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Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1376
Experience:  JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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A corporation chartered in Louisiana intendes to downsize and

Resolved Question:

A corporation chartered in Louisiana intendes to downsize and has formed an LLC whose only member is the corporation. As such, cash assets may be transfered back and forth without a taxable event. But what about the land that the corporat9on owns?
Submitted: 2 years ago.
Category: Tax
Expert:  Jax Tax replied 2 years ago.

Jax Tax : That is a bad idea and will not work as you intend it to. Why not just make a partnership or sub s election for the Corporation. It would have the same effect. Form 2553.
Jax Tax : Yes, the corporation can make capital contributions to the LLC establishing basis but the income still flow back to the corporation, is taxed at the corporate level and is then paid out via dividends to shareholders.
Jax Tax : An LLC is a good idea as far as operating a new type of business bit not to completely take over for the corporation and absorb all assets.
Customer:

I should have given you more information. We had an offer for the land when the LLC was formed because without the land the income would drop significantly. Hence, we wanted to cut expenses for directors, officers, etc. All assets were transferred to the LLC except the land so that the buyer could purchase the corporation or the shares and thereby gain ownership of the land, while we avoided the tax from the land sale. But after a year of negotiations the buyer backed out and there is no foreseeable buyer in sight. The stockholders in the corporation were supposed to become the members of the LLC, but if we issue them member certificates it seems to trigger a taxable event. Perhaps the LLC can purchase the land from the Corporation at it's purchase price ($27,000 in 1917, now appraised at about $7 million)?

Jax Tax : If the buyer bought the corporation it would have owned the LLC since the LLC was owned by the corporation. What you were trying to do cannot be done because as the assets were given to the LLC it was a capital contribution and the LLC would take the place of those assets on the balance sheet.
Jax Tax : Yes, then giving the ownership to shareholders would trigger a huge taxable event.
Jax Tax : No, the LLC cannot buy the land for less than FMV. It violates federal law and would be an illegal tax avoidance transaction
Jax Tax : What you are trying to do cannot be done. The entire set up could end up with someone in prison. At the very least a huge tax liability.
Jax Tax : You cannot move assets to the LLC and then just close the corporation. The corporation will remain the owner of the LLC.
Jax Tax : If the members become the owner, it would trigger taxable gain.
Jax Tax : The corporation cannot close until its assets are dispossessed of. At this point that seems to be land and an LLC ownership.
Jax Tax : I can't advise you on how to do something that cannot be done.
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1376
Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
Jax Tax and 3 other Tax Specialists are ready to help you
Expert:  Jax Tax replied 2 years ago.
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Customer: replied 2 years ago.

Thank you for your responses. It is regretable as we were served by local counsel (who set up the LLC) and local CPA (who mandated that the corporation be the sole member). If you are allowed to, and wish to help me in the future, please provide your name, address and contact numbers.

 

Cyrus Potts

Manager, LF&L Minerals LLC

XXXXX@XXXXXX.XXX

 

Expert:  Jax Tax replied 2 years ago.
As you see your personal info has been blocked. This is for your protection and unfortunately I am not permitted to provide my contact information. The structure of having a corporation own an LLC and capitalizing the LLC with corporation assets is not an issue. It is perfectly fine. The problem is that the LLC then replaces the assets on the corporation's balance sheet. This means the LLC cannot simply be detached from the corporation without owner distributions then replacing the LLC on the corporation's balance sheet. If a corporation return is filed and suddenly has significantly less assets with no sale or distribution reported, you will be flagged for audit which could get messy. And, with the corporation owning the LLC, the profit is passed to the corporation and taxed. Then taxed again when dividends are made to shareholders. If a sub s, the profit then just passes to the owners through the corporation.
There is no solid way to get rid of or sell the land or other assets without being taxed.
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1376
Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
Jax Tax and 3 other Tax Specialists are ready to help you

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