don't want to put yourself in that position.

I might have the merger agreement reviewed by tax counsel. You are going to need language in that agreement that gives effect to the plan of reorg. Whoever reviews it should do the drafting of those clauses.

You could read BNA, Ginsberg, etc....but you'd have to take this tax season off : )
 

#11
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
We're getting way out of hand here. In no particular order:
If you shut down corp #1, the goodwill is taxable. 311(b) gain triggered on liquidation, picked up by shareholder. You don't want to put yourself in that position.
. 336, not 311.

Can you provide some specific guidance on the process? S Corp #1 has cash, a bit of A/R, some goodwill, a couple of old pressure washers (window cleaning business) a very small loan from shareholder on the balance sheet 12/31/19.
. I'm guessing small $ involved here.

Another CPA gave me a copy of a corporate reorganization statement filed by corporation that needs to be used.
. Needs to be used? Says who? Follow reg. 1.368-3.

Seems like it shouldn't be too complicated, ...
. It really isn't.

Since the two are combined as of 1-1-20, do I do a final return for SCorp #1 and zero out their balance sheet?
. I meant to comment on this. I'm not sure you can do this "as of", especially if it's a statutory merger that has not yet happened. Now a stock-for-assets, (C reorg), maybe. Or a 351 followed by a 332.

I could spend hours on the phone with IRS reps that could give me inconsistent guidance,
. They won't give you hours, they might give you erroneous answers.

In the end, it would probably be much more simple, and save on tax/accounting fees.
. Probably been done that way before, but not under the law. And how will you answer when IRS asks what happened?

My specific advice is either to thoroughly read through BNA Portfolio 771-4th: Corporate Acquisitions — (A), (B), and (C) Reorganizations, Ginsberg & Levin, Mergers Acquisitions and Buyouts, [Ch. 6 Basic Principles of Tax-Free Reorganizations, Ch. 11 Special Considerations in Taxable and Tax-Free Acquisitions Involving S Corporation] or dump it.
. Excellent advice, and certainly not wrong, but also might bankrupt the client when bill arrives.

I might have the merger agreement reviewed by tax counsel.
. Or any decent lawyer who knows how to read reg. 1.368-1.

What's needed here is a simple decision and a simple transaction with some boiler plate legal document. But first figure out how and why they are in 2 corps., why (business purpose) for wanting to change, and whether, outside of tax considerations, do they really want to change the structure? Have they thoroughly considered limited liablity and protection from problems of one business affecting the other?
 

#12
Posts:
85
Joined:
3-Feb-2019 3:12pm
Location:
Chicago
Sorry wrong cite, but same general idea...GW taxed on windup, so you don't want to be in that position ...unless you know for a fact that it's immaterial and you're confident you can prove it on audit, right? As far as "tax counsel" or any " decent lawyer who knows how to read reg. 1.368-1," the point is somebody needs to "draft." My experience with corporate lawyers is that unless they also function as tax counsel (i.e., have malpractice coverage for tax as part of their practice) they will not take on a tax review of a corporate document....if it's a material issue. If not material, all of this is somewhat academic and anything goes : )
 

#13
DLB  
Posts:
16
Joined:
10-Oct-2018 10:25am
Location:
CO
Thank you all for input! An attorney has drafted a reorganization document and it has been filed with the state. Statement of Merger is effective 12/31/19. They have made the decision to merge the two companies and docs have been drafted and filed. Their "business purpose" is to consolidate operations and books for simplicity. They have also mentioned they would like the operations to be one business if they choose to sell in the future. There is an Agreement and Plan to Merge document from the attorney that gives more detail, but basically says one will merge into the other surviving LLC and that both LLCs agree. Says S Corp #2 will assume all assets and all liabilities.

Some detail on the Balance Sheet- they have roughly 10K cash, 16K receivables and 72K of Unamortized Goodwill from when they originally purchased this business from a previous owner, other depreciable assets are fully depreciated and more than 6 years old (ladders, a computer, pressure washers) . No liabilities. 10K Add. Paid In Cap, 1K Stock and Ret Earnings of course.

Do I have the choice to do stock for stock or stock for assets? If so, should I choose one over the other?

Nilodop -- I thought Reg 1.368-3 indicates we have to attach the statement of reorganization indicating which companies and EINs are involved, etc. Seems it also said that the shareholders possibly might need to attach a statement to their personal return stating they're involvement in the tax free reorg?

Thank you in advance!!
 

#14
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Sounds like lawyer chose a statutory merger, so no, you don't have a choice of stock for stock or stock for assets.

I did not know that a statutory merger can be retroactive.
 

#15
DLB  
Posts:
16
Joined:
10-Oct-2018 10:25am
Location:
CO
The attorney filed the statement of merger in November with a delayed effective date of 12/31/19
 


Return to Taxation



Who is online

Users browsing this forum: HowardS, itssewtaxing, JoJoCPA, JR1, lckent, ManVsTax, MAPCPA60, msmith7305, sjrcpa, SumwunLost, TaxDude, Terry Oraha, Treetopclimes and 209 guests