You may qualify for excluding gain from the sale of your home by up to $250k of your capital gains from your taxable income or $500k if you’re filing a joint tax return with your spouse. You must sell your principal residence before you can claim the exclusion. You can exclude gain up to $500k of each home’s capital gain if you own two houses. Publication 523, “Selling Your Home,” provides cost basis rules and worksheets. Topic No. 409, “General Capital Gain and Loss Information,” covers general capital gain and losses information.

Requirements for the Gain Exclusion

To meet the requirements for Section 121 Gain Exclusion, you must satisfy both of the following tests: 

1) you must own and use your principal residence as your main home for at least two out of the five years before the date of sale, and 2) you must exclude any gain from the sale of your other home during the two years preceding the sale of your principal residence. If you meet either test, you may exclude the gain from the sale from your capital gains tax liability calculation. 

To determine whether you meet the ownership requirements, you need to identify the period when you met both tests. For example, if you meet the ownership test during the first three years of owning your home, then you meet the ownership test for the entire five-year period. Similarly, if you meet the use test during the last four years of owning your home before selling it, you meet it for five years.

Reporting the Sale

If you sell real estate, you may need to file a Schedule D (Form 1041) each year’s end. You should also file Form 8949 if you sold any property during the year. Suppose you received a Form 1099-S (Proceeds From Real Estate Transactions). In that case, you must report the sale even if the gain from selling the house is excludable. You must also report the sale if you can’t exclude the entire amount of capital gains from taxable income. To know whether you need to report the sale, see Publication 523.

Suspension of the Five-Year Test Period

An individual is eligible for the suspension of the five-year test if they meet either of the following two conditions:

1) They are on a qualified official extended leave of absence from their position for more than 90 consecutive days.

2) They serve in a capacity that requires them to be absent from their position due to unforeseen circumstances.

At a military base at least 50 miles away from your family or living in government housing. Suppose you live in a dormitory, barracks, or similar quarters while stationed overseas. In that case, you may not be considered a resident of your state or county of your principal residence. You must also meet all other requirements for residency. For example, suppose you’re living in a hotel or motel room. In that case, you might need to stay there for 30 days before qualifying for residency.

Installment Sales

If you sell your house under a contract that provides that part of the selling price will be paid in installments, you must report the sale as an installment sale. You may exclude any gain realized on the sale, but not any loss. See Publication 537, Installments Sales, for more information.

Summary Section 121 Exclusion

• You must sell your primary residence within ten years of buying it.
• You can exclude up to $250K of the gain or $500K if you file a joint return with your spouse.
• You must use the proceeds of the sale to buy another property, such as an investment property.
• You can deduct up to $10K per year for the cost basis related to selling your house.
• You can claim a deduction for state and local sales taxes paid on the sale of your home.
• You can also claim a deduction for mortgage interest paid on the home’s sale.
• You cannot claim a deduction for moving costs.
• You can exclude up to $250,000 ($500,000 for married couples filing jointly) of taxable gain from the sale of your primary residence.
• The exclusion applies to any gain from the sale of a primary residence.
• You’re required to report the sale of your primary residence even if you can exclude some of the gains.
• The suspension applies to spouses who are also military members.
• The exclusion of gain under section 121(b)(3) continues to apply to installment sales regardless of whether the seller uses the installment method to defer the gain.

Need Help With Filing Taxes On Your Property Sale?

There are many different ways to file your tax return. You don’t have to navigate them all by yourself. If you need assistance with your tax return, plenty of resources are available to help you. Some of the most common options include filing online, using an app, or contacting The McGuire Law Firm and speaking to one of our tax attorney professionals. Call us at (720) 833-7705.

Common Use for a Forward Triangular Merger

One standard method used is a forward triangular merger, or as some people refer to it, an indirect merger under Section 368(a)(2)(D) of the Internal Revenue Code. This type of merger is beneficial when a parent corporation is looking to purchase or acquire another entity, known as the target corporation, but is hesitant to inherit any liabilities or other negative aspects of the target. 

In a traditional A reorganization under Section 368(a)(1)(A), the target corporation merges directly with the acquirer. At this point, the acquirer is responsible for all liabilities associated with the target. Therefore, the purchasing corporation may often structure the transaction as a forward triangular merger rather than a traditional A merger by using a subsidiary to protect against any known or unknown liabilities the target may have. A Denver business attorney has prepared the article below to provide additional information on a forward triangular reorganization.

Where Forward Triangular Mergers are Prevalent

Forward triangular mergers are also prevalent where entities plan to use a significant amount of cash, or boot, in the deal.

Unlike reverse triangular mergers, forward triangular mergers have greater flexibility in the amount of boot that may be used in the transaction since the 80% voting requirement does not apply under Section 368(a)(2)(D) for purposes of consideration.

For example, consider Corporation P, which would like to acquire Corporation T. However, Corporation T has a massive liability on its books that Corporation P is hesitant to accept. Corporation P will first set up another entity called a subsidiary. The Corporation T is the target corporation and will then merge into a subsidiary, rather than Corporation P, for consideration provided by Corporation P. The target corporation ceases to exist and thereby liquidates. At this point, the only surviving corporation in the merger is the subsidiary. Thus, the shareholders of Corporation T will ultimately receive the consideration provided by Corporation P. This structuring allows the target’s liabilities to remain isolated within a subsidiary while simultaneously allowing the purchasing corporation to acquire the target, Corporation T. 

