Discussion:SCorp s/h purchase of asset

I found this IRS examining process, "4.11.7.6 (12-01-2004)Corporation's Gain or Loss" http://www.irs.gov/irm/part4/ch10s03.html#d0e194476

The loss appears to be limited by code section 336(d)

A shareholder's basis in property received pursuant to a complete corporate liquidation is the fair market value of the property received. This is because the transaction is treated as a taxable sale or exchange of the property. It is as though the shareholder sold its stock in the corporation for the property received. The shareholder's amount realized on this sale or exchange is the fair market value of the property on the date of distribution (Code Sec. 334(a)).

As the shareholder assigns a new fair market value basis to property received, the shareholder may not tack onto its holding period that of the distributing corporation.

In general, both gains and losses are recognized by shareholders that receive distributions of corporate property, including money, in complete redemption of their stock holdings. The shareholder's recognized gain or loss is computed as the fair market value of the money and other property received on the date of distribution (the shareholder's amount realized on the exchange) less the shareholder's adjusted stock basis (Code Sec. 1001(a)). The gain or loss is generally capital in nature (Code Sec. 1221).

We've considered several options for one S corporation owner (both over 20%) to sell to another. One of the attorneys thinks we should look at the owners liquidating and then sale to the other owner at a much higher price that would be indicated by the cost of the current S corporation assets. We have never purchased intangible assets in this corporation. Since section 336 says the "assets" are to be liquidated at FMV, I was hung up on the fact that one of the owners after liquidating would be selling his personal goodwill to the other owner. Is there any danger that the FMV of intangibles would be challenged at the corporate liquidation. The attorney thinks that all goodwill dies at liquidation so the goodwill is obviously ZERO. I wasn't comfortable making that a ZERO when the majority owner was turning around and selling HIS goodwill for a larger number than all of the other amounts in the deal after he receives his S corp liquidating distribution. Has anyone done a liquidation and sale like this or have any help on how to separate the FMV of corporate goodwill or other intangibles from personal professional goodwill when liquidating a S corporation?

The corp will report a loss on the distribution, since FMV of distributed assets is less than cost basis.

The loss will flow to shareholders via K-1. The loss will be ordinary.

The loss will reduce shareholders' tax basis in the corp.

Have the corp issue the shareholders a Form 1099-DIV and report on it ... the FMV of those distributed assets.

The shareholders' tax basis in the corp will increase by the FMV of the distributed assets.

Report the liquidation of corp stock on shareholders' Schedule D ... Sales price = FMV of assets received ... and cost = tax basis in stock.

If this is going to be the liquidating distribution, won't the shareholders' tax basis in the corporation's stock remain unchanged by the distribution? The stock is being surrendered.

I have some complex ideas, but I am going to pass on sharing those for now and fast forward your transaction above. In your transaction, what will happen after the new owner purchases the intangible of the retiring owner? Is the new owner going to recapitalize the old corporation with his new asset? Is the new owner opening up his own business? Basically, how will the new owner get his new amortization deduction?