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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3900
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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For Lane only: I am bothering you again for clarification

Resolved Question:

For Lane only: I am bothering you again for clarification with a Sec 338(h)(10) purchase election. May I assume from the seller's side, there is no difference between a Sec 338 sale and an Asset sale, meaning The Step up value from the tax books for Class I thru VII assets will be treated as ord income and the the remaining amount allocated to Goodwill will be treated as Cap Gain?
Regarding the closing, for example if the sale price is 10MM and the debt to be paid off and not assumed by the buyer is 2MM, other deductions paid by seller of 1MM, will the taxable amount then be 7MM minus any basis remaining?
Thanks
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Yes, Paula.

Your first sentence says it.

The election means that this "stock sale" will be treated as an asset sale for tax purposes.

I am in the middle of a class right now.

Let me think through the math and get back with you in the AM if that's OK.

But yes, I think you have it.

Can you check back mid-morning tomorrow (ea time)?

Customer: replied 1 year ago.

Sure , no problem

Expert:  Lane replied 1 year ago.

Thx

My students don't like me right now...

Quiz night.

:)

Expert:  Lane replied 1 year ago.

Hi Paula,

Sorry it took so long to get back.

Re: "Regarding the closing, for example if the sale price is 10MM and the debt to be paid off and not assumed by the buyer is 2MM, other deductions paid by seller of 1MM, will the taxable amount then be 7MM minus any basis remaining?"

How is this debt structured? Is this debt in the name of the Corp?


Customer: replied 1 year ago.

Yes, the debt is in the name of the Corporation with formal agreements with bank and Shareholder. Other deductions would be closing costs (no finders fee).


Just to confirm . . . new cap gain rate is 20% and ord inc max is 39.6%? (rats)

Expert:  Lane replied 1 year ago.

Sorry, just to be sure ... debt is to third parties, or is the debt from shareholder TO the corporation .... (Who is the creditor?)


On Gains,

  • 0% applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets,
  • 15% applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and
  • 20% applies to long-term gains and dividend income if a person is in the 39.6% tax bracket.

Then there's the additional 3.8% Medicare tax (good article here)

 

 

Modified adjusted gross income (AGI with any foreign tax credit or Foreign excluded income added back in) thresholds for the additional Medicare tax are:

  • $250,000 for married filing joint filers and qualifying widows or widowers;
  • $200,000 for single and head of household filers; and
  • $125,000 for married filing separately filers.

Here's how it works.

Suppose Fred and Wilma are married and file a joint tax return. They have $260,000 of salary income combined and $50,000 of investment income from dividends and capital gains. Their adjusted gross income is $310,000. They don't have any foreign income exclusions.

  • Step 1: Calculate their net investment income, or $50,000.
  • Step 2: Calculate their modified adjusted gross income in excess of the threshold amount, or 310,000 minus 250,000 for joint filers = $60,000.
  • Step 3: Take the lower of net investment income or modified adjusted gross income over the threshold, which is $50,000 in this case.
  • Step 4: Multiply 50,000 by 3.8% = $1,900.


And yes, on ordinary income:

(Remember it's progressive BUT your sale proceeds will probably be at the margin - on top of everything else - for the tax year)

FOr Married Filing Jointly:

  • 10% on taxable income from $0 to $17,850, plus
  • 15% on taxable income over $17,850 to $72,500, plus
  • 25% on taxable income over $72,500 to $146,400, plus
  • 28% on taxable income over $146,400 to $223,050, plus
  • 33% on taxable income over $223,050 to $398,350, plus
  • 35% on taxable income over $398,350 to $450,000, plus
  • 39.6% on taxable income over $450,000.

 

Let me know about the debt ... whether it's part of the basis or debt owed to third parties

 

 

Customer: replied 1 year ago.

Hi . . . thanks


The debt consists of both bank and shareholder. The shareholder loan goes back many years ago and no longer has basis (used in years of heavy losses) and never built up again.


Good Flintstones analogy

Expert:  Lane replied 1 year ago.

OK, the amount thats paid back to the bank will reduce basis,

And you've already gotten the tax benefit of the the shareholder portion.

Make sense?
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3900
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 5 other Tax Specialists are ready to help you

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