Note that even though this may be considered a tax-free reorganization, there may still be tax consequences to the target corporation’s shareholders upon liquidation, depending on the amount and type of consideration used in the transaction (See Internal Revenue Code Section 354).

Three Critical Things to Remember in a Forward Triangular Reorganization

 First, this transaction only qualifies for tax-free treatment if it would have satisfied the requirements of a traditional A reorganization under Section 368(a)(1)(A) had the merger been done directly between the purchasing corporation and the target corporation. This requires evaluating the transaction as if the subsidiary were not used. If the target merged into the purchasing corporation and still satisfied the A reorg requirements, then this would help Section 368(a)(2)(D)(ii). This requires a statutory merger and, even more importantly, continuity of interest requirements.

Second, in Section 368(a)(2)(D) reorganization, no stock of the wholly-owned subsidiary entity may be used as part of the consideration in the transaction. The only stock acquisition of the purchasing corporation, Corporation P in the above example, may be used. However, other reviews from the subsidiary may be provided, such as cash. Suppose the stock of the wholly-owned subsidiary corporation is used. In that case, it will fail the requirements of Section 368(a)(2)(D) and may result in a taxable transaction unless it satisfies another reorganization structure under Section 368.

Finally, according to the treasury regulations under 1.368-2, the purchasing corporation must substantially acquire all of the target’s assets by using the subsidiary.

Forward triangular reorganizations optimize restructuring without facing tax consequences while removing the transfer of a target’s liabilities to a parent corporation. Depending on the type and value of consideration available, a forward triangular reorganization may be the best restructuring tool for your merger.

Key Takeaways

• A forward triangular merger is a form of reorganization that provides a means to avoid the potential tax consequences of acquiring a company with substantial liabilities. It accomplishes this by merging the target with a subsidiary of the acquiring corporation. The target corporation ceases to exist and is liquidated. The sole remaining corporation is the subsidiary.
• The IRS considers a forward triangular merger to be a reorganization because it satisfies the definition of a reorganization found in Section 368(a).
• However, the IRS does not allow a forward triangular merger to qualify as a tax-free reorganizational event unless the following conditions are met:
  • The acquiring company must pay fair market value for the target company’s assets.
  • The target company continues to operate after the acquisition.
  • The acquired company ceases to exist and is liquidated.

You can contact The McGuire Law Firm to discuss your business or tax-related issues with a Denver business attorney or tax attorney. 

Non-recourse debt means that if the debtor defaults, the creditor cannot pursue the debtor personally. Instead, the creditor must seek recovery from the collateral securing the loan. The creditor can file a suit against the borrower if the collateral does not cover the debt. However, if the collateral covers the debt, the lender will likely agree to accept less than the total amount owed.

With recourse debt, the creditor can come after you and your assets if you fail to repay the loan. If you default, the creditor can seize your property, including any real estate you own and sell it to recover the amount owed. Non-recourse debt does not allow the creditor to go after you if you default on an obligation. Instead, the creditor can only get back what he paid for the asset. For example, if you bought a house using a mortgage, the bank cannot come after you for the unpaid portion of the mortgage. However, if you default on the mortgage, the bank can foreclose on the house and sell it to recover its losses.

Concerns when Obtaining Property Subject to Non-Recourse Debt

A second concern arises when considering acquiring property subject to a non-recoverable debt. You must first determine if the non-recourse liability is included in the purchase price. If so, you must also consider whether the non-recoverable responsibility is part of the sale proceeds. The cornerstone case for both of these questions comes from Crane v. Commissioner, 331 U.S. 1 (1947), which was decided in 1947 by the United States Supreme Court.

The basis of a property is the price paid for the property when you bought it. If you buy a house for $100,000, the basis is $100,000. You can deduct any increase in the value of the home during the year from your taxable income. For example, if you sell your house for $200,000, you get a capital gain of $100,000 ($200,000 – $100,000) and pay taxes on half of that gain ($50,000), leaving you with a $50,000 net profit. A higher basis means you can claim more significant deductions for depreciation, interest, and other expenses.

Non-recourse debt is usually considered when you buy a house. You must pay back the loan plus interest if you borrow money to buy a home. If you default on your loan, the bank may seize your assets. However, if you own your house free and clear, you won’t owe any money if you fail to repay the loan. You’ll still have to pay taxes on the gain, but there won’t be any penalties for failure to repay the loan.

In general, if you borrow money against your residence, the basis should be the property’s fair market value at the time of the loan. If you borrow money against your business real estate, then the basis should reflect the fair market value of your business real estate at the time of the borrowing. However, there are exceptions to this rule. You may be able to exclude certain types of debt from the basis of your property. For example, if you borrow money to pay for improvements to your property, the amount borrowed does not become part of the basis of the property. Similarly, suppose you borrow money to purchase an asset that is held primarily for sale to customers in the ordinary course of business. In that case, the amount borrowed is excluded from the basis of the asset.

Key Takeaways

A recourse loan is a type of credit instrument where the lender has recourse against the borrower if there is an event of default. A non-recourse loan is a type of loan where the lender does not have recourse against the borrower if the loan goes bad. Non-recourse loans are often associated with real estate lending because real estate is considered a safe asset. However, non-recourse loans are also used in other industries, including finance, manufacturing, and construction.

