C Corp Dissolution, Loans to SH on books

Technical topics regarding tax preparation.
#1
EADave  
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Hello all, I truly hope all is well and you survived the first part of the tax season!

I inherited a new client, Fiscal Year C Corp, my favorite! :roll: They are selling their business in an asset sale. Most of the sales price will be allocated to fully depreciated assets, the remainder to Goodwill. I have two questions.

I am thinking we should indicate in the sales agreement the company will be selling the equipment, and the owners/individuals will be selling the Goodwill. This is merely an attempt to avoid taxation on liquidating distributions and 21% tax at the C Corp level versus the single layer of 15% tax at the individual level. Doable/Common approach? Martin Ice Cream case, perhaps?

There are $250K in "loans to shareholders" on the books, my assumption, the prior accountant was trying to avoid tax on what truly were dividends to the shareholders, but I can't read minds. Let's say the sale produces $250K in cash; can we simply "write off" the loans to shareholders by labeling this a forgiveness of debt to the shareholders, or would we be shooting ourselves in the foot here? I am trying to avoid triple layer of tax; tax on the gain of sale of assets to the C Corp, tax to the shareholders for the liquidating distributions, and tax to the shareholder for forgiveness of debt. Argh!

Any guidance would be most appreciated!
 

#2
JAD  
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If you want to take that approach with the goodwill, you need to establish your facts and align with case law to support that the goodwill really is that of the individual's. If the individual sells the goodwill but the goodwill really belonged to the business, then all you have is a distribution of goodwill to the individual before the sale, and what good is that?

As for the loan to the shareholder...what would the corporation's business reason be for forgiving the loan? Perhaps the corporation makes a dividend distribution of $250k to clear the loan. How much interest does the shareholder owe to the corporation?

The bottom line is the shareholder received cash in the past on which he did not pay tax. Now, everything has to be resolved, and it is time to pay up.
 

#3
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ditto
Steve
 

#4
EADave  
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Ouch, JAD, ouch. But, I see what you're saying regarding the Goodwill, I talked myself into a corner there and what you said makes perfect sense.

Regarding the loan, I have very little detail thus far, but out of curiosity, are you saying the liquidating distribution could be used to clear the loan? I am perfectly fine with that, and I think the client would be as well, knowing they did receive tax free distributions in year's past. I just didn't want a situation where the distributions and the clearing of the loan (loan forgiveness to the shareholder) would cause a double-tax issue. I suppose I'm overthinking this one.

Thanks, Steve for the ditto!
 

#5
JAD  
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Well, yes, I do think there is double tax on the loan. Over time, cash was provided to the shareholder without the corporation claiming a deduction. Now the shareholder will pay tax on that income.

Bigger concerns:

1. you have a new client who is selling. At the end is when you see the problems. Do the problems become yours in the final year? Two years ago one of my favorite clients asked me if I wanted to do a final return of a business that she had left with her old accountant. We agreed to let him wrap it up for that reason. Good thing, there were some serious issues at the end. I am glad I dodged the bullet.

2. You sound like you are trying to make up the facts to suit your desired tax outcome. The thing with C corps is there is double taxation. If you don't want double taxation, don't be a c corp. So don't get yourself dirty.

Get all of your facts. Look at your trial balance, and see what happens as you get to an ending. The facts will drive the tax result.

BTW, it sounds to me like your guy owes the corporation interest, which will increase double taxation, right? And you will have to trace the interest expense to determine how much if any is deductible to the individual. Or you have unreported income exposure in the corporation (the interest income) and maybe unreported income exposure in the 1040 (the deemed distribution of that amount.) In other words, maybe your guy owes the corporation $25000 of interest. He doesn't pay it. The IRS treats it as paid (income to the corporation) and distributed to your individual (a dividend).
 

#6
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C corp doesn’t always mean double taxation (sec 1202, etc)

Not sure I understand the “triple taxation” comment - how would there be 3 layers of tax, is income being double-counted?
 


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