Discussion:Dentist, personal service corp. can she convert to s to avoid double taxation

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Tax Questions --> Dentist, personal service corp. can she convert to s to avoid double taxation


Tiffaney (talk|edits) said:

11 January 2007
My dentist client is selling the right to provide services to one half of her patients. She has been in business since 95 as a c corporation. The practice grosses approximately 1m per year and pays her a salary of approximately 365k per year. She is tired, but does not wish to sell the entire practice. She is in Washington State, and has offered one half of her practice to a dentist who will come from Idaho and practice here with her in her office. He will set up his own business, share office space, and take over one half of her clients for 500k. He will not have any ownership or association with my client’s practice.

Her question was can I convert to S? The sale will transpire sometime in 07 to come. She is concerned about the double taxation.

Does sec 1031 apply? Can I bonus the 500k? If I convert to S, is the 500k a built in capital gain? Is the goodwill attributable to her personally under these facts?

The dentist will continue in business, in the same corporation, however with half the customers.

Thank you for your ideas.

JR1 (talk|edits) said:

January 11, 2007
Yes, and you probably should. Good time for it, being able to now justify a much lower salary. Yes, you've got BIG issues, but a high salary for one more year eliminates that anyway, I think...yes, since it's only charged on profit. This is not a 1031 deal. Goodwill probably should be attributed to her in this case, chat with Death and Taxes on that topic. He'll tell you about Martin Ice Cream. Never knew Martin until I met him....

Death&Taxes (talk|edits) said:

11 January 2007
Martin Ice Cream? That must be some other Death & Taxes.

JR1 (talk|edits) said:

January 11, 2007
Dennis, then.

Jdugancpa (talk|edits) said:

11 January 2007
Be careful on the BIG issues. Assuming the S election occurs after the sale of the first half of the practice, goodwill will surely be present for the second half of the practice. In addition, all of the receivables at date of election will become BIG's waiting to be recognized upon collection, i.e., in Yr-1 of S status. Zeroing out taxable income in YR-1 does not eliminate the BIG tax resulting from BIG recognition, it only pushes it into the next year. If taxable income results anytime before Yr-11 the BIG tax will come into play. In order to eliminate the BIG you will need to accrue built-in losses to offset the BIG's. Things you might consider include a whopping big bonus accrued in the last year of C status (so that it is considered as a built-in loss) to be paid in the following year to offset the receivables collected and possibly a retirement plan accrual of some sort.

Blrgcpa (talk|edits) said:

11 January 2007
The purchaser has goodwill, not the seller! She will have a cap gain.

This isn't a 1031 exchange unless she purchases another practice and everything goes through a qi.

Jdugancpa (talk|edits) said:

11 January 2007
If buyer purchases 50% of practice and a portion of the purchase price gets allocated to goodwill, what chance will the seller have in arguing there is no goodwill for the remaining 50% of the practice she is not selling with respect to valuation of assets for purposes of determining BIG tax?

Dennis (talk|edits) said:

11 January 2007
There are tax cases that have found the existence of corporate goodwill. For example, in Schilbach v. Commissioner, T.C. Memo 1991-556, the court held that a corporate medical practice had goodwill despite the lack of a covenant not to compete with its sole shareholder and only physician-employee. Dr. Schilbach had a patient base of between 8,000 and 10,000 due to making services available on the patient’s schedule, requiring employees to show an interest in the patients and their families, providing X-ray, laboratory and other services at the office rather than referring patients to others, accepting Medicare payments, billing patient’s insurance company directly, and arranging payment plans for those patients who were unable to pay. In 1986, Dr. Schilbach decided to sell his practice due to personal medical problems and the termination of his medical malpractice insurance. Dr. Schilbach followed advice to liquidate the corporate medical practice prior to the end of 1986 due to tax law changes (the repeal of the General Utilities doctrine) and sold his practice in 1987. The court defined personal goodwill as attributable to the individual skill, knowledge, and reputation of the professional and practice or business goodwill to include patient lists and records, trained employees, and leases in place. The court then found some of the goodwill associated in the operating entity based on the factors set forth above. Accordingly, the analysis of and allocation between personal goodwill vs. corporate goodwill relies upon the particular facts of each case.

Tiffaney (talk|edits) said:

12 January 2007
So, if the dentist is selling goodwill attributable to her, can I then tell her to have the new dentist write a check to her, leave the transaction out of the corporation, and reflect the capital gain on her 1040?

Dennis (talk|edits) said:

12 January 2007
Probably not. Note the difference between Schilback and a case like Norwalk. The incomming dentist is getting a lot more than the rights to half the patients.

To join in on this discussion, you must first log in.
Personal tools