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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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I want to make a 351 election to transfer the assets & liabilities

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I want to make a 351 election to transfer the assets & liabilities of a multi member (50/50) LLC to a newly formed Corporation, which will elect 'S' Corp status. However, there is a deficit balance in the partners' capital account, which would result in tax on the transfer. Since this is a medical practice, is it possible to record goodwill &/or patient list equal to the deficit partners' capital balance to avoid tax on the transfer? Additionally, the LLC accepts medical insurance & is currently billing under its employer i.d. #. Since the LLC has to be dissolved after the transfer, is there any way to continue usingthis ein for the newly formed Corporation, to avoid the re-credentialing process with the health insurance companies?

I don't switch my client's EIN's simply when going from LLC to S-Corp (you just use Form 2553). There has to be more to it. Sending a notice of your S-Corp acceptance under your old EIN to the state agencies will get them to process the change as a name change and not a discontinuance, generally speaking.

 

 

 

Lets start with Section 351 itself:

 

§ 351. Transfer to corporation controlled by transferor

 

(a) General rule No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.

 

 

 

 

 

 

§ 357. Assumption of liability

(c) Liabilities in excess of basis

(1) In general In the case of an exchange-

(A) to which section 351 applies, or

...

if the sum of the amount of the liabilities assumed exceeds the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be.

 

 

....

 

 

In other words, no, you cannot set up a goodwill account for tax avoidance purposes. Sorry there.

 

Good luck and let me know if you need more clarification.

 

Thank you for your question.

Customer: replied 6 years ago.

Since the 'S' Corp will be newly formed & considering the primary value of a medical practice is its patient list & goodwill, wouldn't this enable me to record the patient list & goodwill, or a portion thereof, to offset the negative partners' capital account. Please note I am a practicing CPA & need to be sure if this is not possible. Thank you.

You have no basis in the goodwill or list, even though they may have fair value, so no, under IRC 357. If you pay tax on the conversion, you will then have additional basis...

 

Adding these items to the books in order to avoid tax would not only avoid the tax initially, but also later on when you again expensed the amounts for tax purposes (goodwill is amortized).

 

Thank you again.

A medical practice is a personal service S-Corporation (new bill expected to pass by late this year). Starting in 2011, personal service S-Corps will pay the equivalent of self-employment tax on all earnings. I'm not sure you want to even make this switch...

P.S. - CPA's looking to commit some sort of fraud in this area usually do it with a shareholder note to the partnership / S-Corp that levels out the balance sheet... I DO NOT suggest this.
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