C-Corp to LLC (Partnership) w/ Asset Acquisition

I have a client with an existing C-Corp. They are acquiring the assets of another company and wish to convert the C-Corp to an LLC, most likely as just a partnership (though S-Corp election is not off the table). The target company's assets are in the same industry as existing C-Corp and new LLC.

I've been on the selling side of larger deals, not buyer's side, and not with a simultaneous change in entity type. I want to verify some thoughts and see if anyone notices I am missing anything critical:

-C-Corp will be liquidated using one of three methods, but ultimately flows through to two shareholders (each at 50% ownership), assets liquidated at FMV net of liabilities

-Target company's acquired assets should pass directly to LLC, not to C-Corp, unless a valid reason for doings so is identified

-Am I correct that of the three primary methods of transferring existing C-Corp assets/liabilities (shareholder stock transfer to LLC and then LLC exchanges stock for the Corp's assets/liabilities; C-Corp direct transfer of assets to LLC or interest, then C-Corp liquidates LLC interest to shareholders; or, corporate liquidation directly to shareholders and shareholders contribute to LLC), that corporate liquidation directly to shareholders can expose the shareholders to the liabilities, whereas the other methods directly transfer the liabilities to the LLC and thus still shelter the owners?

-LLC receives step up in bases of transferred assets and may capitalize and depreciate as normal...but does Bonus or Sec. 179 apply? I feel like I read transfers of assets from a related party do not qualify for bonus/179, but not certain this qualifies as related party per circumstances.

-Since target company is specific (not a general search--one company was identified from day one) and in same industry as existing C-Corp, am I correct in interpreting that investigatory expenses may be immediately expensed? If correct, does the expense go the C-Corp or what will be a newly formed LLC?

They're all good questions. Let's get some more facts.

You speak of asset step-up. Was the purchase consideration cash for assets?
What is reason to liquidate corp., and is it coincidence that they want to do it at same time as acquisition?
If S corp. status is still "on the table", then it's even more relevant to know why they want to liquidate.
Are you familiar with the law that requires the C corp. in a taxable liquidation to recognize gain/loss inside the corp.?

Let's take it step at a time.

You speak of asset step-up. Was the purchase consideration cash for assets?

Cash for assets via a bank loan. As far as I know right now, no goodwill, no employee retention--strictly hard asset acquisition. Also, as far as I know, the bank is willing to lend under an LLC, too, due to long-standing history and other companies. They have the assets and history with various companies to finance the acquisition.

What is reason to liquidate corp., and is it coincidence that they want to do it at same time as acquisition?

LIquidation of C-Corp out of concern over future corporate tax rates, and anticipated market growth/net income as a result of the assets they are acquiring. These assets open up a new market within their existing industry.

If S corp. status is still "on the table", then it's even more relevant to know why they want to liquidate.

It is basically entirely because of uncertainty around future corporate tax rates and wishing to avoid double taxation.

Are you familiar with the law that requires the C corp. in a taxable liquidation to recognize gain/loss inside the corp.?

Yes, and then taxation at shareholder level.

The shareholders are aware of this taxation hit and they believe it is worthwhile for the long term benefits of no longer being stuck under the double taxation umbrella of the C-Corp. As it stands now, they have paid minimal or no tax since they had a period of operating losses or at least minimal net income, but they are expecting net income to increase dramatically as they are able to enter new markets within their industry.

Well, it seems you and they are willing to accept the hit you describe even though they can go to S corp pass-thru status without it, albeit with a remaining hangover of BIG tax in the future.

Whether the transitory ownership of the assets by the individuals creates liability risks seems to be a purely legal question.

The related party 179 limits are described in 179(d)(2). No bonus either.

I think you're right about the investigatory expenses. They'd be 162 expenses because just an expansion of an existing business. Kind of like when a corporation incurs costs in developing a franchise business.

Kind of confusing. Why not just liquidate the C before the sale and transact the sale with the new entity? Does the current C have any real value? You make it sound like it doesn’t, but it’s hard to tell.

Also, you talk about future tax rates. If that really is a concern, why not just wait to see if rates really do go up?

Finally, I haven’t heard you mention anything about an exit. So I wonder about the possibility of Sec 1202. And I wonder why making an S-election now, and just waiting out the BIG period, isn’t an option.

All in all, you’re kind of going down a path without giving other options/angles due consideration, IMO. I also think Nilodop feels the same way, hence him trying to get you to slow down.

This isn't "me"...this is my client and his lawyer driving this change in entity and the rapid fire approach to it all and I only became aware this was actually moving forward in this manner five days ago. I am simply advising them on the tax matters associated with it and raising questions to them (notably, the lawyer) about the asset transfer from C-Corp to LLC, whereby one method could potentially expose the shareholders to personal liability of debts. Since there are so many events occurring at once, I want to make sure I am not missing something critical based on their current plan of attack.

I have not yet received a response about an S-Corp, though I know they firmly feel they are better off taking the tax hit now than in the future. I posed the scenario, have not received any remarks other than "Tennessee LLC." The current C does not have much actual value, it is one of their smaller operations but I am not sure why they are utilizing this particular entity for the asset acquisition versus their larger S-Corp.