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Cash for Assets Business Acquisition

In previous articles a business attorney from The McGuire Law Firm has discussed certain acquisitions between corporations.  The article below will discuss an acquisition known as a cash for assets acquisition.

The first step of a cash for assets acquisition, Corporation 1 would pay Corporation 2 cash consideration of the assets of Corporation 2.  Corporation 1 could decide to accept the liabilities of Corporation 2, and such acceptance would lower the purchase price.  Please note, Corporation 1 does not have to accept the liabilities of Corporation 2 in this type of asset acquisition though. No change would be necessary in the corporation documents of Corporation 1 or Corporation 2 and no change would need to occur in the outstanding shares of either corporation as well.  After the purchase, and as may be commonly seen, Corporation 2 could dissolve after the sale of the corporate assets.  If Corporation 2 did dissolve, the corporate charter would be cancelled and the shares extinguished.  After Corporation 2 satisfied all remaining liabilities, the remaining cash would be distributed to the shareholders of Corporation 2 in a liquidating distribution.  The dissolution and liquidation of Corporation 2 would not impact the shareholders of Corporation 1.

If Corporation 2 did not dissolve and distribute the cash to the corporate shareholders, Corporation 2 would reinvest the cash in operating assets or for corporate operations.  If Corporation 2 reinvested this cash in passive assets such as stocks or bonds, it is important to know that the Internal Revenue Code could deem Corporation 2 a Personal Holding Company and such designation may not have the most favorable tax treatment.  Thus, from a practical point of view, a corporation in Corporation 2’s shoes, is likely to reinvest in business assets to produce income, or dissolve and distribute the monies to the shareholders.

The cash for assets acquisition differs from a stock swap merger in a couple of ways.  First, the shareholders of Corporation 1 shareholders do not vote in the asset acquisition.  Second, the post transaction of the Corporation 2 shareholders is different as in the cash acquisition the shareholders will be cashed out as opposed to holding shares in the survivor corporation.  Third, Corporation 2’s pre-transaction liabilities may remain with Corporation 2 depending upon the terms of the transaction.  Additionally, a stock swap merger, also known as an A Reorganization is typically a tax free transaction, whereas the cash for assets acquisition is likely to be a taxable transaction.

You can speak with a Denver business attorney at The McGuire Law Firm if you have questions regarding a business transaction and/or the tax implications of a business transaction.

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Series of Distributions to a Withdrawing Partner

When a partner in a partnership is having their interest terminated, often such termination may be through a series of distributions.  The series of distributions may be needed due to the cash flow of the buyer or purchaser. Thus, the question arises, are these liquidating distributions?  The article below has been drafted by a Denver tax attorney to provide information regarding a series of distributions to a partner in a partnership in liquidation of the partner’s interest.  Discuss your partnership tax matters and questions with a tax attorney in Denver by contacting The McGuire Law Firm.

When a withdrawing partner’s interest is terminated through multiple, or a series of distributions to the partner, each distribution can be considered a liquidating distribution as opposed to a current distribution.  This is so even if the partner is a tax partner until the final distribution is made (see IRC Section 761) and recognizes gain only after total, actual or the constructive money distributions would exceed the outside basis of the partner’s partnership basis.  Therefore, this is not necessarily installment sale treatment, but rather open transaction treatment.  It is also important to note that a withdrawing partner can only recognize a loss once the final liquidating distribution is received.

The partnership’s obligation to make the distribution is not treated as a cash equivalent for a cash method taxpayer nor is it treated as an obligation for an accrual method taxpayer.  Under IRC Section 736, the obligation to make these deferred payments is not a debt obligation.  Thus, the liquidating distributions can be made by the partnership to the partner as a debt obligation that liquidates the interest immediately and thus the withdrawing partner is considered more as a creditor than as a partner of the partnership.

For example, John is withdrawing from J Cubed, LLC and the partnership agreement satisfies the special allocation regulations.  John is entitled to receive $100k upon his withdrawal.  Half is payable upon withdrawal and the other half in the year after the withdrawal.  John’s outside partnership basis is $75,000.  Thus, assuming there is no 751 Exchange, John will not recognize gain on the initial distribution of $50,000 because of the $75,000 in outside basis and gain recognition rules.  All of the $25,000 gain John will recognize will be recognized upon the second distribution.  J Cubed’s obligation to make the second $50,000 distribution is not a debt obligation.  The gain of $25,000 may be capital gain, but one should always considerable the collapsible partnership rule.  Assuming John had an outside basis of $150,000 and received the same $100,000 total in distributions, the loss could not be recognized until the second payment was made.