Non-recourse loans allow borrowers to borrow up to the value of the property. If the borrower defaults, the bank cannot pursue them for the remaining amount. As a result, banks charge higher interest rates on these types of loans to cover the increased economic risk. In the United States, loan-to-value ratios for residential mortgages are generally capped at 80%.

Special Considerations

Non-Recourse debt is an investment strategy involving borrowing money at low-interest rates and then investing those funds in projects that will generate returns later. These investments are made without guaranteeing that the borrower will repay the loan. If the project fails, the lender does not lose anything because they did not put any money down. On the other hand, if the project succeeds, the lender gets paid back plus interest.

For more information speak with a Denver business attorney at The McGuire Law Firm, call 720-833-7705.

A reorganization allows a company to restructure its operations without triggering significant tax consequences. A reorganization is generally considered a change in the form of a corporation rather than a mere change in the place of doing business. For example, suppose a company moves its headquarters from New York City to Los Angeles. In that case, it will likely qualify as a reorganization because the move changes the form of the corporation. However, if a company merely changes its name, it may not qualify as a reorganization. You should consult your accountant or other professional advisors about the potential tax implications if considering a reorganization or B reorganizations.

What Are B Reorganizations?

In B reorganizations, the acquiring corporation acquires all of the target corporation’s shares. The acquiring corporation doesn’t need to pay any money to purchase the target corporation’s shares. Instead, the acquiring corporation pays the target corporation’s shareholders for the acquired shares. This means that the acquiring corporation owns the target corporation’ shares directly.

The acquiring corporation then calculates the basis of the target corporation’s share using the same method as if it had bought the shares. For example, if the acquiring corporation buys 100 shares at $10 per share, the acquiring corporation will calculate the basis of the target shares as if the acquiring corporation owned those shares. If the acquiring corporation paid $100 for the shares, the basis would be $100.

B reorganizations are complex transactions that require careful planning and execution. They must be done correctly to avoid legal issues.

What Are The Control Requirements For B Reorganizations?

In B Reorganizations the control requirement is satisfied if the acquiring corporation possesses at least 80% of the value in all classes of voting stock plus at least 80% of all other classes of stock. If the acquiring corporation acquires 80% of the value from Classes A and B, it will satisfy the control requirement. However, receiving less than 80% of the value may still qualify for a tax benefit. For example, consider five classes of stock – Class A and Class B, with voting rights, Class C, Class D, and Class E, none of which have voting rights.

What Type of Consideration May Be Used In B Reorganizations?

A B reorganization is a type of corporate restructuring that allows companies to move assets out of an insolvent subsidiary and back into the parent company. This corporate restructuring requires a particular form of corporate reorganization called a “B” reorganization. Only certain types of corporations are eligible for a B reorganization, including those whose primary activity consists of owning or operating businesses in the same line of business as the corporation seeking the reorganization. For example, if a company owns a hotel chain, it could seek a B reorganization to transfer all of its hotels to another company. However, if a company owns real estate, it could not pursue a B reorganization unless it also owned a hotel chain.

Can B Reorganizations Occur Over a Series of Transactions?

A reorganization can occur when a company acquires another company. A reorganization occurs when the acquiring company’s shareholders receive all or substantially all of the target company’s shares. Reorganizations can be accomplished via multiple steps. For example, an acquisition could involve the purchase of all outstanding shares of the target company at a price below its fair value. Then, the shareholders of the acquiring corporation could vote to approve the merger. Finally, the acquiring corporation could issue additional shares to the target company’s shareholders.

Will There Still Be Minority Shareholders?

B reorganizations require at least 80% control to be successful. This isn’t the right choice if you’re looking to reduce your share count. A B reorganization doesn’t necessarily mean that you’ll lose any control. You could retain all of your shares if you wanted to. But if you’re looking to reduce the number of outstanding shares, other options are available.

If you are considering a business sale or acquisition, you may qualify for a tax benefit under Internal Revenue Code Section 368(a)(1)(A) if the transaction meets specific requirements. For example, you must not have shareholders other than yourself, and you cannot transfer all of your assets to another entity. You also need to meet specific financial criteria. If you meet those criteria, you may be eligible for a tax deduction for the amount paid to acquire the company.

Key Takeaways

Bankruptcy is an attempt to turn around a failing business. If a company is insolvent, then it cannot repay its creditors. When a company files for bankruptcy, it must submit a reorganization plan. An insolvent company will often file for Chapter 11 bankruptcy protection.

The plan’s purpose is to restructure the company’s finances and operations to return it to solvency. The goal is to put the company back on track to repay its debts. Insolvent companies often need to cut costs drastically. This includes cutting wages and benefits, laying off employees, closing stores, and selling assets. These actions are called “reorganizing.” A judge usually supervises reorganizations. The judge approves the reorganization plan, and the company emerges from bankruptcy if all goes well.

A Chapter 11 bankruptcy filing allows a company to reorganize its finances while continuing operations. This type of filing is often used when a company needs a period of time to restructure its debt and re-establish its financial structure. It also gives companies breathing room to negotiate with creditors and avoid liquidation. Companies may file for Chapter 11 protection if they cannot pay all of their debts or if they are unable to come to an agreement with their creditors about how to repay them.

