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I have a client who operates a manufacturing operation,

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selling their products through both...
I have a client who operates a manufacturing operation, selling their products through both retail and wholesale channels. They also own the real estate where they operate under the same tax id. They have some significant carry over losses (over $750K Fed and almost $150K RI as of 11/30/14 return plus the amounts for year ended 11/30/15 still to be determined, but significant nevertheless). I’ve spoken with them and their attorney and they are considering breaking the company apart into 3 commonly owned businesses (not a holding company). One entity would own the real estate and lease space to the other entities. One would be a retail sales company, selling all goods directly to residential and commercial customer needing windows and doors. The third would be a manufacturing operation that produced goods, selling those to the retail company, as well as other third party contractors.
My concerns are many fold, but to start with:
1. Which entity gets the carryover losses?
2. What are the rules around how management fees, and charges for goods and services sold between the related entities?
3. The current entity is a C corp, but should the other entities be a different structure?
Any help is appreciated!
Submitted: 2 years ago.Category: Finance
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Answered in 29 minutes by:
3/7/2016
Financial Professional: Stephen G., Sr Financial Expert replied 2 years ago
Stephen G.
Stephen G., Sr Financial Expert
Category: Finance
Satisfied Customers: 7,473
Experience: Extensive Experience with Tax, Financial & Estate Issues
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First of all, I have no idea of your level of experience, so please excuse any comments that may be too elementary in your situation.

1. My first comment to the client & attorney would be "Why".

2. Secondly, no matter what is done & how it's done, the potential for isolating the current and any future NOLs in the wrong place, is enough of a reason to be very careful of any reshuffling.

3. If there are 750K of NOLs and more to come that have been incurred, but yet quantified, you need to engage experts in this field before any action is taken as the $ are too big to screw up whatever is done.

4. These are complex areas of the tax code & not to be messed around with by amateurs (like me for example who has only be a CPA for 45+ year & is now retired - I spent 7 years with Coopers & Lybrand leaving as an Audit Manager, so if nothing else I learned to realize when I was in over my head). I would tell my client that we need to engage a consultant from one of the "Big 4" like PWC who has individuals who do nothing but this. Here's a link to an article which touches on some of this & even invites you to call some of the PWC individuals which I would recommend that you do as it will cost nothing to do so & whatever they say will be useful.

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0ahUKEwj4y8uL667LAhXGqx4KHR2MDqgQFgg7MAU&url=https%3A%2F%2Fwww.pwc.com%2Fus%2Fen%2Fwashington-national-tax%2Fnewsletters%2Fmergers-and-acquisitions%2Fassets%2Fpwc-this-month-ma-january-2014.pdf&usg=AFQjCNG_QKx9LC5GTMYvL0MEugPRlBLxpQ&cad=rja

PWC has other similar articles which you can access: Google "Corporate Spin-offs"

That's a start, look for the PWC names at the end of that article as well as within the document, they tell you which one to call about the specific areas mentioned.

Hope this helps.

Steve G.

PS You mentioned RI; I know some of their best people are in Boston.

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Financial Professional: Stephen G., Sr Financial Expert replied 2 years ago

Just checking in. I see you have had a chance to read my response to your question.

Do you have any follow-up questions?

If not, please remember to rate my response as that is the only way we receive credit for our work.

Thanks very much,

Steve G.

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