Discussion:Loss C-Corp converts to an LLC

The shareholders decided to go their separate ways and dissolve the C-Corp. The newly formed LLC will assume the outstanding loans and take possession of the land as an asset. As I said, the shareholder have agreed to forgive the loans due to them ($178k). No section 1244 stock.

My questions are these: 1. Can I simply move the land asset and loans over to the new LLC at current book value without any gain/loss? I can't see a way of doing that and having the zeroing journal entry work. 2. What happens to the forgiven shareholder loans - are they ordinary income to the C-Corp? If I do that, only a portion of the NOL from previous years is used to offset this because of Section 382 limits. 3. What becomes of the remaining NOL? Can I attribute some of it to the value of the land upon transfer to maybe offset gains? 4. Do the shareholders receive any taxable income as a result?

Thank you.

You may have ordinary COD income from the shareholder loans that can't be repaid. Research that. Sounds like the corp may be insolvent. If not they would be reclassified as a non taxable increase to equity. Then they would be either added basis to the stockholders or separate capital losses on their personal returns.

Unused NOL's would die with the C Corp. The shareholders must have invested most of the cash to fund those expenses so sounds like they have significant stock basis they can't recover (=capital losses)?

Work through the numbers to see if your shareholders received a net gain or loss with the land at FMV less the debt and less their stock basis.

Note I am assuming none of this discussion applies to developer status where the land is inventory.

And why wasn't an election made for all those years to capitalize the interest and property taxes into the basis of the land?

Putting the property into a new LLC starts off with newly established FMV value and the debt. No preservation of prior NOL's to deduct if sold with a future rise in value. Payments of interest would be a flow through item to your TP (TP's if multiple). Deduction of that interest on the TP's return is controlled by the purpose of the debt. Investment property? Sch A investment expense allowed to the extent of investment income with potential carryovers. You could also consider making the election to capitalize the interest and taxes to add to the basis of the land.

Again, the election was never made to capitalize the interest - they were just waiting for the big payoff created by the land sale, in which they would use the losses to offset it. No one thought that they would one day dissolve and lose the NOL's.

Going forward in the new LLC, how is the election to capitalize interest made? This may provide a better tax benefit than simply deducting investment expense on Sch A each year.

Carrying Charges Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Certain carrying charges must be capitalized under the uniform capitalization rules. (For information on capitalization of interest, see chapter 4.) You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible.

You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. For unimproved and unproductive real property, your election is good for only 1 year. You must decide whether to capitalize carrying charges each year the property remains unimproved and unproductive. For other real property, your election to capitalize carrying charges remains in effect until construction or development is completed. For personal property, your election is effective until the date you install or first use it, whichever is later.

How to make the election. To make the election to capitalize a carrying charge, write a statement saying which charges you elect to capitalize. Attach it to your original tax return for the year the election is to be effective. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach the statement to the amended return and write “Filed pursuant to section 301.9100-2” on the statement. File the amended return at the same address you filed the original return.