LLC to Corporation

[cpabsd]

A client changed from an LLC to a Corporation as of 1/1/08. It qualifies as a section 351 transfer. The owernship was the same percentages in both entities. The LLC was taxed as a partnership. They are a cash basis taxpayer. At the time of the transfer, the LLC had $182,000 on the books as Accounts Receivable. This money was all received in January of 2008 per the corporations books. Is A/R an allowable item to be transferred in a 351 transfer?

Thanks

[jklcpa]

Yes, in general A/R can be part of a 351 transfer. It's just part of the consideration in exchange for the stock.

Then, just thinking out loud:

The part that is interesting here is that the A/R was booked by the LLC, but the LLC's tax reporting is on the cash basis. In that case you should have adjustments on the LLC's Sch M-1 reconciling book to tax income. That also means that the balance of A/R hasn't been taxed yet.

If you include the A/R's value as basis of stock, then it would be is as if the owner's received a step-up in basis of the stock of the corporation received.

I think you'd be OK including its value in the basis of stock received in the 351 exchange, as long as the corporation is also reporting on cash basis for tax purposes. That way, some entity has recognized the $182K A/R collections in taxable income at some point.

But if the corporation is reporting on the accrual basis for tax purposes and starting out with that $182K on it's books, then I don't think you can include that in the 351 transfer.

I hope that makes some sense.

[cpabsd]

That does make sense. That was part of my hesitence to include as the LLC was taxed as a partnership and those monies were not taxed in that entity. Both entities will be cash basis. Thanks for your help.

[OldJack]

I question if the 351 transfer of accounts receivables from a cash basis partnership to a corporate entity. Technically I believe the partnership terminates and distributes the assets and the individual then uses sec. 351 to transfer in exchange for shares of stock. Since the individual has not recognized the accounts receivable for income tax purposes the transfer would result in the tax basis for the corporation as zero requiring the recognition of income as received. The corporation's tax basis in contributed property is the same as it was in the hands of the transferor (IRC 362)

>>IRC 362a) Property acquired by issuance of stock or as paid-in surplus

If property was acquired on or after June 22, 1954, by a

corporation -

(1) in connection with a transaction to which section 351

(relating to transfer of property to corporation controlled by

transferor) applies, or

(2) as paid-in surplus or as a contribution to capital,

then the basis shall be the same as it would be in the hands of the

transferor, increased in the amount of gain recognized to the

transferor on such transfer.

<<

>>IRC 351a) General rule

No gain or loss shall be recognized if property is transferred to

a corporation by one or more persons solely in exchange for stock

in such corporation and immediately after the exchange such person

or persons are in control (as defined in section 368©) of the

corporation.

<<

[joelgilb]

Looks to me like Jack has it in a nutshell

[RoyDaleOne]

So are accounts payable.