338 Election

DEEMED ASSET PURCHASE

Internal Revenue Code Section 338


From the seller’s income tax perspective, the same amount of total gain will be recognized by the S corporation shareholders in a sale of all of the S corporation outstanding equity as in a sale of all of the S corporation assets. However, in an asset sale (without the benefit of the Section 338 election), income tax is due on the gain on the sale of the target assets.  This income tax is paid by the target company (some at ordinary income tax rates).  This is because the target company (and not the S corporation shareholder) is the seller of the company assets.  Upon liquidation of the target company, the shareholders also pay a second level of income tax on the remaining asset sale proceeds that are distributed to them.




    Corporate Law Practice 

Buying/Selling a Business


PURCHASE PRICE ALLOCATION

Internal Revenue Code Section 1060


In buying and selling a business, one of the most important (yet often overlooked) component of the transaction is the "1060 allocation."  Under both IRC sections 338 and 1060, the calculated total purchase price is allocated among specifically identified categories-or classes-of acquired assets. The total transaction price is allocated based on the fair market value of the acquired assets. Under Treasury Regulations section 1.338-6, the total transaction price is allocated sequentially to the following seven asset classes: 1) cash and general deposit accounts, 2) actively traded securities, 3) other securities and accounts receivable, 4) inventoiy, 5) tangible personal property and real estate, 6) Section 197 intangible assets except for goodwill, and 7) goodwill and going concern value.


​​Treasury Regulations section 1.1060-1(c) describes the asset classes that are used to allocate the total consideration paid in a business combination structured as an asset acquisition. Basically, section 1.1060-1(c)(2) refers to the same asset classes described under the IRC section 338 purchase price allocation regulations, but section 1.1060-1(d) also provides a simple, but informative, example of an IRC section 1060 purchase price allocation, which is generally agreed upon by the parties to the transaction


​LLC Operating Agreement


Because of its flexibility, ease of operating, and certain tax benefits, the LLC has become an important entity in which to conduct business.  Generally, a well-planned LLC will have an operating agreement that governs the LLC's business.  The agreement also addresses the rights and duties of members of the LLC. LLCs operating without an Operating Agreement are governed by the state's "default" rules set forth by statute and case law.  Operating agreements can be amended at any time by the company members or managers

​In single member LLCs, an operating agreement is a declaration of the structure that the member has chosen for the company and sometimes used to prove in court that the LLC structure is separate from that of the individual owner and thus necessary so that the owner has documentation to prove that he or she is indeed separate from the entity itself.


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Buy-Sell Agreement


​A buy-sell agreement is an extremely important agreement between co-owners of a business that governs what happens if a co-owner dies or is forced/chooses to leave the business. An insured buy-sell agreement is often recommended to guarantee there will be money when the buy-sell event is triggered.  A buy-sell agreement is generally used to address business decisions regarding 1) who can purchase a previous owner's interest; 2) events triggering a buyout; and, 3) price of the interest.  Buy-sell agreements can be a cross-purchase plan or a repurchase (entity or stock-redemption) plan.

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One of the things I have enjoyed about my litigation and controversy practice is that it has made me a better business law attorney.  Working in litigation, you see all of the things that can go wrong in a business or transaction.  While I frequently encouter taxpayers who have received unfavorable tax results from a business deal, I have also seen many business deals turn sour simply because of poor planning on the front end.  Jimmy McGee

Business Entities 

ENTITY SELECTION


Selecting the right type of business entity can be critical in taking advantage of tax benefits, but also in maximizing the operating goals of the business owners.  The following are the main business designations and types:


  • Corporation
  • General Partnership
  • LLC
  • LLLP
  • LLP
  • LP
  • PLLC
  • Professional Corporation
  • Sole Proprietorship


James G. "Jimmy" McGee, Attorney

Corporate Law:  Tax LL.M., MBA, BS - Accounting, Former CFO

Jimmy has worked as the Chief Financial Officer for a large company; he has worked in corporate and individual tax return preparation; he has litigated numerous cases involving tax issues, corporate matters, owner disputes, and white collar criminal matters; and, he has handled well over 1.000 IRS and MDOR tax cases.  This unique blend of experience makes him uniquely suited to provide high level business/corporate planning, from not only an accounting and tax perspective, but from the perspective of a seasoned civil and criminal litigator.  Call him today to schedule a Business Planning session.  He will make sure that you receive the best tax planning, the best corporate structuring, and the most reliable asset protection strategy.

 Resources 

Corporate Law & Business Planning

S Corporations

ABILITY TO DEDUCT LOSSES - Basis & "At Risk"

Internal Revenue Code Section 465


A shareholder's ability to deduct losses passing through to the shareholder from an S-Corporation is limited in two ways.  First, the shareholder can only deduct losses to the extent that the shareholder has a sufficient basis in the stock and debt of the S-Corporation. (IRC §1366(d)(1))  Second, the shareholder can only deduct losses to the extent that the shareholder has a sufficient amount at-risk with regard to the shareholder's investment in the S-Corporation. (IRC §465)  Generally, the term "at-risk" to refer to both of these limitations on the deduction of S-Corporation losses, but the term "at-risk" technically applies only to the latter limitation. Oftentimes a shareholder's stock and debt bases will be the same as the shareholder's amount at-risk; however, the shareholder's amount at-risk can be lower thanthe shareholder's stock and debt bases due to the fact that some transactions that give rise to additional basis do not provide an addition to the shareholder's amount at risk. (IRC §465).