Discussion:Section 368(c) reorganization
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Discussion Forum Index --> Tax Questions --> Section 368(c) reorganization
| 17 February 2007 | |
| I have recently acquired a client that was a parnter in a partnership, in which the accountant dissolved the partnership by forming two corporations for each partner using Section 368(c)as a reorganization, is this correct? I thought this section only applied to corporations. Should it have been a Section 351 transfer after the partnership was disolved? This new client was made a sole shareholder in a S corporation that upon the transfer of his half of the assets and liabilities in the partnership to the corporation resulted in a negative capital account classified as common stock. Shouldn't he have had to recognize a gain upon the initial transfer due to the fact that his basis in the stock acqured from the transfer was negative? Any help on this issue would be greatly appreciated. | |
| 17 February 2007 | |
| ...so the partnership created two corps and then distributed the stock of the corps to the partners in liquidation of their partnership interests? Or did they liquidate the partnership by distributing assets and liabilities to partners who formed separate corps?
IRC Sec. 368(c) defines control...it's not a type of reorg. Based on your statements and questions, I can't tell what happened, or even what you think happened. It would help me if you could restate the facts as you know them to have occurred. | |
| 17 February 2007 | |
| All that I can tell is that the assets and liabilities were divided from the partnership and placed into two separate corporations. Each partner after division owns all stock in his respective corporation. In reference to the Section 368 reference (c) meaning a "type C" reorganization, not paragraph c. (Sorry) I don't have sufficient information to determine if the partnership created two corps. Based on the information that I do have, It appears that the partnership was liquidated because each partner contributed to their respective corporations their share of the assets (less depreciation) and liabilites distributed from the partnership. No gain or loss was recognized by either partner on their individual tax returns in the year this occured. My concern is that the contributions of these assets and liabilities to the respective corporations resulted in each shareholder having a negative basis in their stock. (more liabilities transfered than basis in assets). One of the corporations was a C, and one was an S. For the S, basis in stock is not supposed to be negative, and no gain was ever recognized by the S Corp Shareholder. What other info would you need to help you, help me? | |
| 17 February 2007 | |
| I think it's important to get and review the documentation through which the transaction was accomplished...or at least speak with the attorney (hopefully) who drafted the various legal documents that are required to make the various transfers occur.
The C reorg does not seem to apply to your transaction. The fact that someone used the term in connection with the deal would cause me to look further into my understanding of the facts. That being said, if all is as you have laid out, I agree with your concern for some sort of gain to be recognized due to liabilities in excess of basis. Whether it's under Sec. 351 or Sec. 731 will depend on how the transaction occurred. Maybe an exception applies...See IRC Sec. 357(c)(3). Also, be sure you are not mistaking a negative capital account reported on a partnerhsip's books for negative basis. Basis is never negative. | |
