I have an S Corporation client who wants to purchase the assets of a related (owners of the S corp. own the C corp.) Corporation and the manufacturing business. The C corporation is operating at a loss and they cannot benefit from the losses, so they want to bring the operations under the S Corporation to get a little step up (at FMV) in basis from the assets that were written off using bonus depreciation. What issues and pitfalls do I need to aware of, and do you have any better ideas on how to take advantage of the loss or structure the purchase? In addition, there is a four million dollar loan from the S Corporation to the C Corporation that will not get repaid. Do you have any ideas on how to convert that to an operating loss, instead of a capital loss that we cannot use except for the $3,000 per year allowance? (The S corporation is not in the business of lending money; it’s a retailer, and we have not been able to pay interest on the loan.)
Robert W. Jamison: There are some possibilities here, but it will take some very careful attention to detail, in both the transactions and the relevant tax laws. The sale of the assets from the C corporation to the S corporation would probably meet the objective of triggering gain to the C corporation, which would allow it to deduct its net operating loss carryforward. Without knowing the relative values of the assets owned by the C corporation and its net operating loss carryforward, I can’t really say much more.
The bad debt is a tricky matter. There is quite a bit of case law on what constitutes a business or nonbusiness bad debt. You may want to consider restructuring things so that the S corporation owns the C corporation, or perhaps some alternative structure.
Even though the S corporation is not in the trade or business of lending money, you mention the purchase of assets from the C corporation. If it has use for these assets, could it not accept them in payment of the loan?
If the C corporation became a subsidiary of the S corporation, might it continue until it has used up the carryforward?
Again, I see some possibilities here.
Chapters 15 and 16 of the treatise have some material that you may find helpful.*