Discussion:Susanrid - Consider Corporate Reorg
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Discussion Forum Index --> Tax Questions --> Susanrid - Consider Corporate Reorg
| 26 July 2006 | |
| Sometimes one topic gets buried in with another. Susanrid, I think your questions would be better addressed as a separate topic. So here it is.
On 7/18 in the thread "Discussion:Change from a C corp to a LLC" you asked: "C corporation with two shareholders wants to transfer appreciated land along with the related Note Payable to a recently formed LLC having the exact same ownership as the C Corporation. The C Corporation will continue to exist. Can this be done with no tax effect to the C Corporation? or... can the LLC purchase the asset at cost basis from the C Corp?" On 7/25 you asked: "Please revisit my July 18 post regarding shareholders of a C Corp transferring or selling appreciated land from the C Corp to a recently formed LLC. C Corp continues to exist. Exact same ownership of both entities. REason for change is owners want to be able to sell the C Corp business in the future without the land (purchased for investment). Also, the LLC will purchase additional real estate in the future. I cannot find this specific point in the literature. I cannot see where this transaction would be disallowed since the motive is to hold the property in the new entity...not sell it for an immediate profit."
Riley2, JR1, et al, what are the pitfalls? Is this doable? | |
| July 26, 2006 | |
| I like it, but I'm no expert in type D's, but it seems like the best solution for the moment. If that works, that's fantastic thinking JDugan. | |
| 27 July 2006 | |
| I think if you try a Type D reorg, you will have problems with the Sec. 355(b) spin-off rules if the LLC is not engaged in a active trade or business. | |
| 31 July 2006 | |
| The activity of the LLC will be to buy and rent real estate. The LLC will rent improved property to the original C Corp. The land in question is now on the balance sheet of the C Corp with a cost price of 175,000. and debt of 125,000. Current market value is now 500,000. Does anyone think that the LLC can pay 50,000 to the C Corp, transfer the asset from C Corp to LLC and LLC elect to be taxed under partnership rules. I have not been involved in any reorganization transactions. I am not thinking of this as reorganizing but simply a method to separate ownership of a business from ownership of real estate. | |
| 31 July 2006 | |
| Susanrid, a transfer of property from a corporation to a partnership in exchange for a partnership interest is nontaxable under Sec. 721. The problem with this scenario is that the corporation will own the partnership interests, and you will need to find a way to transfer the partnership interests to the shareholders without triggering gain recognition. | |
| 31 July 2006 | |
| I am not thinking of transferring property in exchange for a partnership interest but rather, Corporation will sell the land to the LLC for the agreed upon price of $50,000. The LLC will hold the land for five or more years. The question might be "Can a C Corporation sell an asset to a related party (LLC) for a below market price?" | |
| 31 July 2006 | |
| Sure, as long as you record the gain at market value and pick up the constructive dividend. | |
| 1 August 2006 | |
| Susanrid, I agree with Dennis -- this cannot be done on a tax-free basis. Calling it a sale doesn't really change the character of the transaction. | |
| 1 August 2006 | |
| Thanks for the good discussion. Can anyone point to a code section that specifically disallows the sale of an asset held for investment by a C Corporation at a price below market value. | |
| 1 August 2006 | |
| There is nothing in tax law that requires a corporation to sell property at fair market value. However, here are the consquences of a bargain sale. 1) The shareholder is treated as having received a corporate distribution (dividend) for the difference betwen the purchase price and the amount paid for the property. See Reg § 1.301-1(j). 2) The corporation is treated as having sold the property for fair market value. See Internal Revenue Code § 311(b). | |
| 3 August 2006 | |
| WOW....can this be true? Income to the Corporation AND dividend income to the shareholders....just to change ownership of property from a Corporation to an LLC. Revisiting Sec. 721. Corporation transfers property and debt in exchange for its interest in the LLC(partnership). Each of the other two partners exchange cash for their respective interest in the LLC (partnership). In year two or three of the LLC, is there any rule that would prohibit the partnership or the individual partners from purchasing the Corporation's partnership interest? | |
| 3 August 2006 | |
| No, but you still have to deal with fair market value. To repeat Riley's comment -- What you want to do cannot be done without tax consequence. | |
| 3 August 2006 | |
| What you can do, however, is to elect S status (make sure you understand all the rules) and wait ten years. | |
