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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29949
Experience:  Taxes, Immigration, Labor Relations
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I am a trustee. The individual who died was the sole

Customer Question

I am a trustee. The individual who died was the sole shareholder of his C corp. All of his assets went to the Trust, which includes the stock in his Corp. Someone wants to buy the Corp for $500k. This is within 30 days of his passing, so I’m using that
as a FMV of the business (mainly some furniture and Goodwill, client list). It was an insurance business. If the Corp sells these assets, and takes a note, then it will have taxes to pay each year on the money received, then the heirs (2) will also pay taxes
on the “dividend distribution” from the Corp. Can the trust exchange the stock for the “note” and close the Corp? The Trust would then receive the installment payments tax free (except for the interest) because the “step-up” stock basis would be equal to the
selling price since it the value of the business at the time of the step up. Is this correct or am I missing something? Thanks, Paul
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

We need to be clear what exactly the trust selling?
If the trust is selling shares of C-corporation - then you are correct - we may assume that the FMV of shares is $500k. - and use it as the stepped up basis of shares.
So the trust will report the sale of C-corporation shares.
But if you are selling business assets - the situation might be different - and these assets are either sold by the corporation OR distributed to the trust and sold by the trust. So reporting would be more complex in this case.

The trust may sell on installment and receive a note instead of cash - that is not an issue. However - that is a separate issue that will add complications to reporting and there will be interest on the installment obligations which is reported as interest income.

Customer: replied 1 year ago.
The assets would be distributed to the Trust in exchange for the Stock of the Corp.(assuming equal value based on step up basis). The Trust would then sell the assets and take the note. The Corp has nothing left in it, so it would be closed. The Corp would have no tax consequences upon closing. Is that plausible?
Expert:  Lev replied 1 year ago.

So far - the inherited asset is shares of C-corporation - and shares of C-corporation get stepped up basis - assuming $500k.

Assets that are owned by the corporation are NOT inherited and we need to use their original basis.

First step

When assets are distributed from the corporation to the shareholder (the estate) - they are treated as sold on the corporate tax return - and the corporation will recognize gain.

Second step

That gain is distributed to the shareholder as dividends.

The rest is distributed as non-cash distribution.

Both are reported on form 1099DIV.

Next step - dissolution of the corporation reported by shareholder as the sale of shares where the basis is a stepped up basis (for inherited shares) and non-dividend distribution is the sale price. So - there likely will be capital loss.

For distributed business assets - the basis in hands of the shareholder (trust) would be their fair market value.

Expert:  Lev replied 1 year ago.

Now - we need to report the sale of business assets - the form 8594 is used when the ENTIRE business or SUBSTANTIAL part of the business is sold as the asset sale.
However - there will not be any gain as selling price will likely be the same as the basis.
Thus - we need to put numbers into each step - and verify taxable income on each step.

Expert:  Lev replied 1 year ago.

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