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In 2008 client ceased doing business as X anS-Corporation and

Customer Question
started doing business as A...
In 2008 client ceased doing business as X anS-Corporation and started doing business as A also an S-Corp. He is 100% shareholder of both S-Corps and transferred ALL assets and liabilities from X Corp to A Corp. Book carrying value of Assets(Cost less Depreciation) is around $20,000 with liabilities (including Accounts Payable) of around $35,000. Basically he wanted a name change and did it this way.
A) Is there any gain or loss to deal with on the 2008 tax returns? If so how?
B) On Form 966, line 10. Does Section 331 apply? If not, what does?
c) How do I deal with the fact that there was no plan whatsoever to dissolve X and start A in it's place? What suggestions do you have for attaching a certified copy of the resolution or plan?
D)Should their be a note or disclosure attached to both 2008 1120S returns indicating what took place?
E) Anything obvious that I am missing?
Need to finish this by Sept 15th. Client totally dragged their feet! Thank you.
Submitted: 8 years ago.Category: Tax
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9/3/2009
Tax Professional: Mark D, Enrolled Agent replied 8 years ago
Mark D
Mark D, Enrolled Agent
Category: Tax
Satisfied Customers: 1,304
Experience: MBA, EA, Specializing in Business and Individual Tax Returns and Issues
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Customer

 

A) No taxable gain is recognized as this would qualify for a Sec 351 transfer. However, if liabilities exceed related assets, the shareholder will recognize a gain for the difference and their basis in the new corporation would be zero.

 

B) Section 331

 

C) No need to attach a plan to the tax return, but you do need to attach a Sec 351 statement with the new corporation's first return.

 

D) No disclosure needed, as noted above.

 

E) You will take a property distribution of the equipment at net book value from the old corporation. You will then contribute these assets at the same value into the new corporation. Record this transfer to the new corporation retaining the same actual cost and accumulated depreciation. Continue to use same depreciation schedule as in the old corporation.

 

Please let me know if you have further questions.

 

Regards,

 

Mark D

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Customer reply replied 8 years ago
Thanks Mark; this is very helpful. Just a couple quick questions before I accept your answer so that you can be paid for your time.

A) To clarify, please. Shareholder transfers Truck A & Truck B and $3,000 cash to new corporation from old corporation.
Truck A Cost: $30,000
A/ Depreciation at time of transfer: $12,000.
Adjusted Basis of Truck A: $18,000
Truck A Loan Payable Balance at time of transfer: $25,000

Truck B (No liability)Cost $25,000-$20, 000 Accumulated Depreciation. Adjusted Basis of truck B $ 5,000.

Am recognizing a $7,000 gain (25,000-18,000) related to the transfer of truck A and not looking at anything else transferred at the same time?
or
is there no gain on the entire transfer in its' entirety? (18,000(Truck A Basis) +$ 5,000(Truck B Basis) + $3,000(Cash) -$25,000 (Loan Payable)=$1,000 shareholder basis in the corporation.
B) If there is a gain, is it a Capital Gain on Schedule D?

Boy do I hate when little corporations choose to do things the hard way! I found the Section 351 requirements. You don't by any chance have a template that you use that you could send me related to this requirement? I've never done one of these and want to do this correctly.

Sorry for the delay in responding. I'm getting ready for a big labor day party and trying to put this to rest at the same time.

Thank you very much for your time. I appreciate your help.
Warmly,
Deb L


Tax Professional: Mark D, Enrolled Agent replied 8 years ago

Deb,

 

Using the gross method, you would consider all liabilities and assets together as long as this was all one initial Sec 351 transfer. Under your scenario, there would be no recognized gain. The $1K would be the basis, allocated to stock and APIC if needed.

 

If there were a gain, it would be LTCG.

 

Regards,

 

Mark D

Mark D
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Customer reply replied 8 years ago
Terrific! I would have hated to tell the client that a gain had to be recognized.
Thank YOu.
Deb
Tax Professional: Mark D, Enrolled Agent replied 8 years ago
Thank you Deb.
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