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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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If a C Corporation spins off a subsidiary C corporation to

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If a C Corporation spins off a subsidiary C corporation to an employee who has been underpaid for years what are the taxable consequences to both the corpoarion & the shareholder? Both corporation are actively in the insurance agency business.

LEV :

Hi and welcome to Just Answer!
The first step - you need to determine the fair market value of the subsidiary.
For the C-corporation - that disposition will be reported as a sale of the subsidiary at its fair market value - so the taxable gain will be based on the basis. I assume - it will be an asset sale - so the gain will be determined separately for each asset.
The transfer to the employee will be treated as compensation for services and will be reported as wages - subject of employment taxes - again based on the fair market value of the subsidiary. Generally - that will be deductible for the C-corporation as wages and taxable for the employee as such.
The employee will start depreciating business assets based on their fair market value as determined above.

Customer:

Would your answer change if only the capital stock of the subsidiary was tranfered to the employee?

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