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This pertains to a C Corporation. Facts: -3 shareholders…

This pertains to a C...
This pertains to a C Corporation.
Facts:
-3 shareholders each own 1/3 of corporation.
-2 of the 3 shareholders sell their shares to the 1 remaining shareholder and a new (individual) shareholder
-C Corporation is now owned 50/50 by two individuals
-This was structured as a stock purchase agreement
(I don't believe 338 comes into play as the buyer was an existing shareholder (individual) and a new individual)
- Subsequent to the sale, the new shareholders added $300,000 to the corporation as a capital infusion (not a loan)
- One shareholder loaned the corporation an additional $100,000.Questions:
- I'm unclear on the tax treatment to the C Corporation. I am very clear on the tax treatment to the individual sellers and buyers.
- If the new shareholders sign a personal promissory note to the outgoing shareholders, is a liability created on the corporate books? If no, what if the promissory note is guaranteed by the corporation? (Promissory note is not in default.)
- Is goodwill created on the corporate books? Again, this is a stock purchase and not an asset purchase. If GW on books, what about tax return balance sheet? No step-up for tax purposes. No existing goodwill on books prior to stock purchase agreement.
- How to record, for tax purposes, capital infusion?
- If corporation pays promissory note (not in default), isn't that treated as the same as a cash distribution to the existing / new shareholder benefiting from the payment?
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Answered in 16 minutes by:
1/20/2018
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,432
Experience: Former IRS Revenue Agent
Verified

Dear Customer,

Provided that all background information provided is true, and this is not an LLC reporting as C Corporation.

1) Question: If the new shareholders signed a personal promissory note to the outgoing shareholders, is a liability created on the corporate books? If no, what if the promissory note is guaranteed by the corporation? (Promissory note is not in default.)

Answer: I am assuming that the new shareholder does not have enough money to pay the two outgoing shareholders which is the reason the promissory note was written. This note should have no effect on the corporation.

The new shareholder still owns 50%. If he cannot pay, he personally owes the two outgoing shareholders the money he signed.

If the situation or consequence is different than this, then, it was not as background described that two outgoing shareholders sold to the new shareholder.

2) Question: Is goodwill created on the corporate books? Again, this is a stock purchase and not an asset purchase. If GW on books, what about tax return balance sheet? No step-up for tax purposes. No existing goodwill on books prior to stock purchase agreement.

Answer: For C Corporation, the new funds coming in is additional capital contribution against cash increase. Nothing changes. The two owners are still 50% and 50%.

3) Question: How to record, for tax purposes, capital infusion?

Answer: See answer to #2.

4) Question: If corporation pays promissory note (not in default), isn't that treated as the same as a cash distribution to the existing / new shareholder benefiting from the payment?

Answer: Do not let the corporation pay the promissory note. Have the new shareholder pay the promissory note him/herself. The distribution is withdraw of capital account if it is not evenly distributed to both shareholders which would then be dividend. If the corporation pays the promissory note, it could cause the corporation in the future have legal issues involved in this note and relationship between the new shareholder and the two exited shareholders. Have the new shareholder withdrew his additional capital contributed. Then, he can use the money any way he wants to.

Please feel free to follow up.

Regards,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP,, IMTA

Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,432
Experience: Former IRS Revenue Agent
Verified
Dr. Fiona Chen and 87 other Tax Specialists are ready to help you
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Customer reply replied 6 months ago
Thank you. I inherited a mess created in part by the shareholders and in part by a previous CPA. The last tax return (after the stock purchase) shows liabilities that don't exist and goodwill that doesn't exist. To complicate matters, the 'new' 50% shareholder bought out the other 50% shareholder 11 months later creating additional promissory notes guaranteed by the corporation. It may be time to simply kick the entire a/c back to the former CPA and let his firm sort through it. I appreciate your answer. It confirms what I thought and what my research reflected but I didn't want to be 'guilty' of missing the obvious.

Dear Customer,

You are welcome. Thank you.

Regards,

Fiona

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