Discussion:S corp spinoff -- restaurant business and real estate
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Discussion Forum Index --> Tax Questions --> S corp spinoff -- restaurant business and real estate
| 21 August 2009 | |
| I have found other discussions on this general topic, but nothing addressing this specific situation. My clients own an S-Corp which operates a restaurant. In addition to the business, the corp owns the restaurant building and an adjoining house which is rented to residential tenants. Clients have a potential buyer who is interested in the business but does not want to buy the real estate, so they want to divide the corp into two separate entities, with A owning and leasing out the real estate and B owning and operating the business.
Can this be accomplished as a tax-free spinoff under Section 355? I am concerned that it would not meet the active trade or business requirement because it sounds a lot like Example 13 here (scroll down to the last page). Would it make a difference if A retains all responsibility for maintaining the property, paying the taxes, etc.? Is there any other way to structure this which would make sense? Thanks in advance for your thoughts. | |
| 21 August 2009 | |
| why don't they just sell the assets of the business instead of spinning it off and selling the stock? | |
| 21 August 2009 | |
| Sorry, I should have clarified that the buyer would like to buy in gradually -- i.e., he would like to buy an additional 20% share each year, so that he will not end up owning the whole business until after 5 years. If the corporation is still a single entity during that period, I'm not sure how to structure the sale so the buyer is buying only 20% of the business assets each year. | |
| August 22, 2009 | |
| Contribute the restaurant business to an LLC, have the corporation sell interests in the LLC to the buyer as slowly as it wants? | |
| 22 August 2009 | |
| LH2004, that sounds promising. Would the contribution itself be a tax-free event? | |
Harry Boscoe (talk|edits) said: | 22 August 2009 |
| Yes, tax-free. At first, the LLC will be a single-member LLC, and it will be *disregarded* for income tax purposes, so the contribution of the "restaurant assets" won't even be seen, for tax purposes. But document the contribution very carefully; maybe even get the purchaser involved at this point so's there's a business tension driving the identification of the "restaurant assets." Because, when the purchaser buys a piece of the LLC, I *think* it - the LLC - sort of magically appears on the radar screen as a *partnership* for tax purposes and that there's a Section 721 (that's tax-free) transaction for tax purposes that accounts for the tax-free contribution of the assets of the LLC to the LLC. This is a little spooky. The LLC, which doesn't exist, owns the *restaurant assets* until it materializes as a partnership and contributes those assets to itself, sorta. Maybe there's a clarifying example somewhere in the Regs... Anybody? | |
| 22 August 2009 | |
| oh boy, inside and outside basis, guaranteed payment issues, and SE tax galore! | |
Harry Boscoe (talk|edits) said: | 22 August 2009 |
| Shifting profits, changing bases, lots of work for tax accountants! | |
| 22 August 2009 | |
| 'oh boy' was meant to mean 'yippee'
but I can see where it might have been interpreted as 'aw shi7' | |
Harry Boscoe (talk|edits) said: | 22 August 2009 |
| I took the "Oh Boy" as a "Yippee." Only the SE Tax is an "Aw Shi7."
How do we convince our client how important, how valuable, and how invaluable our work is, however, when it's so totally arcane that he, the client, will *never ever* understand it, I mean it's so abstruse that we don't even *try* to explain it to him...? [What does "abstruse" mean?] | |
Harry Boscoe (talk|edits) said: | 22 August 2009 |
| Does the S corp have to get into a *lease* with its *tenant* now? Oy. | |
| 22 August 2009 | |
| Harry, rather than describing it as the LLC contributing the assets to itself, isn't it more accurate to say that the contribution is being made by the corporation and the new buyer? The IRS does not view the original "contribution" from the corporation to the LLC as a contribution, because the corp and the LLC are one and the same.
This ruling seems to provide some clarification: rr-99-5 | |
Harry Boscoe (talk|edits) said: | 22 August 2009 |
| I was exercising my .. uh .. literary license. The LLC already owns the assets, clearly, but contributes them to itself, for tax purposes, because it was disregarded up until it got a second member. Sort of a conceit if you will. Or, we could have the LLC make the "treated as an association" election and the S corporation make the QSSS election, which would add another dimension...
It ill behooves me to wander, unequipped as I am, nearer and nearer to the mine field of the written word.... But no, the *buyer* doesn't get these assets, not at all, not now. Not even 20%. He gets LLC, all net, a little bit at a time. Or would be make it an installment sale? | |
