Discussion:Removing asset from c corp to place in LLC
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Discussion Forum Index --> Tax Questions --> Removing asset from c corp to place in LLC
| 3 November 2009 | |
| Client took appreciated real estate and transferred it to a c corp wholly owned by herself (don't ask why... long story). Now I'm worried that the property cannot get a step up in basis when she dies because corporations cannot make elections under section 734/754 to adjust the basis after the death of the shareholder. However, an LLC (that chooses to be treated as a partnership or, presumably, a sole proprietor) can choose a 754 election to step up the basis at death (I saw this specifically in a treatise). So, my questions are:
1) If we remove the property from the corporation, does the client have tor recognize a capital gain based on her original basis even though she just transferred the property to the corporation a couple of months ago when it was at the same market value? My feeling is that the answer is yes, but I'm just trying to make sure. 2) Can we elect s corp treatment for the corporation and then convert the s corporation into an LLC? If we do, would that cause the client to have to recognize the gain or is this a solution to our problem? Thanks in advance! | |
| November 3, 2009 | |
| Assuming that her transfer to the corporation was a 351 transaction (and that she had gain at the time), the corporation took her basis in the real estate and she took that basis in the corporation's stock. If this is the corporation's only asset, then, on a liquidation, it will have gain equal to the difference between that and the current value, and she will have gain in the same amount (reduced by the corporate tax).
The corporation can become an S corporation if it wants to. Converting to an LLC either has no tax effect (if it elects to continue to be treated as a corporation) or is a liquidation that will result in double tax. Having the S corporation hold on to the property until the expiration of the sec. 1374 recognition period would at least cut out one tax. | |
| 3 November 2009 | |
| If you keep the property in the C Corp and let it pass to heirs, those heirs get a step up in their basis of the C Corp shares which reflects the FMV of the property it owns. If the heirs want to remove or sell the property, the C Corp does have to report a taxable sale at FMV less the original 351 basis when contributed. Distributing the cash from a sale to the heirs in a liquidation would be compared to the stepped up stock basis at date of death to calculate any shareholder level gain or loss. That helps to mitigate the double taxation of C Corps. You would however be giving up capital gains tax rates on the corporate sale transaction since C Corps don't enjoy that.
Very good example of why you never own real property in a corporate entity. | |
Harry Boscoe (talk|edits) said: | 5 November 2009 |
| whatever you do, do it quickly and very carefully. maybe ... maybe ... the asset can be returned to the shareholder if it's done as some sort of rescission. is this the only asset the corporation has, or has the corporation been around a long time and is it - perhaps - operating a successful business and has | |
| 24 November 2009 | |
| The corporation has only been around for less than a year and holds no other assets. How would I go about doing this rescission you allude to in the safest possible manner? Thanks. | |
Harry Boscoe (talk|edits) said: | 24 November 2009 |
| Consult an attorney. Ask about "abortive incorporation" and its consequences. | |
| 24 November 2009 | |
| I am an attorney. In any case, the main thing I'm worried about is whether we can undo the transfer to the corporation and have that be considered an allowable rescission with no tax consequences. I've come across RR 80-58 that deals with this issue and seems to allow it in some cases. I'm wondering if anyone has any knowledge as to whether a rescission can work on this case and avoid having to recognize gain when the property comes out of the corporation.
Thanks. | |
Harry Boscoe (talk|edits) said: | 25 November 2009 |
| IANAL; According to the Rev Rul, "The legal concept of rescission refers to the abrogation, canceling, or voidÂing of a contract that has the effect of releasing the contracting parties from further obligations to each other and restoring the parties to the relative positions that they would have occuÂpied had no contract been made. A rescission may be effected by mutual agreement of the parties, by one of the parties declaring a rescission of the contract without the consent of the other if sufficient grounds exist, or by applying to the court for a decree of rescission." [emphasis added]
IANAL; Stretch the revenue ruling as needed, get [pay for?] an opinion letter, and git 'er done. | |
| 25 November 2009 | |
| In light of the RR and 3 subsequent PLRs, it seems that rescission can be done as long as you put everyone back in the same position as they were originally and you do it in the same calendar year. There are some more specific facts that were present in the PLR cases that seemed to be factored into the service's allowance of the rescission; but all those factors are satisfied in my case as well.
IAAL and we're going to do the rescission. Thanks for the idea. :) | |
Harry Boscoe (talk|edits) said: | 26 November 2009 |
| You betcha. E-mail me a case of PBR but don't you dare send me a 1099. | |