Conclusion

If you’re considering a reorganization, you owe it to yourself, your shareholders, and your employees to follow a rigorous plan rather than winging it. You will make better decisions, keep everyone more involved and engaged, capture more value and avoid costly mistakes.

You can contact The McGuire Law Firm to speak with a Denver Business Attorney and learn if your transaction qualifies as a B reorganization for tax deferral purposes.

What is FIRPTA?

If you are considered a foreign person for tax purposes, you may have special tax withholding requirements when it comes to disposing of an interest in real estate. Generally, the most common disposal of a real estate interest is through a normal sale. However, for purposes of determining FIRPTA requirements, a disposition can include a variety of transfers. FIRPTA stands for Foreign Investment in Real Property Tax Act of 1980. Note, for FIRPTA withholding requirements to apply, the property must be considered U.S. property (§1445(a)).  

What is the rate of withholding?

Under Section 1445 of the U.S. Tax code, the current rate of withholding is 15% of the amount realized. For example, if the seller purchased the home 5 years ago for $300,000 and sold the house on June 1^st, 2021 for $600,000, the amount realized is $600,000. Therefore, the required amount of withholding is $90,000. The gain on the property is $300,000, which may be subject to certain exclusions to income under §121.

Alternatively, if the seller sells the home and the purchaser conveys $500,000 cash and a  $50,000 art collection, then the total amount realized to the seller would be $550,000. The total withholding requirement would be $82,500 in this scenario.

Are there exceptions to FIRPTA Withholding requirements?

According to Treasury Regulation 1.1445-2(a), the withholding requirements only apply to foreign persons, not those who are considered United States residents for tax purposes. In other words, if you satisfy the substantial presence test, you may be exempt from the withholding requirements under FIRPTA. There are various requirements for those who satisfy the substantial presence test, but may be lawfully in the United States under certain visas.

Section 1445(b)(5) also eliminates a withholding requirement where the amount realized on the disposition does not exceed $300,000 and is being acquired for use as a residence. Note, as described above, the amount realized is distinct from the gain realized. 

What are the requirements for the Substantial Presence Test?

The Substantial Presence Test requires that taxpayers be physically present in the United States for a specific number of days to be considered a U.S. resident for tax purposes. First, the taxpayer must be present in the United States for a minimum of 31 days for the year in which the property is sold. Next, the taxpayer must be present in the United States for a minimum of 183 days over the past three years.

Note, that there are special requirements for each year. A taxpayer may not simply remain in the U.S. for 183 days in year one and no other days for year two and three. Rather, the IRS will consider each of the days you were present in the current year (Year 3). Next, the IRS will consider 1/3 of the days you were present in the U.S. for the year prior (Year 2), and 1/6 of the days you were present in the U.S. for the year before Year 2 (Year 1).

Example:

For example, Taxpayer X was physically present in the U.S. for 240 days in Year 1. In year two, Taxpayer X was present in the U.S. for 180 days. In the current year, Taxpayer X has been present for 84 days. In total, the IRS will consider 40 days for Year 1, 60 days for Year 2, and all 84 days for Year 3, or the current year. This is a total of 184 days, and the taxpayer satisfies all the requirements for each year. In this situation, the taxpayer will be considered a U.S. resident for tax purposes and will not be subject to FIRPTA withholding requirements for the sale of the real estate.

Please contact The McGuire Law firm to speak with a Denver tax attorney to help determine if you are eligible to avoid FIRPTA withholding requirements and/or need assistance with tax issues dealing with the title company.

Reorganization is a term used when a company changes its structure. A reorganization differs from a merger or acquisition because it does not involve merging two companies. Instead, it consists in changing the legal form of a corporation. Reorganization is also different from liquidating a company because it doesn’t involve selling all of the company’s assets. Reorganization is done to change the corporate structure of a company. For example, if a company wants to expand its operations, it may restructure itself by creating a subsidiary instead of growing through mergers and acquisitions.

The article below has been prepared by a Denver business attorney and tax attorney to discuss a few issues related to tax-free reorganizations.

What Are The Types Of Reorganization?

An acquisitive reorganization occurs when one company buys out another. These transactions are often referred to as “acquirers” and “target companies.” Acquirers may acquire target companies through mergers, acquisitions, asset purchases, stock purchases, or other means. Acquisitions are usually motivated by strategic goals such as growth, expansion, diversification, or cost reduction. Acquirers may seek to achieve these goals through organic development, acquisition, divestiture, or other means.

Acquisitive Reorganization

Acquisition deals are often done through mergers or acquisitions. Mergers are when two companies combine to form a single company. Acquisitions are when two companies combine to create a larger company. Both mergers and acquisitions can be made privately or publicly. A private equity firm usually makes private acquisitions. An investment bank usually makes public acquisitions.

A type B reorganization is when an investor buys out a minority shareholder. If the investor owns more than 50 percent of the shares, then the investor must buy out the remaining shares at fair market value.

A type C reorganization is when a company sells all of its assets to another company. Then the seller liquidates (IRC §368(a)(1)(c)). This is called a boot because the buyer gets a cash infusion.

A type D acquisition occurs when a company buys another company. If the buyer controls 80% of the shares of the acquired company, then the acquirer will be called a Type D Acquirer. A type D acquisition is different from a merger because there is not always a change in ownership. For example, if a company sells 10% of its shares to another company, that does not mean that the original owner of those shares sold them to someone else. Instead, the original owner still owns 90% of the claims.

