Discussion:Splitting a "C" Corp into 2 "C" corps.
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Discussion Forum Index --> Tax Questions --> Splitting a "C" Corp into 2 "C" corps.
| 9 September 2007 | |
| I am a CPA and need help with the following problem.
Facts: I have a "C" corp with 2 50/50 individual shareholders. They have operated this "C" corp like this for 3 years and now want to go there seperate ways. What recommendations does someone have to accomplish this????? No input is needed on the conversion to "S" corp, personal holding company, built-in-gains and net excess passive income. | |
TheTinCook (talk|edits) said: | 9 September 2007 |
| Well, you can't do this as a tax-free reorg.
I'd go with a redemption of the stock which would result in the smallest gain to the corp. | |
| September 9, 2007 | |
| Was the title on the real property really ever changed over to the Corp? | |
| September 9, 2007 | |
| No input is needed on the conversion to "S" corp, personal holding company, built-in-gains and net excess passive income.
Huh. OK, then, can we comment on putting real estate inside a corp, or is that out of bounds, too? | |
| September 9, 2007 | |
| JR1, It's a trap or a trick question. RD is trying to steer us away from the obvious answer. | |
| September 9, 2007 | |
| Dang. Death is usually the only way out. Now have to think of something else. | |
TheTinCook (talk|edits) said: | 9 September 2007 |
| "TinCook, redeem with what?"
A combination of the land or securities and other corporate property. I think it would be better then liquidating the corp, at least tax wise. This is how I see it: A and B are in business together. The are 50/50 shareholders of a subchapter C corporation called AB Inc.A contributed land for his share of stock, B contributed securities for his share of stock. A and B no longer want to do business together. One of the options is a stock redemption. AB Inc would buy A's shares with the land and/or other property. Or AB Inc could buy B's shares with the securities and/or other property. Hopefully AB Inc would choose the option that creates the least gain for the corp. | |
| September 9, 2007 | |
| So only 1/2 of the gain will be recognized by the corp, and the other 1/2 will remain trapped. | |
| 9 September 2007 | |
| TinCook: "Well, you can't do this as a tax-free reorg."
As long as the continuity of business enterprise, continuity of shareholder interest, and business purpose requirements are met, what would prevent a Type D reorganization to split up the investment activity and the real estate activity? | |
TheTinCook (talk|edits) said: | 9 September 2007 |
| "As long as the continuity of business enterprise, continuity of shareholder interest, and business purpose requirements are met, what would prevent a Type D reorganization to split up the investment activity and the real estate activity?"
From the OP, it sounded like the shareholders no longer wanted to do business together at all. As if they had a falling out. This is just an assumption on my part. Thus a tax free reorg would not be an option because the companies would still be tied together. Its that whole continuation of ownership thing. In a type D reorganization the "old" corp would own all the shares of the "new" corp, if only old corp assets were transferred. The corps would be intertwined, and if the shareholders no longer want to do business with each other, why would they want that? "So only 1/2 of the gain will be recognized by the corp, and the other 1/2 will remain trapped." If the shareholders wanted to continue there business' seperatly, how would this be a bad thing? | |
| 10 September 2007 | |
| TinCook: "Thus a tax free reorg would not be an option because the companies would still be tied together."
How would the corps be tied together under Type D reorganization? If structured properly, each shareholder would end up as a shareholder of his/her respective corporation. | |
| 10 September 2007 | |
| Don't think a Type D reorg will work since the 5-year active business requirement has not been satisfied. | |
| 10 September 2007 | |
| Yes, they would have wait a couple of years to satisfy the requirements but may be willing to do that. | |
| September 10, 2007 | |
| Even if they waited a couple of years, the activities may not satisfy the active trade or business requirement. See Reg. 1.355-3(b)(2) which provides that an active trade or business does not include (i) the holding for investment purposes of stock, securities, land or other property or (ii) the ownership and operation (including leasing) of real or personal property used in a trade or business, unless the owner performs significant services with respect to the operation and management of the property. | |