If you have tax questions relating to the sale of a business or business interest, discuss these questions and issues with a Denver tax attorney at The McGuire Law Firm.  You can schedule a free consultation with a tax attorney in Denver who can assist you with your matters.

Denver Business Attorney Video on Contributing Property to a Partnership

When a partnership is formed the partners will generally contribute property to the partnership in the form of cash and/or property.  These contributions of property impact the partner’s basis and capital account in the partnership and thus may impact tax matters in the future.  A contribution of property will generally increase a partner’s capital account and a distribution of property from the partnership to the partner will generally decrease a partner’s capital account in the partnership.

The video below has been prepared by a business attorney at The McGuire Law Firm to provide general information regarding the contribution of property to a partnership.  You should speak directly with your business attorney or tax attorney regarding your partnership matters and the contribution of property.

Contact The McGuire Law Firm to speak with a business attorney or tax attorney in Denver or Golden Colorado.

Controlled Partnership Transactions

Previous articles posted from The McGuire Law Firm have discussed controlled entities and certain related party issues.  The article below has been prepared by a tax attorney at The McGuire Law Firm to discuss controlled partnership transactions.

A controlled partnership is a partnership of which 50% (fifty percent) or more of the capital interest or profits interest is directly or indirectly owned by or for such person.  A gain that is recognized in a controlled partnership transaction may be ordinary income.  The gain can be ordinary if the gain is the result of a sale or exchange of property that in the hands of the party receiving the property is a noncapital asset such as accounts receivable, inventory or depreciable or real property used in a trade or business.  A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities:

–          A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership

–          Two partnerships, if the same person directly or indirectly own more than 50% of the capital interests or profits interest in both partnership

How is ownership determined?  Under most situations, stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries.  However, one should note that for a partnership interest that is owned by or for a C corporation, the above rule should only apply to those shareholders who directly or indirectly own 5% or more in value of the stock of the corporation.

An individual will be considered to own the stock or partnership interest directly or indirectly owned by or for his or her family.  So what constitutes family?  Family would include only sisters, brothers, half-sisters, half-brothers, a spouse, ancestors and lineal descendants.  In applying these rules, stock or a partnership interests that are constructively owned by a person via ownership in an entity is treated as actually owned by that person.  However, stock or a partnership interest that is constructively owned by an individual through a family member is not treated as owned by the individual for reapplying this rule to make another family member the constructive owner of tat stock or partnership interest.  No “double-dipping” so to speak in terms of this type of constructive ownership.

You can discuss your tax and business transaction matters with a tax attorney or business attorney at The McGuire Law Firm.  The McGuire Law Firm offers a free consultation to all potential clients.  Contact a tax attorney in Denver by contacting The McGuire Law Firm.

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Manager Managed LLC

A Limited Liability Company can decide whether to be manager managed or member managed.  When manager managed, one or more managers will make the pertinent business decisions for the LLC.  Having an LLC manager can have its advantages and disadvantages.  A Denver business attorney from The McGuire Law Firm has prepared the article and video below to discuss a manager managed LLC.

A manager for an LLC may be beneficial when the LLC has many members, and maybe more so when these members are passive and do not actively participate in the day to day operations of the business. Under such a situation, a manager well versed in operating a business such as an LLC and with experience in the business industry the business is operating in, may work well for the company.  On the other hand, if the members of the LLC are few or fewer, and these members actively participate in operating the business each day, then the members themselves may want to manage the LLC, and thus the LLC would be member managed.  Each business and the business owners must make important decisions as to how a business will operate and no two businesses will operate in entirely the same manner.  That being said, you may find it more likely to see a manager managed LLC when there are a larger number of members (maybe eight to ten or significantly more) and/or some or the majority of the members are not actively involved with the business operations.  For example, if thirty individuals invested in a partnership that was purchasing and selling real estate and most of the members were passive investors, and real estate was not their expertise, you may find this LLC to be manager managed.  However, if three individuals formed an LLC to purchase and sell real estate and one was a real estate broker, the other a contractor to fix up the houses and the third an attorney to draft up the partnership documents and contracts, this LLC would probably be more likely to be member managed.

