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I need to know some advice on how to structure the sale of

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a franchise from an air...
I need to know some advice on how to structure the sale of a franchise from an air conditioning company that is an S Corp. Will the sale be ordinary or cap gain on the "franshise" proceeds and should they sell the assets or the stock?
Submitted: 6 years ago.Category: Tax
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7/1/2011
Tax Professional: socrateaser, Lawyer replied 6 years ago
socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 39,350
Experience: Retired (mostly)
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Hello,

It is always preferable to sell the entire corporation (the stock) than only the assets, because by selling all assets and liabilities, the seller is relieved of any potential liabilities, for example to creditors employees who decide that the sale is impairing their contractual rights with the corporation. Moreover, there is no corporation to dissolve -- no administrative paperwork or additional tax accounting.

The contrary argument is that selling assets simplifies negotiation because the buyer is better able to determine what he or she is purchasing. That's a benefit to the buyer -- not to the seller. So, whether or not it's better to sell assets or stock is mostly a question of who you're representing in the transaction.

That said, the sale of stock is a capital gain to the extent that the price exceeds the shareholder's basis.

Hope this helps.


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Customer reply replied 6 years ago

I believe this entity has been paying a franchise fee to a national based AC marketing company that has providing marketing leads for the past several years and now is interest in buying the client's accounts receivable/client base. In that instance, will they not be interested in the stock, and only want the customers/client list and how would that be "sold."

Tax Professional: socrateaser, Lawyer replied 6 years ago
Accounts receivable acquired for services rendered are not considered capital assets, and a gain/loss is ordinary (Treas. Reg. 1.1221-1(d)).

The "client base" (customer list) is good will. Treas. Reg. 1060-1(b)(2)(B), and is treated as a capital asset.

As for your direct question re what the franchisor will or will not be interested in, were I negotiating, my position would be that I don't care what they're interested in, because if you want to buy only the assets, then the price will be higher so as to mitigate the risk of retaining the liabilities and the cost of winding up the corporation.

Hope this helps.


And, if you need to contact me again, please put my user id on the title line of your question (“ToCustomerrdquo;), and the system will send me an alert. Thanks!

socrateaser
socrateaser, Lawyer
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Customer reply replied 6 years ago
toCustomerbr/>i have more info on the sale, The sale is for "territory rights" that were paid in a franchise deal that the taxpayer now wants to get out of and now become an independent owner. the franchise rights initial purchase has been totally amortized therefore I assume the $ 30 K he will receive for the sale of territory rights will be ordinary income to the corp which he intends to keep open and running. Correct? Remember is it a sub S.
Tax Professional: socrateaser, Lawyer replied 6 years ago
In my opinion, if all 1231 gains exceed losses, and the gain exceeds any recapture amounts, then the franchise cancellation is a capital gain. IRC 1231(a)(1). Otherwise, an ordinary loss. IRC 1231(a)(2).

See Rev. Rul. 7-37.

Hope this helps.


And, if you need to contact me again, please put my user id on the title line of your question (“ToCustomerrdquo;), and the system will send me an alert. Thanks!



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