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Closing a C Corporation

 
 
HW \Skip\ Weldon
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      04-01-2004, 12:31 PM
Person sold most of the business assets of C Corp. He still
owns 100% of corporate stock. Is in process of selling two
pieces of real estate owned by corporation. When sold, I
presume that the capital gain on the real estate will be
taxed to corporation.

The owner is retired, for personal reasons wants to wind-up
the corporation, and I have sent them to a CPA-tax attorney
for help. But for my own info, two questions:

1. Assume that corporate assets (ultimately cash) will also
be taxed to her as regular income. Yes?

2. The asset sale is on a 3-year note (monthly payments with
balloon at end.) Note is held by, and payments made to, the
corporation. When he terminates the corporation, what are
the tax ramifications of the note?

I understand that there are negative tax consequences with
this, but for other reasons he needs the money (however beat
up by taxes).

Comments appreciated.

-HW "Skip" Weldon
Columbia, SC

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Stuart O. Bronstein
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      04-02-2004, 10:01 PM
"HW \"Skip\" Weldon" <(E-Mail Removed)> wrote:

> Person sold most of the business assets of C Corp. He still
> owns 100% of corporate stock. Is in process of selling two
> pieces of real estate owned by corporation. When sold, I
> presume that the capital gain on the real estate will be
> taxed to corporation.
>
> The owner is retired, for personal reasons wants to wind-up
> the corporation, and I have sent them to a CPA-tax attorney
> for help. But for my own info, two questions:
>
> 1. Assume that corporate assets (ultimately cash) will also
> be taxed to her as regular income. Yes?


If handled improperly, yes. If it's handled properly it
will be taxed as capital gain.

> 2. The asset sale is on a 3-year note (monthly payments with
> balloon at end.) Note is held by, and payments made to, the
> corporation. When he terminates the corporation, what are
> the tax ramifications of the note?


Assuming it's done properly, to the extent the note
represents profit on the sale it will be capital gain. To
the extent it represents interest it will be interest.

Stu

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Gene E. Utterback, EA
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      04-02-2004, 10:40 PM
"HW "Skip" Weldon" <(E-Mail Removed)> wrote:

> Person sold most of the business assets of C Corp. He still
> owns 100% of corporate stock. Is in process of selling two
> pieces of real estate owned by corporation. When sold, I
> presume that the capital gain on the real estate will be
> taxed to corporation.
>
> The owner is retired, for personal reasons wants to wind-up
> the corporation, and I have sent them to a CPA-tax attorney
> for help. But for my own info, two questions:
>
> 1. Assume that corporate assets (ultimately cash) will also
> be taxed to her as regular income. Yes?
>
> 2. The asset sale is on a 3-year note (monthly payments with
> balloon at end.) Note is held by, and payments made to, the
> corporation. When he terminates the corporation, what are
> the tax ramifications of the note?
>
> I understand that there are negative tax consequences with
> this, but for other reasons he needs the money (however beat
> up by taxes).


As I understand it, and with the caveat that I'd have to do
the research, here's what I see:

1 - if the corporation terminates while the installment note
is still open, the entire uncollected balance becomes
taxable income. There would be no more deferral available;
2 - keep in mind that C corporations do NOT get the benefit
of the long term capital gain tax rates, so the corp will
pay regular income tax on the gain from the sale;
3 - the money distributed to the stockholder will be income,
but I'm not sure of the character. Assuming the corp stays
alive and collects on the note, the money paid to the
stockholder may qualify as dividends. If the corp
liquidates it may be that the money paid to the stockholder
is a liquidation of their investment, which could be treated
as a capital gain item - again, I'm not sure.

Good luck and please let us know how this works out.
Gene E. Utterback, EA

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Lawrence Brown
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      04-02-2004, 11:57 PM
"HW "Skip" Weldon" <(E-Mail Removed)> wrote:

> Person sold most of the business assets of C Corp. He still
> owns 100% of corporate stock. Is in process of selling two
> pieces of real estate owned by corporation. When sold, I
> presume that the capital gain on the real estate will be
> taxed to corporation.
>
> The owner is retired, for personal reasons wants to wind-up
> the corporation, and I have sent them to a CPA-tax attorney
> for help. But for my own info, two questions:
>
> 1. Assume that corporate assets (ultimately cash) will also
> be taxed to her as regular income. Yes?
>
> 2. The asset sale is on a 3-year note (monthly payments with
> balloon at end.) Note is held by, and payments made to, the
> corporation. When he terminates the corporation, what are
> the tax ramifications of the note?
>
> I understand that there are negative tax consequences with
> this, but for other reasons he needs the money (however beat
> up by taxes).


When the C corporation sells assets, it recognizes gain
taxed at normal corporate rates (no special capital gains
rate). If the corporation stays in existence, it can report
the gain on the installment method, except for inventory and
equipment (depreciation recapture).

Distributions from the corporation would normally be taxed
in full as dividends (currently at a 15% rate). If the
corporation is liquidated, capital gains tax is normally
imposed on the difference between the value of the
liquidation proceeds and basis in the stock. A specical
rule (IRC section 453(h)) provides for deferred (installment
sale) treatment of the note under certain circumstances that
might be applicable here.

Larry

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Phoebe Roberts, EA
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      04-05-2004, 07:51 PM
HW "Skip" Weldon wrote:

> 1. Assume that corporate assets (ultimately cash) will also
> be taxed to her as regular income. Yes?


I believe that liquidating distributions are taxed at
capital gains rates, but since a normal dividend would
almost certainly be "qualified," it probably doesn't matter.

> 2. The asset sale is on a 3-year note (monthly payments with
> balloon at end.) Note is held by, and payments made to, the
> corporation. When he terminates the corporation, what are
> the tax ramifications of the note?


The distribution of the note would be taxable (as a dividend
or as a liquidating distribution) at the time. Interest
would be taxable as received.

Phoebe

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L. T. Portella
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      04-05-2004, 09:48 PM
"Stuart O. Bronstein" <(E-Mail Removed)> wrote:
> "HW \"Skip\" Weldon" <(E-Mail Removed)> wrote:


>> Person sold most of the business assets of C Corp. He still
>> owns 100% of corporate stock. Is in process of selling two
>> pieces of real estate owned by corporation. When sold, I
>> presume that the capital gain on the real estate will be
>> taxed to corporation.
>>
>> The owner is retired, for personal reasons wants to wind-up
>> the corporation, and I have sent them to a CPA-tax attorney
>> for help. But for my own info, two questions:
>>
>> 1. Assume that corporate assets (ultimately cash) will also
>> be taxed to her as regular income. Yes?


> If handled improperly, yes. If it's handled properly it
> will be taxed as capital gain.


how can it be handled properly??????????????????????????

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Stuart O. Bronstein
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      04-07-2004, 08:30 AM
"L. T. Portella" <(E-Mail Removed)> wrote:
> "Stuart O. Bronstein" <(E-Mail Removed)> wrote:
>> "HW \"Skip\" Weldon" <(E-Mail Removed)> wrote:


>>> The owner is retired, for personal reasons wants to wind-up
>>> the corporation, and I have sent them to a CPA-tax attorney
>>> for help. But for my own info, two questions:
>>>
>>> 1. Assume that corporate assets (ultimately cash) will also
>>> be taxed to her as regular income. Yes?


>> If handled improperly, yes. If it's handled properly it
>> will be taxed as capital gain.


> how can it be handled properly??????????????????????????


See IRC sections 331 and 332. It's not as simple as it
looks, and you're not paying me enough to produce a 40 page
report on the subject.

Stu

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