A triangular reorganization is when a company changes its structure by merging with another company, acquiring another company, or selling a division of itself. These types of reorganizations can be classified as triangular reorganization (excluding reorganization type E), depending on whether there is an intermediary party. Type A involves a target corporation, a corporate parent, and a subsidiary, while type B consists of a target corporation, an investor, and a subsidiary. Type C involves a target corporation, two investors, and a subsidiary.

Divisive Reorganization

A split-off is when a company splits itself into two separate companies. The parent company will buy back its stock from the shareholders, giving them a controlling interest in the new company.

A spin-off is when a parent company sells a portion of itself to create a separate company. A spin-off may involve selling an asset or division of the parent company to another company. For example, a company might sell the factory to another company if it has a manufacturing plant. Or, if a company owns a patent, it might sell the patent to another company.

A split-up is when an existing company splits into two or more smaller companies. This happens when the shareholders vote to dissolve the old company and distribute its assets among the shareholders. Each shareholder receives a share of the new company’s stock. If the shareholders agree to form two or more new companies, then each shareholder will receive a percentage of each new company’s stock.

Restructuring Reorganization

Restructuring is an event that changes the legal structure of a company. It may involve changing the number of shares outstanding, the type of ownership, or the amount of debt. For example, if you own 100% of a company, you might sell your shares to someone else. You could buy out the other half if you own 50% of a company. Or, you could change the debt ratio. You could increase the amount of debt, decrease the amount of equity, or even eliminate the deficit.

A type F restructuring is when you change your legal structure. You could change your name, your address, or even your country. If you move your company to another country, you must file an application with the local government. This is called a type F restructuring.

Bankruptcy Reorganizations

A bankruptcy reorganization is when a company transfers its assets to another company. These events are usually triggered when a company cannot pay all of its debts. Bankruptcy reorganizations are often done because companies need time to restructure their finances and become stronger.

How Does An A Reorganization Work?

A merger occurs when two companies combine forces to form a single company. Mergers usually happen when there is a need for growth or expansion. A merger can also arise when a company wants to acquire another company. When a company merges with another company, the shareholders of each company receive shares of stock in the resulting company. After the merger, the shareholders of the acquired company become shareholders of the acquiring company.

What Are The Requirements Of An A Reorganization?

There are two main reasons why a company might need to restructure itself. One reason is when the company needs to merge with another company. Another reason is when the company wants to change its focus. For example, a company might want to focus more on technology or manufacturing instead of selling products. If the company continues to operate after the restructuring, it will still have the same owners and employees.

In a corporate acquisition, the acquiring company pays the target company a purchase price equal to at least 40 percent of the value of the acquired company’s shares outstanding. The acquiring company does not need to own any of the acquired company’s stock to satisfy the 40% rule. Instead, the acquirer can pay cash or debt to buy the target company’s shares. If the acquirer buys all of the target company’s shares, the acquirer will have to pay at least 40 percent of its equity capital. However, suppose the acquirer buys less than 100 percent of the target company’s stock. In that case, the acquirer must pay at least 40 percent out of its equity capital plus the amount of the difference between what the acquirer pays and the minimum percentage required. For example, if an acquirer pays $10 per share for a target company with 200 million shares outstanding, then the acquirer needs to spend at least $40 per share ($20 + $20 $40) to meet the 40% requirement.

Example

In the above scenario, company A acquires company B for $150,00. At least $60k must be stock of A, and the remaining $90k could be anything. Company B receives the money from A and then liquidates it. The consideration provided by A is distributed to the shareholders in a tax-free transaction. Depending on whether $90k is stock or other property, there may be tax consequences for the shareholders of B.

When you consider a tax-free reorganization, keep in mind that there are different types of considerations that may qualify for tax-free treatment. For example, if you are going through bankruptcy, you will not be able to claim any tax-free treatment. However, if you want to sell your company, you might be able to claim tax-free treatment. 

Still Have Questions? Call Us

Speak with an experienced Colorado Business Attorney or Tax Attorney about what options are available to you. Contact The McGuire Law Firm at 720-833-7050 to discuss your situation.

When buying a company, you have two options: buy all its shares or just the company’s assets. If you’re looking to sell your company, you may also choose to sell all of its shares or just its assets. There are pros and cons to stock sales or asset sales options. For example, if you own 100% of a company, you will receive all the proceeds from any future company sales. However, you’ll get less money if you sell only the company’s assets. It would be best to consider both types of transactions when making an investment decision.

An acquisition is a purchase of shares in a company. An asset transaction is when you buy something like a house or car. A stock transaction is when you buy shares in a company. When you buy shares in a corporation, you become a shareholder. You get all the rights that come along with that. If you buy 100 shares of XYZ Corporation, you will receive one share of XYZ Corporation. That means you own 1/100th of the company. You also get all the rights that accompany owning a piece of the company. For example, if the company owns a factory, then you get access to the factory. 

This article has been prepared by a Denver business attorney and tax attorney to discuss section 338(h)(10) of the Internal Revenue Code.

Stock sales

In a stock sale, the company sells its shares to another company. The buyer buys all the shares owned by the sellers. The buyer also takes on all the debts and obligations of the company. The buyers gain full ownership of the company and become responsible for paying any debt or obligation incurred by the company. If the company does not have enough money to pay back the debts, the buyer must either sell off other assets or borrow money to pay them back.

