Tax Tips
| Jurisdiction | United States,Federal |
| Citation | Vol. 4 No. 11 Pg. 2290 |
| Pages | 2290 |
| Publication year | 1975 |
1975, November, Pg. 2290. Tax Tips
When a business being conducted in corporate form is to be sold, the purchaser often insists upon purchasing only the corporate assets, as opposed to a purchase of the stock and the company itself with its inherent and unknown liabilities. In such a situation, by having the corporation sell its assets after it has adopted a one-year plan of liquidation under § 337 of the Internal Revenue Code, the selling shareholders can have the same results for income tax purposes as if they had sold the stock itself. Instead of a tax on the corporation in the sale of the assets, and a tax on the stock-holders on receipt of the liquidation distribution, there would be only one income tax to pay, that by the stockholders upon the liquidation transaction which would be treated as a sale or exchange of their stock. As a general rule, the sale of the assets by the corporation would not be taxable if the corporation has adopted a one-year plan of liquidation.
Often, however, for income tax and business reasons, both the seller and the purchaser wish to structure the transaction on an installment payment basis. Section 453 of the Internal Revenue Code states that sales of personal property or real property can qualify for reporting on the installment basis if no payments, or payments not exceeding 30 percent of the sales price, are received in the year of sale.
If the transaction is structured as an installment sale of assets by the corporation after the one-year plan of liquidation has been adopted, the corporation would normally not pay any income tax. Furthermore, the corporation would not recognize gain on the distribution of the installment obligations to the stockholders in the liquidation of the corporation.
Irrespective of this fact, however, the fair market value of the installment obligations must be taken into account by the stockholders in computing their gain or loss on the liquidating distribution. Thus, it is important to remember that when a corporation is arranging for a sale of its assets after adopting a one-year plan of liquidation, its stockholders can derive no tax-deferral benefits from a sale on the installment basis, even though there may be business reasons for spreading the payments over a period of time.
Furthermore, if the installment obligations are reported at less than their face value in the liquidation transaction in order to reduce the capital gain...
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