Is it a per se corp or eligible (able to choose classification) entity? o Look at per se corporation list in 301.7701–2(b). It includes 9 major sections. If it is on the per se corp list, STOP it is a corp. If it is not on the per se corp list, it is an “eligible entity” and can choose its classification. How many owners? 301.7701-3(a). 39
o If 1 owner it can ELECT to be a corp or a “disregarded” entity (it is treated like a sole proprietorship or a branch of the owner). o If 2+ owners, it can ELECT to be a corp or a PP. Default classification? 301.7701-3(b). o Domestic entity with 1 owner is a disregarded entity. Entity with 2+ owners is PP. o Foreign entity is A partnership if it has 2+ members and at least one member does not have limited liability; An association if all members have limited liability; or Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability. If ownership in an entity classified as a partnership is reduced to one taxpayer, the entity becomes a disregarded entity. 301.7701-3(f). A foreign entity is a corporation if included in the “per se” list, if not, it is by default an eligible entity. Change in Election An election into subchapter K from subchapter C is treated as a complete liquidation of the corporation, followed by a contribution of the assets to a partnership. 301.7701-3(g). Note that since change in election is treated as a complete liquidation, the liquidation provisions apply. §337 (Nonrecognition for property distributed to parent in complete liquidation of subsidiary), §336 (gain/loss on property distributed in complete liquidation). Sale of Corp Assets §338 Which assets and liabilities will be part of the assets transfer? o Contingent liabilities vs fixed (like bank loans): We give you basis in the property you bought with a bank loan bc you are bound to pay it and that requirement is absolute. With contingent liabilities, they are taken into account on your books, but you don’t get credit for them on your tax books until you actually pay them. There are circumstances where you could add the contingent liability into your basis before paying it (we will get to these) Think of contingent liabilities as negative goodwill. They can be things other than loans, like if you own a bunch of gas stations there is a very high likelihood that one will have a site contamination that you will have to clean up, so that goes on your books as a contingent liability. We care about these liabilities in asset sales bc some liabilities disappear on transfer and some don’t, so we need to know what we are dealing with and how to treat those liabilities. These days there are a lot of contingent liabilities, so you will almost always deal with this in asset sales. When we have a sure price we still have a broad range of possibilities what the positive and negative numbers will be on the balance sheet.
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- Spring '14
- Taxation in the United States, Related corps