Discussion:Administratively dissolved California C corp conveys real property to shareholder
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| Revision as of 18:52, 23 October 2009 Trillium (Talk | contribs) (transfer related responses) ← Previous diff |
Revision as of 19:17, 23 October 2009 KatieJ (Talk | contribs) (Well, since Gram) Next diff → |
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| As far as seeing this day coming, Gramps perhaps should have had the corp make the sub-chapter S election long ago, i.e. 10+ years ago.}} | As far as seeing this day coming, Gramps perhaps should have had the corp make the sub-chapter S election long ago, i.e. 10+ years ago.}} | ||
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| + | {{ForumReplyPost|UserID=KatieJ|Date=23 October 2009|Text=Well, since Gramps had this appreciated real estate locked up in a corporation, which is always a bad idea (see JR), New Shareholder should not distribute the property out to himself, but sell the stock of the corporation (assuming the real estate is its only asset). Of course the developer would demand a discount on the price, because it would be buying the New Shareholder's tax problem. But there are companies that specialize in putting such buyers and sellers together and helping to negotiate deals that are acceptable to both parties.}} | ||
Revision as of 19:17, 23 October 2009
Discussion Forum Index --> Advanced Tax Questions --> Administratively dissolved California C corp conveys real property to shareholder
Discussion Forum Index --> Tax Questions --> Administratively dissolved California C corp conveys real property to shareholder
| 23 October 2009 | |
| Background:
Former shareholder (“Gramps”) owned a California "C" corporation with one asset, undeveloped real property with an inside cost basis for tax purposes of $1,000. There was no real income from the property and consequently the “C” corp was not required to file U.S. tax returns. Gramps fell ill and failed to file the necessary paperwork required to keep the corporation in good standing and California administratively dissolved the corporation. Shortly thereafter, Gramps passed away. In Gramps will, Gramps left the stock of the “C” corp owning the property to his grandson (“New Shareholder”). At the time of Gramps passing, the property was estimated to have a market value of approximately $20M and the “C” corporation stock (given the imputed $8m corporate tax liability at 40%) was estimated to be worth $12M. The estate was settled and presumably paid all pertinent taxes; giving the New Shareholder a “step-up” in the basis of the stock. Three years later, the market value of the undeveloped property has fallen to $12M. Developer approaches New Shareholder and desires to acquire the real property. New Shareholder (as President of the dissolved corporation) deeds the property to himself, “…for $10 and other valuable consideration.” with the intent to convey the property to the Developer for $12M in the next three months. Question (1): “Does the administratively dissolved corporation escape the Californian or U.S. Federal Capital Gains tax on the distribution of the property to the New Shareholder?” Question (2): “If so, would the corporation’s capital gains tax on the distribution be based on the value at the time the estate was resolved (i.e. @ $20M) or the market value at the time administratively dissolved corporation deeded the property to the New Shareholder, personally (i.e. @ $12M) ?” | |
- Transferring the following responses from the first time this question was asked (at the end of an old discussion).
| 21 October 2009 | |
| I'm not a lawyer, but I don't believe there is such a thing as administrative dissolution in California. A corporation that fails to file its California franchise or corporate income tax returns, or its annual reports to the Secretary of State, is suspended, not dissolved. The corporation continues to exist and, as noted above, can enter into contracts (which are voidable at the instance of any party other than the corporation itself, but are otherwise valid). See, e.g., Parmar v. SBE, Calif. Super. Ct. (Los Angeles Cty.), Case No. BC379013, 11/26/2008 (tentative decision). In order to dissolve, the corporation must first revive by filing all of its back returns and paying all of its tax liabilities.
So I think the answer to Pomcor's first question is no, the corporation does not escape the tax on its distribution of the real estate to the new stockholder. The value of the stock, not the value of the property, was determined at the date of the decedent's death. The stock got a step up in basis, the property did not. I would guess that the corporation's IRC Sec. 311 gain is the difference between the FMV of the property at the time it was distributed to the new stockholder ($12 million in Pomcor's example) and the corporation's basis in the property. | |
| October 21, 2009 | |
| So the stupid question of the day is why didn't the corp distribute the land to the s/h when received by the estate? Zero gain at that point, then it all shifts to personal after that. No one could see this day coming? | |
| 22 October 2009 | |
| Assuming Katie is correct and I have no reason to believe otherwise; if the corp distributed the land when the estate "stepped-up" the s/h's basis in the stock, although the s/h would not have a tax liability, the corp would as it still has a low inside basis in the asset.
As far as seeing this day coming, Gramps perhaps should have had the corp make the sub-chapter S election long ago, i.e. 10+ years ago. | |
| 23 October 2009 | |
| Well, since Gramps had this appreciated real estate locked up in a corporation, which is always a bad idea (see JR), New Shareholder should not distribute the property out to himself, but sell the stock of the corporation (assuming the real estate is its only asset). Of course the developer would demand a discount on the price, because it would be buying the New Shareholder's tax problem. But there are companies that specialize in putting such buyers and sellers together and helping to negotiate deals that are acceptable to both parties. | |
