Farm Estate and Succession Planning
This blog focuses on making complex and difficult topics in estate and business planning understandable and applicable to the reader.
C-Corporations and Appreciating Assets
May 19, 2011
At times, people are advised to establish an entity and own their assets within them. The reason being is that certain entities can provide additional asset protection, compared to individual ownership. Asset protection is important; however, it is extremely important not to have “tunnel-vision.” There can be drastic tax consequences in later changes, depending on the type of entity.
The worst of these scenarios involves a C-corporation. I am leery about putting any appreciating asset into a C-corporation because of the negative tax effects should you ever want to take it out. For example, assume you set up a C-corporation and transfer your land into it. Assuming you receive shares in return for the transfer, and retain “control”, then this would generally be a tax free event. “Control” in this situation is generally defined as owning at least 80% of the voting stock and 80% of all other classes of stock. There are other potential pitfalls with this, so it is crucial that you consult your pertinent professionals when contemplating this type of transaction.
Once the corporation is set up and you have your land in the corporation, if you later wanted to take the same land out of the C-corporation, it can be a nightmare. Understand that no money is exchanged; instead, it is simply coming back to you as the original owner. This transaction is treated as though the C-corporation “sold” the land to you for fair market value. Accordingly, when the C-corporation distributes the land back to you individually, there would be a consequence of double taxation (a C-corporation characteristic.) There would be a tax at the corporate level, and also at the individual level (capital gains.) Simply put, getting the same land back to you individually may lead to a major tax bill. This is an unintended consequence that must be analyzed when contemplating this type of planning.
Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information.
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.