Category: Corporations; Partnerships & LLCs; Sales
& Exchanges Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Taxpayer, TP, is a C corporation engaged in the business of performing psychological services through licensed practitioners. TP's stock is owned on a 50%-50% basis by two other corporations, one of which is a §501(c)(3) entity. The management of TP was interested in conducting business as a partnership, not a corporation. Accordingly, as of 1/1/93 TP transferred all its assets and liabilities to a new partnership. No consideration was paid in connection with the transfer except for assumption by the partnership of TP's liabilities. TP's balance sheet as of 12/31/92 is attached and is incorporated by reference into this memorandum. The initial issue is how to account for the transaction for tax purposes. It seems that there are two possibilities. The transaction could be treated as a sale of assets from TP to the partnership. In the alternative, the transaction could be viewed as a liquidation of TP's assets followed by a contribution of those assets by the shareholders of TP to the newly formed partnership. After some consideration of the matter, it is clear that the two methodologies yield the same results as regards the gain or loss recognized by TP, the amount of gain or loss recognized by the shareholders, and the basis of TP's assets in the hands of the new partnership. Since a variety of legal and tax disclosures and actions would have been required to liquidate TP in 1993, it appears that the cleanest way to account for this transaction is via the first alternative, a sale of assets as between TP and the partnership. Since the only consideration for the sale of TP's assets is assumption by the partnership of TP's liabilities, this amount becomes the selling price of TP's assets. In order to determine TP's tax consequences on the sale it is necessary to determine what was actually sold. Under §1060, both the buyer and seller of the assets which constitute substantially all the assets of a trade or business are required to allocate the purchase/sale price of the assets (assuming such allocation was not provided for in the contract of purchase/sale) under the so-called residual method. In essence, the purchase/sale price is allocated first to identifiable tangible and intangible assets to the extent of their fair market values. Any excess purchase price is then allocated to goodwill and going concern value. The identifiable assets at 12/31/92 are of the type that normally would have fair market values at or very near their carrying amounts on the balance sheet. In any event, the fair market value of each asset should be compared to its tax basis in order to determine the gain or loss on sale of the particular asset. The character of gain or loss (if any) would of course be determined by the type of asset in question. Presumably, the vast majority of the gain on this transaction will result from the disposition of TP's goodwill which is normally considered a capital asset. On the partnership's books, the determination of basis is simply the "flip-side" of the determination of the selling price at TP's level. Section 1060 requires consistency as between buyer and seller. For the depreciable assets, §168(f)(5)(B)(iii) provides that MACRS property transferred to a related party is not subject to the anti-churning depreciation rules. In other words, the partnership starts over with new lives and methods for cost recovery purposes. Both buyer and seller must disclose the allocation of the purchase/sale price and details. See Form 8594. The fact that there is a §501(c)(3) entity involved in this transaction is potential source of significant tax issues. While no effort has been made on my part to identify or resolve such potential issues, several readily come to mind. 1. Does the fact that the exempt entity is engaged as a general partner in an active, for- profit trade or business in any way jeopardize its exempt status? 2. Will income from the partnership to the exempt entity be subject to the unrelated business income tax? 3. Care should be taken with respect to formulating the partnership agreement for the new partnership, particularly if any special allocations are contemplated. There are a variety of restriction as regards allocations to tax exempt partners. 4. Does the transaction set forth above create any problems for the tax exempt entity under the local laws applicable to charitable organizations? |