As stated above, the choice to be manager managed or member managed is a question that will be answered by the business owners and typically the overall size of the business, nature of the business and day to day involvement of the partners.  There is no right or wrong answer for each business, and an LLC that begins as a member managed LLC, may end up choosing to be a manager managed LLC after the business operates and the partners see the need for one or a few individuals to be making certain decisions for the business.

If you have questions regarding the operation of your LLC or other business issues speak with a Denver business attorney and tax attorney at The McGuire Law Firm.

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Asset Sale Discussed by Denver Business Attorney

Generally speaking when one business buys or acquires another business the transaction can be either an asset sale or a stock sale.  There are different tax implications, liability matters and other issues depending upon how the transaction is set up.  The video below has been prepared by a Denver business attorney at The McGuire Law Firm to discuss general matters relating to an asset sale.  Please remember that the information provided in the video below is for informational purposes.  You should always contact your business attorney and/or tax attorney to discuss the sale or purchase of any business assets or the stock of a corporation.

If you feel the need to speak with a business attorney in Denver, please contact The McGuire Law Firm to schedule a consultation.

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Shareholder Issues in an S Corporation

An S Corporation is a corporation that has made an election with the Internal Revenue Service to be taxed as an S Corporation.  As such, an S Corporation is a pass through entity whereby the shareholders claim the corporate items of income, gain, loss etc on their 1040 Individual Income Tax Returns.

To be eligible for an S corporation election and to maintain the status as an S corporation the Internal Revenue Code mandates the S corporation allow only a certain number and types of shareholders.  For example, currently, I believe an S corporation can have only 100 shareholders and only one class of stock.  This differs from a C corporation as C corporation can or could have many more shareholders and many different types of stock.  For example, a C corporation can have multiple classes of stock, such as common stock, preferred stock, A shares, B shares etc.  Additionally, generally only individuals can be a shareholder in an S corporation.  Some exceptions apply for specific types of trusts (QSSTs).

A corporation will initially file their articles of incorporation with the secretary of state and thereafter file the election with the IRS to be taxed as an S corporation.  Form 2553 can be filed with the IRS to make the S election.  If the S corporation violates the Internal Revenue Code with a disallowed shareholder, the corporation can lose its S corporation status and be taxed as a C corporation, which could be very disadvantageous to the corporation and the shareholders.

In addition to the allowable shareholders and related issues, a corporation that operated as a C corporation for some time and then made the S corporation election must consider additional issues such as built in gain matters, which refer to the gain in certain assets at the time the corporation made the S corporation election.

If you have questions related to your choice of entity, entity structure or the taxation of your business or certain business transactions, speak with a Denver business attorney and tax attorney at The McGuire Law Firm.  The McGuire Law Firm offers a free consultation where you can meet with an attorney and discuss your current business operations, business questions and tax questions.

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What is Fair Market Value?

In terms of a business transaction, such as an asset sale, stock sale or otherwise, how would you define fair market value and why do we care?  One could define fair market value as what a knowledgeable and willing buyer under no compulsion to buy would pay and what a knowledgeable and willing seller under no compulsion to sell would sell an item for in an arm’s length transaction.

Ok, so in short, fair market value is what someone is willing to pay and what someone is willing to sell an item for, but what is an arm’s length transaction?  Arm’s length is referring to the relationship between the parties.  When related parties, such as father and son, mother and daughter, grandfather and grandson etc. enter into a transaction, such transaction may not be considered arm’s length because of your relationship.  The idea or thinking is that you would be more willing or likely to give a family member a “deal” on the purchase or sale of an item.  The Internal Revenue Service takes into account and considers related parties in regards to the tax treatment of certain items and transactions in the Internal Revenue Code.

Why do we care about fair market value?  You may care for many reasons, and a few will be discussed below.  If fair market value is not provided or exchanged in a transaction, the transaction could be considered part sale and part gift.  This part sale and part gift issue brings in too many issues to discuss within this article, but in short implicates gift matters, gift exclusion issues etc.  In terms of inheriting an asset, when you inherit property, you take such property with a stepped up basis, meaning your basis is the fair market value of the property on the decedent’s date of death (or there could be an alternative valuation date).  Thus, the current fair market value of an item becomes very important as it can dictate your basis in an asset and thus the gain whenever the asset is sold, transferred or disposed of

The video below has been prepared by a tax attorney and business attorney at The McGuire Law Firm.  The McGuire Law Firm hopes that you have found this information useful.  If you have questions relating to the tax treatment of an individual transaction or a business transaction, you can schedule a free consultation with an attorney by contacting the firm.

