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I have an elderly client that is sole shareholder of a Subchapter C corporation since its inception. The business purpose of the corporation was hauling raw milk. He sold the trucks, equipment and route (list of farmer patrons) in 2004. The remaining assets of the corporation include just cash. 1) Do these circumstances make the corporation a holding company? 2) If sole shareholder dies, does the son and daughter (only beneficiaries) receive a stepped up basis in the stock or does it maintain its original basis? 3) Sole shareholder is currently pulling money out of the corp as a dividend. Is there a better way? 4) If entire corp is liquidated, would there be a tax both at the personal and corp level?
ANSWER
The BIDaWIZ Team's Answer:
1) The company may be subject to the personal holding company tax since it's a C Corporation, more than 50% of the company is owned by one individual, and 60% of the adjusted gross income may be undistributed personal company income. If that's the case, then the company would be subject to the personal holding company tax as per IRC Section 541.
2) If the shareholder passes away, then the named beneficiaries will inherit the company stock at an adjusted basis that steps-up to the fair market value at the time of death.
3) The sole shareholder may want to contribute to a retirement account to defer/avoid individual taxation. Depends on many factors though.
4) If the entire company is liquidated, the tax treatment to the shareholders is governed by the tax code's Section 331(a), which provides that amounts distributed in complete liquidation, "shall be treated as in full payment in exchange for the stock." This essentially means that in most cases, the company would report a gain/loss on the exchange and then the stockholder will record a gain if the distribution exceeds the basis -- therefore there is two levels of taxation.
