Assets
Stock
Hybrids
S-Corps and C-Corps
Miscellaneous
100
True or False: In an asset sale, the seller retains possession of the legal entity and the buyer receives the individual assets of the business.
True
100
What is the most popular method for disposing of stock?
Redemption
100
True or False: Goodwill is depreciated over a 15 year period
False. It is amortized.
100
What tax consequence results when a C Corporation makes an asset sale?
Double taxation
100
The _________ type of business tax structure is favorable to the business entity owners from an income tax perspective.
Pass-through
200
Which type of business can be structured in a stock sale?
An S Corporation
200
The AAA Bypass Election can be filed by _______________ under IRC §________.
"S-Corps that used to be C-Corps" and "IRC §1368(e)(3)"
200
How is Goodwill taxed to the seller?
As Ordinary Income
200
When an S Corporation is involved in an asset sale, what is the tax rate they're subject to if there is a gain?
0%-S Corporations do not pay tax on any gain resulting from the sale of assets. The gain flows through to the shareholders.
200
What is a Cross Purchase and how does it effect the corporation?
A Cross Purchase is the purchase of a shareholder's stock from another shareholder. There is no real effect on the Corporation--it is just a transfer of stock ownership.
300
List one benefit of an asset sale from the buyer's perspective.
1. Buyer receives step-up in basis 2. Buyer can receive additional tax benefits 3. Less chance of inheriting potential liabilities
300
What is the purpose of Revenue Ruling 77-237? (hint: substantially disproportionate redemption)
Revenue Ruling 77-237 determined that, if a corporation redeems non-voting and voting stock, Sale or Exchange Treatment can still apply if enough voting stock is redeemed to satisfy §302(b)(2)
300
What section of the Internal Revenue Code treats certain stock purchases as asset acquisitions?
IRC §338
300
If a C Corporation receives a promissory note as payment for an asset sale, what method can they use to report any gain?
Installment Method
300
Name one factor that makes an asset sale less attractive than a stock sale.
1. Character differences 2. Built in Gains Tax 3. Discrepancies between outside and inside basis 4. State and local tax considerations (transfer taxes exist on asset sales)
400
In an Asset Sale, a C-corporation that elected to be an S-Corporation should be aware of possible built-in gains tax (“BIG Tax”). What Internal Revenue Code Section applies to the BIG Tax?
IRC §1374
400
Shareholder bought 100 shares (constituting 100%) of target corporation for a total investment of $1,000. Target corporation is sold two years later through a stock sale for $20,000. Assume at the time of sale that shareholder’s basis equals the total investment made in the shares of $1,000. What is the shareholder's gain on the sale of the stock? What rate of tax does the shareholder pay?
Gain = $19,000. $20,000 (price of stock sold) - $1,000 (basis in stock). Rate of tax = 15% (because it's a capital gain)
400
What is the MAIN take-away from the Muskat case? (hint: sale of assets in a meat business)
Always document!
400
What are 3 ways S Corporation Status can be terminated?
Sale of stock to an ineligible shareholder, exceeding 100-shareholder limit and obtaining more than 1 class of stock.
400
Name the possible "treatments" that a redemption can be subject to under a stock sale.
1. Sale or Exchange Treatment 2. Non-Exchange Treatment (subject to general distribution rules)
500
Target corporation sells its assets to Purchaser for $20,000. The assets include target corporation’s accounts receivable, inventory, equipment and goodwill. Target Corporation’s basis in its assets is $10,000. What is Target Corporation's gain on the sale? With a 35% capital gains tax rate, what is the liquidating distribution to Purchaser?
Target Corporation's Gain=$10,000 ($20,000 - $10,000). Liquidating Distribution=$16,500 ($10,000 gain x 3.5% = $3,500. $20,000 - $3,500 = $16,500)
500
The sale of stock qualifies for ordinary loss if it meets the requirements under §1244. What are two requirements under §1244?
1. Needs to be common or preferred stock 2. Issuer must be a domestic corporation 3. Issuer must be a "small business corporation" 4. The stock must be issued for cash or property
500
Buyer agrees to pay seller $300,000 over a two year period ($150,000 per year) in exchange for an "agreement not to compete." How much can be deducted by the buyer in the first year?
$20,000
500
A is an individual who owns 100% of an S Corp. A’s basis in the S Corp’s stock is $100. B acquires all of the stock for $600 and distributes the full $600 to A in a complete liquidation. What is A’s gain? Is S Corp subject to any BIG tax? What is A’s basis after the sale?
A's gain is $500. S Corp is not subject to any BIG tax. A’s basis after the sale is $600.
500
List 3 requirements for Sale or Exchange Treatment
1)Redemption can’t be a dividend, 2) Substantially Disproportionate Redemption, 3) Complete termination of SH interest.
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