Every asset that is distributed will increase the shareholder’s stock basis by the gain recognized in the distribution and decrease shareholder’s stock basis by the fair market value of the asset distributed. Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the note was received. We have three plans to minimize the tax liability of the corporation from the liquidating distributions.
C., a “small business corporation” is a domestic corporation that meets certain statutory criteria.
The precise tax consequences to the corporation and its sole shareholder are not possible to know without knowing the fair market values and basis of the corporation’s assets.
The corporation will recognize gain to the extent that its basis in the LLC, Inc., stock, which is the basis of the warehouse, as adjusted by I. The gain recognized, if any, will be capital gain and, because we are not selling or exchanging the warehouse (we are selling stock, which is nondepreciable property), in the entity that owns the warehouse, we can avoid I. After the contribution, the corporation will sell its LLC2, Inc., stock to the shareholder, and the shareholder will then be the 100 percent owner of LLC2, Inc., the owner of the note. After LLC3, Inc., becomes an S corporation, it will file IRS Form 8869 (Qualified Subchapter S Subsidiary Election) and elect to treat the corporation as a qualified subchapter S subsidiary (QSUB) of LLC3, Inc., which effectively liquidates corporation in a nonrecognition transaction.
By having corporation contribute the note into LLC2, Inc., instead of distributing the note to the shareholder, we avoid the consequences of I. corporation in which 100 percent of the stock of such corporation is held by an S corporation, and the S corporation elects to treat such corporation as a QSUB.