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You are here: Experts > Business > Corporate Law > Tax Law (Questions About Taxes) > dissolving a Sub chapter S corp
Expert: John Kirk, CPA
Date: 9/23/2008
Subject: dissolving a Sub chapter S corp
Question
QUESTION: Hello,
I am a 100% stockholder of a small family sub S corp and I want to dissolve it. My question revolves around my tax liability. There are two assets in the corp., a note on an asset sold, and a working ranch, upon which I live. I purchased the ranch in 1990, under the corp name, and have rented the fields for 18 years. In 2001 I moved to the ranch, built a shop and home, and therin lies the question. How do I handle this asset? How do I figure my tax liability? I do not use the home for business purposes, and I depreciated the shop for three years before declaring it 50% or less business use. Thank you
ANSWER: Dissolve the corporation and the basis in your stock becomes the basis of the assets distributed to you allocated based on their fair value.
The note receivable is already determined if the interest rate is at current market rates otherwise it may need to be discounted to reflect actual rates for the note in today's market.
The ranch's basis will be the remainder of the basis allocated to the shares.
For example lets say you have a note valued at $1,000,000 based on current market interest rates and a basis in the shares of $11,000,000.
The note has a basis of $1,000,000 and the ranch is $10,000,000.
When you sell the ranch the gain or loss will be determined based on the price difference over the $10,000,000 basis in the property.
Hope this helps,
John Kirk, CPA
www.johnkirkcpa.com
---------- FOLLOW-UP ----------
QUESTION: Thank you. As I purchased the ranch without home or shop, can I use the basic land value as determined by the assessor's office as current market value (I rented the bare fields) Can I remove the value of improvements (non-business related...house and shop) from the assessed value of the ranch? In effect, when I purchased the bare land in 1990 for $90K, and the assessed value of the land at that time was $32K, would I be able to claim the assessed value currently at $45K and limit my exposure to the $13K appreciation? I will not be putting the ranch on the market, but will be acquiring the ranch in my name...will the IRS consider this an "arm's-length" transaction? Thank you again for your effort.
Answer
The assessed value of the land is not its fair value. You would have to use the appraised value of the land to determine the amount of distribution to you and the difference in the basis of the stock is gain. Look at it this way, supposed the s-corp sold the land and the note, and distributed the proceeds to you in settlement of the stock. The difference would be considered long term capital gain.
John
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