Discussion:Asset Purchase
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Discussion Forum Index --> Tax Questions --> Asset Purchase
| 26 August 2006 | |
| Client (S Corp LLC) is selling business assets for more than FMV of assets. So far it is not a QSP (Qualified Stock Purchase). Is the purchaser (S Corp LLC) allowed to record assets at FMV and record Goodwill for amortization? OR should purchaser treat this as a QSP and elect 338(h)(10)? Assets have significant appreciation in the hands of seller therefore about a 95% gain to seller. Of course, no NOL since it's an S. Any help on this is greatly appreciated. | |
| 26 August 2006 | |
| Additional ignorant question:
If this is treated as an asset purchase where there's significant goodwill would this cause shareholder(S Corp) to recongize gain as ordinary income or could it qualify as a LT Cap Gain? This will also qualify as an installment sale which should flow to 4797. To simplify this question: Does gain from 4797 always get treated as a capital gain vs ordinary gain? I know this question should be rather simple but I've got myself confused reading 338h10 information and examples. | |
| August 26, 2006 | |
| The purchaser is required to record assets at FMV,and if there is excess purchase price, it is allocated to goodwill. Unless you go to the 338 requirements, which I'm aware of but haven't used yet. I think, in that case, the buyer is still recording everything at FMV, but the seller than gets CG treatment as if it were a stock sale. When the assets are sold by the S, they're reported as with any other sale, recap deprec., cap gain treatment, etc. and ordinary income on sales of AR less AP, etc. No, just because you're on installment or 4797, both actually, that doesn't affect the cap gain treatment. Indeed, recap of depreciation is due and payable immediately without regard to installment treatment, everything else would be installment. And 4797 can flow out both ord. income items, recaptures, and cap gains... | |
| 26 August 2006 | |
| Can the seller sall his stock in corp? Would that be feasible? | |
| August 28, 2006 | |
| That is the 338 election, which I don't yet understand, haven't been thru one yet. The seller sells stock, the buyer buys that stock but immediately collapses that corp into another and is deemed to have bought assets. Somehow. Both win. Now the seller gets cap gain and the buyer gets write offs. | |
| 28 August 2006 | |
| From sellers perspective. If assets purchased were capital in nature seller would still get to record a CG under 331. Am I correct in saying that 338h10 is good for those transactions where there is a transfer of non capital assets ie A/R, A/P, or inventory in addition to capital assets? | |
| 29 August 2006 | |
| As I read further this gets deeper. Majority of asset is realestate, therefore, subject to unrecaptured section 1250 gain taxed at 25%. This makes 338(h)(10) more appealing because under 338h10 to seller transaction is a stock sale subject to normal cg rates not the 25%. To the buyer it is an asset purchase.
Am I thinking through this correctly? | |
| 29 August 2006 | |
| In a normal 338 transaction, the sale of the stock will give rise to a capital gain for the seller and the normal 336 gain recognition rules will usually apply, usually causing the buyer to recognize ordinary gains and losses at the corporate level.
In the case of 338(h)(10) election, the burden of the gain is shifted to the seller. In other words, in 338(h)(10) transaction, the stock sale is ignored and the net result is that the seller is treated as having made an asset sale. | |
| 29 August 2006 | |
| Is the buyer going to report a gain because he's taking the assets and reselling to a new S Corp from the target S corp after stock purchase under a 338h10? I thought one purpose of §338(h)(10) election was for seller to treat transaction as a stock sale rather than an asset sale and seller can avoid the 25% rate on unrecaptured 1250? (There is no recapture of depreciation in this transaction; all assets are S/L'd buildings and fully depreciated) Thank you for your input... | |
| 30 August 2006 | |
| No, the purpose of the 338(h)(10) election is to shift the gain from the buyer to the seller. If you want a situation where the seller recognizes only 15% capital gains from the stock sale and the buyer recognizes ordinary gains and 1231 and capital gains from the deemed asset sale, then you would not make the 338(h)(10) election; instead, you would simply make a regular 338 election. In general, a regular 338 election results in a double tax.
In fact, 338(h)(10) specifically states that no gain or loss will be recognized on stock sold or exchanged in the transaction. Under 338(h)(10), the S corporation (old target) is treated as having sold all of its assets to an unrelated party on the date of the stock sale. New target is treated as having acquired the assets from the unrelated party. New target will get a stepped-up basis on the assets acquired. The gain from the deemed asset sale is reported on the final S corporation return. The old target is deemed to have liquidated or redeemed its shares before the close of the acquisition date. | |
| 30 August 2006 | |
| Riley2 you should write an article about this. Every article/resource I have read does not explain §338 as well as you just did. Thank you. So I have now ruled out §338 which leaves me back to the beginning of just a normal liquidation (§331 I think). Atleast I'm not the only one working on this transaction. | |
| 1 September 2006 | |
| We would love to have an overview article of this subject here on TaxAlmanac! If anyone would like to start one or to convert what Riley2 has outlined above into an article, please let me know - I'd be more than happy to help you through the process.
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| 1 September 2006 | |
| Flow chart for 338(h)(10) from Andrew Mitchell This site is a Gold Mine. | |
