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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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In the purchase of a company, there pros and cons related to

Customer Question

In the purchase of a company, there pros and cons related to an Asset Purchase Vs. Stock Purchase. In some cases, keeping in tact existing contracts is more important than the step-up basis for depreciation. Is there an option that would allow the formation of a holding company to acquire an existing business (Operating Company), plus form a second subsidiary an "Asset Purchase Subsidiary" to purchase the assets and future depreciation, but allow the holding company purchase the stock of the Operating Company preserve the contracts and operations, but after the assets are purchased by the Asset Purchase Subsidiary remaining company as a second subsidiary to preserve the contracts and existing operations. Has this done and/or permitted or alternative?
Submitted: 4 months ago.
Category: Tax
Expert:  Lane replied 4 months ago.

No, so sorry. This would be disallowed (recharacterized and taxed either as an asset sale or stock sale) under the related party rules.


(IRC § 267) - Related Party Definitions and Attribution Rules


A “related party” is defined in Code Sec. 267 as including family members, a taxpayer and a corporation controlled directly or indirectly (through attribution from other family member stock holdings) by the taxpayer (more than 50% of the value of the stock), and a partner and a controlled (directly or indirectly) partnership. Sec. 267 also specifies other related parties, including a trust and its grantor, a trust and its beneficiary, and a personal services company and any shareholder-employee.


Further, in determining if a corporation and a shareholder are related parties, a series of constructive ownership rules specified in Sec. 267(c) are applied. In effect, these rules equate control with ownership, in that stock held by certain related parties is treated as though it is held by the taxpayer. The same is true of two corporations controlled, directly or indirectly, by the same person. Any transaction between a personal services corporation and an employee owner are automatically classified as related parties (regardless of the ownership percentage of the employee owner).

Expert:  Lane replied 4 months ago.

As an aside that's not UNrelated,


One of the primary reasons that Form 8594 is required in the asset sale is to ensure that the assets are classified an a uniform manner by both buyer and seller - (ensuring that where the buyer gets the step-up, the seller has the ordinary income tax)


ANd in the stock sale where the seller gets capital gain treatment, there IS no step up for the person stepping into the shoes as the new stockholder of the corporation.


This is not unrelated to the related party rules. One party or the other (to oversimplify a bit) must realize the tax that's commensurate with the type of sale.

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