Buyers should consider whether they are willing to assume the risks of buying a company’s stock. When selling a company, the seller must disclose any material facts about the company’s financial condition. 

For example, if a company faces legal challenges, there could be a lawsuit against the company. If the company is facing environmental problems, the company could face fines or penalties. Employees could strike or go on strike if the company faces labor issues. All of these situations could cause the price of the company’s stock to drop significantly.

A stock sale will allow the owners to retain control of the company while still allowing them to sell shares to investors. If the company has many copyrights or patents or has significant government or corporate contracts that are difficult to assign, then a stock sale may be a better choice. A stock sale also allows the owners to reduce the risk of losing those contracts.

Sellers often prefer to sell stocks because all the proceeds are tax-free. Sellers also avoid paying taxes on any income earned while holding the shares. For example, if you sold your stock at $100 per share, you’d pay $20 in federal income taxes. If you held onto the stock until it reached $150 per share, you’d owe $50 in federal income taxes. But if you sold the stock worth $100, you’d owe nothing on the sale.

A deal structure can greatly impact the future of both the buyer and the seller. Other factors, including the company’s structure and industry, can also affect the decision. Buyers and sellers need to consult with their business intermediary, legal counsels, accountants, and others early in the process to ensure that all necessary information is gathered and understood before making a final decision.

Asset Sale

When selling an asset, the seller remains the legal owner of the entity while the buyer purchases individual assets. For example, when selling a car, the seller keeps ownership of the vehicle while the buyer buys the engine, transmission, tires, etc. A typical asset sale does not involve buying the seller’s cash or paying off debts. Instead, the buyer pays for the assets individually. An asset sale is often called “cash-free” and “debt-free.”

Net Working Capital is usually included in an Asset Purchase Agreement. It includes items like Accounts Receivable, Inventory, and Accounts Payable.

Selling a corporation can have significant tax consequences for both the buyer and seller. Generally, sellers of corporate entities prefer to engage in a stock sale rather than an asset sale, while buyers choose to engage in an asset sale. However, it is not impossible to satisfy both parties to the transaction with a §338(h)(10) election.

Asset Purchase

If a purchaser pays for a target company’s stock, they receive a cost basis under §1012 for the value of the stock itself. On the other hand, buyers prefer an asset purchase over a stock purchase to increase their basis for depreciation purposes. The underlying assets held by the selling corporation retain the same basis as before, which does not create a benefit for the purchaser in terms of depreciation.

Asset Purchase Example

For instance, consider a corporation that holds a machine that costs $500. In years one and two, the corporation depreciates the machine by $100 per year, so the adjusted basis under §1012 is now $300. This also assumes that the seller holds the stock with a basis of $500, the total fair market value of the entity is $1,000, and there are no liabilities.

If the corporation engages in a stock sale, the purchaser will pay $1,000 for the stock since that is the fair market value. The buyer’s basis in the stock will be $1,000 under §1012. However, the machine retains the $300 basis. There is no adjustment to this underlying asset. The seller enjoys capital gains treatment on $500 of gain from the stock sale, which is the difference between the amount realized of $1,000 and the adjusted basis of $500 (§1001). Even though the buyer purchased the stock for $1,000, he may only use the machine’s basis of $300 for depreciation purposes. There is no step-up in basis allowed for underlying assets absent the §338 elections.

Limitations to Asset Purchases

Note that there are some limitations to asset purchases that make stock purchases more favorable. These include limitations built-in by contracts and other legal obligations. There could also be other liability issues that prevent sellers from engaging in an asset sale.

For these reasons, section 338 may provide an attractive alternative to satisfy both the buyer and seller in a business sale. Please discuss any specific business or tax matters directly with your business attorney or tax attorney.

To speak with a Denver business attorney or tax attorney, please contact The McGuire Law Firm at 720-833-7705.

When you start an LLC business, you are usually excited about what lies ahead. You might even dream about all the possibilities of starting a new venture. However, when you close down your business, you might feel like you need to get rid of any unfinished projects before moving on to the next thing. However, several legal requirements must be met before officially dissolving your LLC. Filing paperwork with the state and informing creditors are two of those requirements. These steps will protect you from personal liability if something goes wrong during the closing period. A Denver business attorney has prepared this article to provide additional information on dissolving an LLC in Colorado. 

Why Should You Dissolve an LLC?

To start a business, you must register your company name with the Secretary of State. You also need to file articles of incorporation with the state. If you are doing business in another state, you may need to file a similar document. Once you registered your company name, you must notify the IRS and other relevant tax authorities. You should also keep records of all payments made to yourself and the corporation. When you dissolve the company, you stop paying taxes and filing returns.

Dissolution is a legal procedure that ends the existence of a corporation. A company can dissolve itself if its owners agree to do so. Suppose the owners of a dissolved corporation wish to continue operating under another name. In that case, they must file articles of incorporation under the state’s general corporation law. Dissolving a corporation does not affect any contracts entered into before the dissolution. A corporation may also be dissolved voluntarily by filing Articles of Dissolution with the Secretary of State. Dissolution of a corporation does not mean that the corporation ceases to exist. Instead, it dissolves the corporate entity and returns all assets to the individual shareholders. When a corporation dissolves, the directors and officers remain liable for any debts incurred before dissolution.

