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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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Asset sale of a C Corps and tax implications

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I am purchasing the majority stockholder's interest (79%) in a C Corp. The other two partners need to be kept in the company for their expertise (total 21%). I also need to make an asset purchase (perhaps) so that the business assets which are now depreciated down to almost 0 can be readjusted to their fair market value and depreciated again by the new entity. What is the best way to structure a deal so that maximum tax benefit can be achieved without impacting the minority partners in any way. One concern I have is that if 100% of the company is purchased by a new corporation and then the minority partners are given their respective % ownership will there be a 'gain tax due' on their percent of ownership.

Hello and thank you for your question.

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There are two ways to complete an asset sale. The first is to literally purchase the assets from the corporation. The second is to purchase stock and make an election under IRC 338, assuming of course the purchase of stock is a "qualified stock purchase" where at least 80% of the stock is acquired (IRC 338(d)(3), IRC 1504(a)(2)).

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You are not acquiring 80%, only 79%, so that makes things trickier... Is there any way you could acquire 80%?

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There is of course the third option, which is to purchase the stock and give up the additional depreciation/amortization deductions resulting from asset acquisition. If you choose just to purchase the stock, you can negotiate the stock price based on the corporation's lack of a tax basis in its assets and the seller's ability to receive capital gains treatment and/or IRC 1202 treatment (ie... IRC 1202 allows the exclusion of a percentage of the gain from the sale of qualified small business stock).

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The shareholders that are going to stay on would prefer you purchase the stock directly from the retiring shareholder. To them, in general, triggering gains on the deemed sale of corporate assets implies corporate tax on income will be due immediately while deductions against taxable income cannot be taken until later periods in the form of depreciation and amortization. The retiring shareholder, who can charge more given the asset sale, essentially wins out over the remaining shareholders who have to hold on to the stock and watch the corporation pay taxes.

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I hope this is helpful.

Customer: replied 4 years ago.

If the minority shareholder stocks in the existing corporation are purchased and the proceeds are immediately reinvested into the new corporation (paper purchase) will that trigger a capital gain?

Yes. While wash sale rules can disallow a loss, the IRS has no problem with gain recognition. The existing shareholders are free to sell their stock at a gain and then purchase shares in your company.

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If you do an IRC 338 asset sale, the exiting shareholders are not relieved of recognizing gain or loss on the disposition of their stock. Acquiring 80% is enough to accomplish your IRC 338 asset sale, relieving the minority shareholders of having to recognize gain on the sale of their minority interests. They could each sell 0.5% of the stock to you (ie... your corporation) and refrain from recognizing gain on the remaining 20%.

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Again, I hope this is helpful.

Customer: replied 4 years ago.

If I go this route (i.e. acquire 80% of the current corporation's stock), I suppose I do not need to form new corporation. I merely make an election at the time of stock purchase, correct. It also does not affect the seller in the sense that he still benefits from stock sale, correct?


 


Also,I do not know where you are located and what additional services do you personally offer. I am looking for someone to assit me in the acquisition. If you are interested, please call me at XXX-XXX-XXXX and I am in Raleigh, NC

You are correct. The election must be filed by the 15th day of the 9th month beginning after the month in which the acquisition date occurs (IRC 338(g)(1)).

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You are also correct in that the seller still recognizes the gain/loss on the sale of stock.

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