Discussion:S Corp purchased by C Corp
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Discussion Forum Index --> Tax Questions --> S Corp purchased by C Corp
| 16 January 2007 | |
| 100% of S Corp stock, (which had been C Corp until 2 years ago) was sold to a new C Corp. (Without checking with their CPA, of course.) S Corp now has lost S status. OldSCorp has all the assets that NewCCorp will use in operating NewCCorp business. Can OldSCorp be merged into NewCCorp? From my research, it looks like a merger is when shares of stock are exchanged and that's not the case here--OldSCorp stockholders sold their shares for $600,000 cash to the NewCCorp and have no ownership in the NewCCorp. If a merger is possible, will the BIG tax come into play for the OldSCorp?
I think the result of how clients structured the deal is that both corporations must now file Form 1120, although NewCCorp could elect S status if we decide to do that. Or I think the NewCCorp could file a consolidated return with OldSCorp. Does anybody have any ideas on how to make this come out better. By the way, the C Corp also bought real estate from another entity! Again, with no input from me. | |
| January 16, 2007 | |
| This is a Riley question, but generally, I think Sec. 338 applies, and yes, BIG tax should hit...wait for Riley. | |
| January 16, 2007 | |
| And they need to transfer that RE ASAP while they still can, into an LLC instead. | |
| 16 January 2007 | |
| What do you think is the problem? Of course they can merge. Or OldSCorp can liquidate.
BIG tax is for S corporations that were formerly C corporations, not the other way around. | |
| 16 January 2007 | |
| And now it is again, and will pay corporate tax on all of its income. That a portion would have been corporate-taxable if it still were an S corporation isn't relevant. And, anyway, nothing will be taxable on the merger.
Dsmith53, how long ago was the sale closed -- is it too late to make a 338 election? | |
| January 16, 2007 | |
| LH2004 - why do you think a Section 338 election is advantageous in this situation? | |
| 17 January 2007 | |
| Sorry, of course, I meant a 338(h)(10) election. Whether it's good or bad depends on a number of things, including how much BIG there was, but it might be quite advantageous. | |
| January 17, 2007 | |
| OK, agreed - I didn't think you meant Sec. 338, but thought I'd ask in case you had some unusual strategy in mind. | |
| 17 January 2007 | |
| LH2004, the sale just closed a couple of weeks ago. Also, how is it possible that "nothing will be taxable on the merger" as you said. Don't mergers involve having the stockholders of one corporation exchange their stock for shares in another corporation? The NewC Corporation is the only stockholder in the OldSCorp so how can an exchange take place? You also said OldS can liquidate but wouldn't that create taxable income (the FMV of assets in OldS are greater than basis. I'm trying to do this tax-free but it might not be possible.
Thanks to everyone who answered. | |
| 17 January 2007 | |
| Under corporate law, a merger is where two corporations turn into one, with one of them ceasing to exist. The stockholders of the non-surviving corporation can get stock in the surviving corporation, money, or anything else at all -- or nothing.
Under sec. 332, there's no income to NewC when its 80%+ subsidiary OldSCorp completely liquidates. Under sec. 337, there's no income to OldSCorp when it completely liquidates in a transaction subject to sec. 332. | |
| 17 January 2007 | |
| Not to belabor the point, but there are usually statutes that make a parent-sub merger especially easy. In Delaware, sec. 253 of the General Corporation Law says that the board of directors of the parent can cause its 90%+ subsidiary to be merged into it without the need for any further action (except that the minority stockholders, if any, would be entitled to appraisal if demanded). Most states have similar laws. | |