Vote to Dissolve the LLC

The first thing you need to do when dissolving a company is to get all the members to agree to dissolve the company. You will then need to follow the procedures set out in the organizational documents. If there are no specific procedures, you must follow the general procedure outlined in your state’s business laws. Once the company is dissolved, you must keep track of any outstanding debts or liabilities.

File Your Final Tax Return

When you dissolve your corporation, you must notify your state tax agency of your intent to dissolve. If you fail to do so, you could face fines and penalties. Once notified, the state tax agency will send you a notice indicating whether you need to pay additional taxes. If you have already paid all of your taxes, then there is nothing else to worry about. However, if you have not yet filed your taxes, you should still contact the state tax agency to let them know you intend to dissolve your corporation.

You must file your final tax return at the end of every calendar year. You may need to file quarterly instead of annually if you are self-employed. You will also need to file an annual report with the IRS. You must file your final employment tax returns within 90 days after the end of each quarter. Failure to file timely means you could face penalties.

File the Proper Dissolution Forms

Next, go to your state’s Secretary of State or Corporations Division website to find the dissolution forms. You will need to provide basic information about yourself and your company. Some states require additional information, such as proof of payment of outstanding taxes. Fees vary by state but generally range from $10-$50. Check the form instructions for the exact requirements.

You need to get an official Certificate of Dissolution from the state. You can do this online at the Secretary of State website. Once you receive the certificate, you must file it in your LLC record books. Be sure to include your LLC number, name, and other information. Make sure you also include the filing fees, if any. There may be additional requirements depending on what type of entity you are forming. For example, you must pay taxes if you are forming a corporation. If you are forming a partnership, you must register with the IRS.

Settle Outstanding Debts

It would be best if you let your creditors know about the dissolution. You can send them a letter via certified mail and return the receipt requested. If unsure what kind of creditor you have, check with your attorney or contact your state’s Secretary of State’s office. Your state’s law will specify the proper procedure. Usually, you must provide notice within 30 days of the dissolution. Any claim filed against you after the deadline will be dismissed if you fail to provide notice.

It’s important to keep track of your debts and credit card balances. If you’re unsure whether you need to send out notices to creditors, check your credit report first. A free copy of your credit report can be found at annualcreditreport.com. You can also get one every four years through AnnualCreditReport.com. Once you’ve checked your report, you should consider sending out notices to creditors.

Distributing Assets

You may need to pay your creditors before distributing any money to your LLC members. You will also need to allocate assets among your LLC members. These allocations are usually based on an owner’s share of the company. For example, if you have three owners with a 40-30%-30% ownership split, each owner gets 30% of the company’s total value. However, you can change the distribution of your LLC’s assets at any time. Doing so will require a special meeting of your LLC’s board of directors.

Take Care of Your Employees

Employment taxes. If you have one employee, you must pay them any final wages or compensation owed. You also need to make final federal tax deposits. The trust fund recovery penalty may apply if you don’t deduct or deposit employee income, social security, and Medicare taxes.

You must pay quarterly federal income tax on all wages paid during the year. You also must pay the estimated tax if you expect to owe more than $1,000 at the end of the year. Failure to pay the required due amount may be subject to penalties and interest.

You must complete an annual return if you paid wages during the calendar year. Suppose you paid wages to any employee during the calendar year. In that case, you must report the total wages paid to all employees. You must also report the total amount of FICA taxes withheld from wages paid to all employees, including those who did not receive wages. You must attach a copy of Form W-2 to the return. For more information about reporting wages, see Publication 1546, Reporting Employee Compensation and Benefits.

If your company receives tips, you must file Form 8027, “Employer’s Annual Information Return,” to report the final tip income. You also need to allocate tips to each employee. If you don’t, you may face penalties.

Conduct Other Wind Down Processes

A proper conclusion to your business involves closing out your accounts, including your business bank account, federal employer identification number (FEIN), and any state tax ID number, if applicable. You should also cancel any contracts and leases that may still be active and let your customers know when your last day of business will be.

Further Steps

If you register an LLC, you will automatically get a tax ID number in many states. You need to keep track of this number and update it when you change your name or state of incorporation. If you fail to do this, you may not be able to claim certain deductions or credits.

When you close your LLC, you’ll file your federal and state income taxes. You’ll also need to file any employment taxes owed. The IRS has a checklist of tax-related actions you need to take when dissolving an LLC. You’ll help avoid future fees, obligations, and lawsuits when you dissolve your LLC.

Contact The McGuire Law Firm to discuss your business questions and issues with a Denver business attorney. 

Section 338 Election of the Internal Revenue Code provides a way to treat stock purchases as asset acquisitions for tax purposes only. In other words, under Internal Revenue Code §338(h)(10), the selling corporation will bear the tax associated with the transaction, but there will only be one level. This single layer of taxation is based on the inherent gain in the assets held by the entity, but there is no tax on the subsequent stock sale. Section 338 Election of the tax code can help resolve some of the issues created in stock sales to benefit both buyers and sellers. This article has been prepared by a Denver business attorney and tax attorney to discuss the specific problems in greater detail.

Requirements for Section 338(h)(10)

Section 338(h)(10) elections require that both the buyer and the seller be corporations, and both parties must agree to make the election (see §338(a)). Unlike section 338(g), where the purchaser bears the tax burden, the seller pays the tax from the asset sale, so this requires agreement between the corporate parties.

