Discussion:Installment Sale closing Corp
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Discussion Forum Index --> Tax Questions --> Installment Sale closing Corp
| 10 September 2007 | |
| I have a new client who sold business name and assets etc of an S-Corp and kept the S-Corp open. The sale was under an installment agreement and they have received payments for the last 3 years, reported on 6252 in the S-Corp and allowed to flow through.
If we now close down the S-Corp what happens to the installment sale are we triggering a sale of the balance or does it just transfer to the individual? Any help would be appreciated. | |
| 10 September 2007 | |
| If the installment obligation is distributed during a 12-month liquidation, the distribution does not accelerate the gain recognition at the corporate level. In addition, the receipt of the installment obligation by the shareholder is not a taxable event. Instead, the receipt of principal payments on the installment obligation is treated as a payment for the shareholder's stock. See Sec. 453(h) and Sec. 453B(h). | |
| September 11, 2007 | |
| And, just in case somebody stumbles across this when doing research for a C-Corp, the answer is different. If the distribution occurs within the 12-month period, C-Corp DOES accelerate gain and shareholder can defer recognition of liquidating distribution based on principal payments of installment obligation. | |
| September 11, 2007 | |
| Huh. Didn't know that. When you guys say 12 month liquidation...what do you mean? From what date? | |
| 11 September 2007 | |
| 453(h) says 'beginning on the date a plan of complete liquidation is adopted and the liquidation is completed during such 12-month period'.
So it sounds like I do have a NEW installment sale for the shareholder in respect of payments for the shareholders stock with a reduction in the original gain due to the basis in the stock? or am i confused?? | |
| September 11, 2007 | |
| I think you are confused. When the corp liquidates it will assign the original installment sale to the SH. In your case, I believe it is too late. The corp needed to liquidate within 12 months of the original sale. | |
| 11 September 2007 | |
| Ahhhh eureka! Within 12 months would be treated as payments in respect of sale of stock.
In my case there is still no taxable event at the corporate level and the installment sale is assumed by the shareholder, correct? I guess this assumes that the shareholder has enough basis to cover the note be distibuted to them? Thanks guys this is so helpful! | |
| September 11, 2007 | |
| Allow me to rephrase my prior post, the sale that gave rise to the installment obligation must occur within 12 months after the plan to liquidate is adopted.
Your sale occured before the plan to liquidate, therefore the S-Corp will recognize the gain immediatly which will pass thru to the SH. The SH will pay tax on this now, and the future installment payments are tax-free as they are a return of SH basis. | |
| 12 September 2007 | |
| Good catch. Didn't notice that the installment obligation was created before the plan of liquidation was adopted. | |
| 12 September 2007 | |
| After spending quite a lot of time on this and thanks to Rileys original post I noticed 453B(h) states -
(h) Certain liquidating distributions by S corporations If -
(1) an installment obligation is distributed by an S
corporation in a complete liquidation, and
(2) receipt of the obligation is not treated as payment for the
stock by reason of section 453(h)(1),
then, except for purposes of any tax imposed by subchapter S, no
gain or loss with respect to the distribution of the obligation
shall be recognized by the distributing corporation. Under
regulations prescribed by the Secretary, the character of the gain
or loss to the shareholder shall be determined in accordance with
the principles of section 1366(b).
As PVVCPA mentioned I believe that it is different for C-Corps. Thanks for your help guys! | |
Pat taylor (talk|edits) said: | 25 February 2008 |
| Hi Guys,
I am really new to this. I have a client who sold his assets and name to another company with an installment sale agreement for 3 years. How do I report this on the 1120S? and 2007 was the year of the contract. So do we have to do another 2 years returns? | |
