Closing a C Corporation

Discussion in 'Tax' started by HW \Skip\ Weldon, Apr 1, 2004.

  1. 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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    HW \Skip\ Weldon, Apr 1, 2004
    #1
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  2. "HW \"Skip\" Weldon" <> 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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    Stuart O. Bronstein, Apr 2, 2004
    #2
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  3. "HW "Skip" Weldon" <> 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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    Gene E. Utterback, EA, Apr 2, 2004
    #3
  4. "HW "Skip" Weldon" <> 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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    Lawrence Brown, Apr 3, 2004
    #4
  5. 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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    Phoebe Roberts, EA, Apr 5, 2004
    #5
  6. "Stuart O. Bronstein" <> wrote:
    > "HW \"Skip\" Weldon" <> 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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    L. T. Portella, Apr 5, 2004
    #6
  7. "L. T. Portella" <> wrote:
    > "Stuart O. Bronstein" <> wrote:
    >> "HW \"Skip\" Weldon" <> 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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    Stuart O. Bronstein, Apr 7, 2004
    #7
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