Additionally, 338(h)(10) requires a qualified stock purchase. Section 338(d) defines a qualified stock purchase as one where the transaction occurs within a 12- month acquisition period and also satisfies the elements of §1504(a). Section 1504(a)(2) requires purchasing 80% of the vote and value of the target entity. For purposes of §338(h)(10), the 12- month acquisition period is not limited to a calendar year.

If a 338(h)(10) election has been properly made, the transaction is essentially treated as an asset sale followed by liquidation, with the tax liability flowing to the selling party. Mechanically, the purchasing target corporation is

 deemed to create a new target entity. This new entity’s sole purpose is to purchase the assets of the original entity. This allows an asset purchase while maintaining the stock sale characteristics for legal purposes. In other words, the asset sale is only considered for tax purposes, not other legal aspects. Note, the asset sale does trigger gain to the selling corporation, but there is no subsequent tax from the stock sale, thus eliminating the second level of taxable income. Treating the sale as a stock purchase may benefit the purchaser, such as maintaining specific contracts, permits, licenses, and other corporate attributes that could be lost from an asset purchase agreement.

The Tax Perspective

From a tax perspective, the purchasing party is satisfied because the transaction has been treated as an asset sale that provides a stepped-up basis for the assets. The seller is satisfied because there has only been one level of tax from the sale of the assets. This increases depreciation deductions which may be used to offset ordinary income in the future. Additionally, if the selling party has any losses, then depending on the character of the gain, these may be offset by the deemed asset sale.

Overall, §338 transactions provide a way for buyers and sellers to structure a transaction to maximize the benefits of both stock sales and deemed asset sales while reducing tax liabilities to each party. You should discuss the elements and implications of a section 338 transaction with your business attorney or tax attorney.

You can schedule a free consultation with a Denver business attorney or tax attorney by contacting The McGuire Law Firm at 720-833-7705.

Are you considering establishing a corporation? Perhaps you have considered contributing property as consideration for your interest while another member would like to contribute cash. You may even find yourself in a situation where a third person would like to donate his services in exchange for an interest in the corporation. Each of these situations can have significant tax consequences, so you must plan to maximize the benefit of the formation. This article was drafted by a Denver Business Attorney and Denver tax attorney to provide information related to the contribution of a property when you form a corporation.

Features of IRC Section §351 

One of the most attractive features of forming a corporation is in §351 of the tax code. This provision allows persons to contribute property to a corporation without recognizing gain if done correctly. 

Alternatively, §351 may stop some members from recognizing a loss, which may be a negative factor. As a general rule, the exchange of stock for property creates a §1001 event taxable. However, Congress wanted to make a way where taxpayers could still contribute property to a corporation without getting hit with a huge tax liability. This resulted in §351, but this code section does create requirements for it to apply.

Requirements in IRC Section §351 

Many requirements must be met, and the whole transaction may trigger immediate tax consequences if the conditions are not met. Remember that simply contributing property to a corporation does not eliminate the gain nor create a step-up basis, similar to §1014. Instead, the tax consequences will linger in the background until any realized gains or losses must be recognized in the future. 

Section §351 of the Internal Revenue Code applies only to the contribution of property, which does not include services. However, there are exceptions, but you must be careful when creating a corporation with someone who plans to provide any services in their interest. The contribution of services may completely ruin a §351 transaction, depending on the value.

Requirements in IRC Section §368(c)

Under Section §368(c) of the Internal Revenue Code, members must also acquire control of the corporation’s formation. This section requires that the members contributing to the property possess 80% of the voting power and 80% of shares of all other classes of stock issued by the corporation.

Non-Recognition and IRC Section §351

Additionally, the non-recognition portion of Internal Revenue Code Section §351 applies only to situations where the members receive solely stock for their interest. However, in cases where members receive boot, or something other than stock, in exchange for their contribution, they may recognize gain or loss. Receiving something different than stock does not always ruin the §351 transaction entirely, but it may trigger profit or loss, which could defeat the entire purpose of the transaction.

Liabilities and IRC Section §351

Liabilities also create issues with IRC Section §351 transactions where the corporation assumes the debt. It is not uncommon to have machines or other equipment carrying a note or obligation to consider one’s interest. As mentioned above, the courts did not want to discourage taxpayers from transferring property to a corporation simply because a liability encumbered it. Instead, the whole purpose of §351 was to encourage entity formations.

As a general rule, if liabilities are incurred on a property for legitimate business purposes, these will not trigger gain or loss upon formation. Instead, the penalties will be accounted for on the member’s basis in the corporation. However, there is an exception where the liabilities exceed the basis of the property. Under §357(c), there will be gain recognition, but only to the extent that the liabilities exceed the basis.

Forming a corporation can have many benefits, but you must consider all the contributions made before determining the overall tax consequences to the newly formed corporation and its shareholders. 

In Summary

Consider speaking with a Denver business attorney and Denver tax attorney regarding the business and tax implications of forming a corporation and contributing property to the corporation. Planning the contributions in the beginning can help avoid significant tax liability in the future.

You can contact The McGuire Law Firm to speak with a Denver Business Attorney or Denver Tax attorney. Call us at 720-833-7705 or John@jmtaxlaw.com