Discussion:Stepped Up Basis - Death of S Corporation Sole Shareholder
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Kim Marie CPA (talk|edits) said: | 22 August 2006 |
| Sole Shareholder of a subchapter S corporation dies. The company owns 5 pieces of rental property. The surviving spouse wants to sell one of the properties but keep renting the others for continuing income stream. The appraiser has set the value of the property within the corporation at approximately $2.5 million on date of death. The company has an adjusted basis of $350K. I am assuming the surviving spouse's stock basis in the S corp is $2.5 million. However the stepped up basis as I understand it does not effect the property within the S corp. If the spouse sells the one piece that has an adjusted basis of $90K for $600K, will she pay tax on the corp. gain of $510K? Or should she distribute all of the property prior to the sell and liquidate the old S and re-contribute the property to a new LLC?
And one more twist, this S-Corp had about $200,000 of C-Corp earnings and profits prior to making an S-election for 1988. Normal treatment would dictate dividend treatment, but under these circumstances, would their be a difference. I have not had this issue before. Any help would be greatly appreciated. | |
| 22 August 2006 | |
| Mirror Subsidiary acquisitions which were outlawed allowed assets to be dropped into a subsidiary and then sell stock for stock with no gain. There are, however, certain remanats of the mirror technique that may still work. You can read about these technique in Bittker and Eustice, Federal Income taxation of Corps.& Shareholders under Affilliated Corporations. My Sixth edition is to old to be relevent. Hope this gets you started in the right direction. One note. You would need a tax attorney use these techniques but the potential tax savings would far outway the costs. | |
| 22 August 2006 | |
| Interesting point raised by JCTMST - some type of tax-free spin-off, reorg or drop-down to a subsidiary. However, regardless of what you do, I would think you still have the real estate basis trapped inside the Corporation and if you sell the stock, any informed buyer would factor in the inherent tax liability into his or her purchase offer.
If you distrubute the real estate from the S Corp you'll trigger the "inside" gain as well. Crappy problem to have (tax-wise) but, this is better than having the property in a C Corp. | |
| 22 August 2006 | |
| Liquidation of S Corp would be the prefeerd route. Gain recognized increases basis and loss on stock nets Sec. 302 | |
Charlietuna54 (talk|edits) said: | 22 August 2006 |
| Kim Marie.... I think the following will work. I assume the C-corp E&P will probably be a qualifying dividend. I am guessing on that though....
1) Original S-Corp owner dies, leaving shares of stock to heir worth $2.5 million. Heir has $2.5 million outside basis. 2) Heir wants the properties out of the corporation, and decides to distribute them. 3) In order to distribute them, they must be "sold" at the corporate level. Corp reports the sale on the books (and tax return) at the properties FMV, and reports $2.5 million gain (keep it simple) 4) The debit side of the transaction - instead of cash for a sale - is stockholder distributions 5) S-Corp Heir-owner has basis of $2.5 million (outside), plus $2.5 million (inside) from the gain on the sale, less $2.5 million (inside) because of the distribution, equals $2.5 million (outside). 6) S-Corp Heir-owner terminates the S-Corp, disposes of the stock, and reports a $2.5 million loss on the Sch D (equal to remaining outside basis) 7) Individual's Sch D shows $2.5 million loss on disposal of stock, and $2.5 million gain passed through on the Sch K-1 ... net gain is zero 8) S-Corp Heir-owner now has a few rental properties on the Sch E, and "paid" $2.5 million for them, and starts depreciating them 9) Former S-Corp Heir-owner loves her CPA, and happily pays said CPA $50,000 in appreciation 10) CPA takes a nice vacation to Europe | |
| August 23, 2006 | |
| Do as Dennis says. This is the technique that works for getting RE out of the corp. The stock value steps up to the value of all the underlying RE since that's all that's in there. Get it all out. No tax. And don't ever put it back into a corp. Simple. | |
Kim Marie CPA (talk|edits) said: | 23 August 2006 |
| I thank all of you for your help. The solution does appear to simple, but I am very curious as to what JCTMSTx's response --
JCRMSTx: Thank you - I appreciate your comment. What do you think about the more simpler approach presented by Dennis and elaborated on by CharlieTuna? - And agreed upon by JR1? Do you see any reason why this would not work?" | |
| 23 August 2006 | |
| Not sure, but I think that mirror subsidiary transactions applied to consolidated groups (which an S corp cannot be part of). I agree that liquidation is probably the best approach. Note that no special "sale" must occur to get this treatment. The liquidating distribution triggers gain as though it were sold. See Sections 331 & 336.
Note also that a portion of the gain may be ordinary income under sections 1245 and/or 1250. To the extent that there is any ordinary gain, there will not be a perfect offsetting of gains with losses. Also, make sure that the liquidating distribution and the actual liquidation occur in the same year. Otherwise you can end up with a gain in one year that cannot be offset by the loss in the following year. | |
Kim Marie CPA (talk|edits) said: | 24 August 2006 |
| Thank you all very much! | |
| 24 August 2006 | |
| Hi sorry Kim but you probably blew your S election way back in 1992 due to C corp earnings if your rental income exceeded 25% of your gross reciepts for three consecutive years. Run for your malpractise carrier. CPA does not take vacation CPA goes to jail. Hurry up and make the S disappear if I am right. bye | |
| August 24, 2006 | |
| Ouch. Good catch. Hoping an auditor isn't as good with their hands as Wes... | |
Kim Marie CPA (talk|edits) said: | 25 August 2006 |
| Good point, but my narrative of this tax issue omitted an important fact: the S-Corp's primary business operations were sold in 2004. So excess passive income is under the three year rule. Thank you for mentioning this, as I would not want to go to jail! :-) | |
| 25 August 2006 | |
| Hi good probably you didnt look good in stripes. Do what MR Tuna suggests within your three years. Ret/Earnings comes out as part of the asset distribution at capital gain nothing special needed to do. May want to look at single member LLC for each property liability limitations. But $50k is alittle steep charge $15k and buy a home theater. bye | |
| 26 August 2006 | |
| I like the "one shot" election afforded to Sub S as mentioned above since that was one of the principle reasons for the establishment of Sub S other than the flow through of R/E losses. However, my concern was as WesR pointed out, no corporate entity, no further limited liability. | |
| 26 August 2006 | |
| One additional comment, the revocation can and should specify the effective date of the revocation otherwise problems under 1.1362-2(a)(4. | |