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Limited Liability Partnership (LLP)

What is a limited liability partnership?  Limited liability partnerships (LLP) were initially developed in Texas as a response to the liability faced by partners of legal and accounting firms for failures of the savings and loan associations.  An LLP could be considered a form of a general partnership.  Under the legislation creating the LLP, an LLP can permit general partners to limit their liabilities for those partners that did not participate in the wrongdoing that brings liability upon the partnership.

Thus, the LLP shielded partners and protected these partners from the liability they would face as partners for the improper conduct and actions of other partners or of the partnership.  You can compare this to shareholders in a corporation as the most a partner in an LLP could lose would be his or her investment in the firm.

This concept of limiting liability spread quickly and now, I believe, most every state recognizes an LLP.  You can elect LLP status relatively easily.  A general partner will file a statement with the appropriate state office (maybe the Secretary of State) electing LLP status.  Some states may call an LLP a registered LLP because the partnership must register with the state.  The business must state “LLP” or “Registered Limited Liability Partnership in it’s name.  Additionally, some states may require an LLP to carry a certain amount of insurance or maintain a certain value in partnership assets.  The failure to maintain this threshold can cause the entity to lose its limited liability status.

Most statutes do not afford limited liability to the partner or partners who committed acts of negligence or malpractice.  However, the LLP statutes brought along the idea that a partner in a general partnership can have limited liability, and thus in some form or fashion these partners begin to look like shareholders in a corporation whereby they are owners, but not liable for debts.  However, unlike a shareholder, a partner can have full rights of management in terms of managing the partnership.

Although, a partner is not liable for the debts or torts of the LLP (if not caused by their negligence etc) it is important and practical to note that most loans or lines of credit will need to be personally guaranteed by one or more partners.  Thus, a partner in the LLP may be liable for a debt because they have personally guaranteed the note.

An LLP will be taxed as a partnership by filing Form 1065, which is the income tax return filed by partnerships.  Speak with a Denver business attorney or tax attorney at The McGuire Law Firm if you have questions regarding the formation of your business, your current entity structure or other business and tax matters.

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Section 1250 Property and 1031 Like Kind Exchanges by Denver Tax Attorney

When Section 1250 property is transferred in a 1031 like kind exchange, is there Section 1250 gain from the transaction?  This was a recent research issue I came across, and thought it would make a nice informational article for those considering a 1031 like kind exchange.  Thus, the article below discusses issues related to Section 1250 property and/or 1031 like kind exchanges.

Through a simple definition, Section 1250 property could be considered depreciable real property.  When Section 1250 property is disposed of, say through a sale or exchange, ordinary income can be recognized to the extent of gain realized in an amount of the applicable percentage of additional depreciation. For further information, please see Internal Revenue Code Section 1250(a)(1).  Thus, the disposition of real property that has been depreciated can trigger Section 1250 gain, but what effect does Section 1250 gain, or is there Section 1250 gain through a like kind exchange controlled by Internal Revenue Code Section 1031?  If a taxpayer transfers and receives solely like kind Section 1250 property, there is no Section 1250 gain through the transaction.  See Internal Revenue Code Section 1250(d)(4).  Thus, the key for deferring such gain is an exchange of like kind 1250 property.

If the taxpayer does recognize gain on a 1031 like kind exchange, such gain would likely be characterized as Section 1250 gain and thus be treated as ordinary income.  The gain would be the greater of the gain determined without applying Section 1250, recognized on the exchange or the excess of the amount of Section 1250 gain that but for a like kind exchange under 1031, would have been recognized over the fair market value of the Section 1250 property.  See IRC Section 1250(d)(4)(A) and 1250(d)(4)(C).

In terms of a 1031 like kind exchange, what types of property don’t qualify for non-recognition under code?  The exchange of the items below do not qualify for non-recognition treatment:

–          Stocks, bonds or notes;

–          Stock in trade or other property help primarily for sale;

–          Other securities or evidences of indebtedness or interest;

–          Partnership interests;

–          Certificates of trust or beneficial interests;

–          Goodwill and going concern value.

You can also reference Internal Revenue Code Section 1031(a)(2) regarding property that would not qualify for non-recognition in a 1031 like kind exchange.

As always, if you are considering a transaction and are unsure of the tax consequences, please consult a tax attorney or tax professional and realize this article is for informational purposes alone.  You can speak with a Denver tax attorney by contacting The McGuire Law Firm.

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