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.
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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.