B and s liquidating corporation

This information is essential because the tax liability of Corporation and Shareholder is based on the gain recognized from the liquidating distributions.In a typical transaction, the gain recognized, if any, is the difference between the basis (the cost) and the fair market value of the asset being sold or distributed.

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If Shareholder’s stock basis is large enough, Corporation can liquidate and incur no tax liability because Shareholder’s stock basis will not be depleted, only reduced, in the liquidating distributions.

After all assets have been distributed, if Shareholder’s stock basis is more than $0, there will be a capital loss in the amount by which the stock basis exceeds $0 and that loss can be used to offset any capital gains incurred in other distributions.

Simply converting or merging the S corporation into an LLC taxed as a partnership is not satisfactory, because that transaction would trigger the taxable liquidation of the S corporation.

One method to convert to a tax partnership tax-free, without undergoing an inversion, is the “LLC drop-down,” which entails the S corporation forming a wholly-owned LLC, that is initially a disregarded entity for tax purposes, and transferring all of the S corporation’s assets and business to the new LLC.

The merger is without tax consequences, because it’s a merger of two entities, Old S and LLC, that are disregarded for tax purposes.

Furthermore, by operation of the Florida merger statute, all of the assets, liabilities, contracts, and legal relationships of Old S transfer to LLC and in most circumstances no third party consents are required.

These headaches can oftentimes be avoided by utilizing an S corporation inversion.

The S corporation inversion is accomplished by having the shareholders of the S corporation (“Old S”) transfer their stock to a newly formed S corporation (“New S”) in exchange for all the stock of New S.

Accordingly, if Corporation has any outstanding debts, it should pay off those debts with cash to reduce the amount of cash to be distributed to Shareholder.

When the cash is finally distributed to Shareholder, there will be less cash to reduce Shareholder’s stock basis leaving a larger stock basis to minimize the tax liability, if any, from the liquidating distribution of the other assets.

Old S immediately makes an election to be a qualified subchapter S subsidiary, and so Old S will be disregarded for tax purposes.

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