Sale of a C Corp

[GeneInAlabama]

I have a C Corporation (automotive parts store) owned entirely by one person. He is thinking about retiring and wants to turn the business over to his son. His son has been working for the corporation for a number of years and is basically managing the business. What is the best way for him to transfer the business to his son. The books show $1,000 capital stock and $157,000 as additional paid in capital. Can he divide the business up and give him $13,000 of it each year? Can he transfer part of it to his wife and she also give $13,000? Alabama is not a community property state. Any help would be appreciated.

[GeneInAlabama]

Bump

[PapaJoe]

Dad can give son (and son's wife if he wishes) $13,000 worth of stock each year and avoid having to file a gift tax return to report the gift. The $13,000 is based on fair market value, not the cost basis of the stock.

[GeneInAlabama]

Thanks PapaJoe. I was hung up on basis rather than fair market value. Thanks for clarifing that. Since the husband owns 100% of the stock, can he give his wife $13,000 of the stock each year and she in turn give it to the son? I don't know if the son has been married long enough for the parents to consider also giving stock to the daughter-in-law. The son has been married for about 5 or 6 years and she seems very nice, but...

[TaxmannEA]

I believe that spouses can gift any amount to each other that they desire. There is no $13K limit to gifts between spouses. Mom and Dad can then gift $13K to son and son's wife. They can also gift the same amounts to the grandkids(if there are any) and the grandkids can then make gifts to son and son's wife. Just remember that in this case it's form over substance in regards to the transactions.

[GeneInAlabama]

Thanks TaxmannEA. That's what I needed to know. You and PapaJoe have got me on the right track.

[TAXBILLY]

Use caution here so that you don't get sued later. Present the options to the owner because you never know about divorce, etc down the road. He may not want to give a portion of his business to his daughter in law or kids who may then have some legal rights in decisions made in the business.

Proceed with extreme caution. I would suggest he gets legal advice before proceeding.

taxbilly

[GeneInAlabama]

Thanks Taxbilly. You are right. Divorce can be a very nasty thing. I'm going to give him the options but suggest that he give his wife (not the son's wife) half the stock and then each of them give the son $13,000 worth of the stock each year until it is all transferred and not involve anyone else. I will also suggest that he might want to keep some of the stock for retirement.

[Gail in Virginia]

I know there is a lot of uncertainty about estates and stepped up basis right now, but it might be to his son's advantage to inherit the business IF stepped up basis is available at the time that the father dies.

[GeneInAlabama]

Thanks Gailtaxed. I hadn't considered that aspect. I will certainly mention that option to him.

[OldJack]

Consideration should be given to the partial exclusion of gain on sale under code sec. 1202. If the stock qualifies 50% (75% for stock acquired from 2/18/09-12/31/10 sold after 5 yr holding period) of gain on sale can be excluded from income. A sale would give the son a step-up to fair market value for his ownership whereas gifting passes the givers low tax basis. For a summary of code sec. 1202 concept see the 2009 small business quickfinder handbook page C-7.

[GeneInAlabama]

Thank OldJack. I just found out that the reason he is planning on selling is that he has just turned 62 and is applying for social security. A representative from the Social Security office told him he "needed" to sell the business and that he should not turn it over to his wife. I don't know the ethics of continuing a business and not drawing a salary from it for social security purposes. I would like to hear some comments on that. I didn't draw social security until I reached full retirement age. One of my clients told me that his lawyer told him he could transfer the business to his wife and work for her for "love and adoreation". I had another client retire early and he was told by Social Security that he could only work something like 10 hours a MONTH at the business. I don't remember the exact number of hours, but it wasn't many. I had another client that gave all his stock in his S Corp to his wife and continued to work for a small salary and the Social Security office seemed OK with that. I wonder if there is a hard and fast rule regarding working at your business after taking an early retirement. Anyway, I recommended that the client talk with his lawyer on that.

[kcjenkins]

Since this is a Corp, not a Sch C or 1065, how much social security he draws will be based on what he is paid in salary. Dividends do not affect SS earnings. So he can continue to own as much of it as he wants to, and it will not have a thing to do with drawing SS, as long as he does not take an inflated salary.

It makes good business sense, however, for him to give his son, who is running the business, at least some stock in the business. But inheriting the bulk of it makes better tax outcomes than getting it all as gifts. Although who knows what the tax code will be when Dad dies. And, of course, there are a lot of issues more important than tax results, in a case of this sort. It's unlikely he will want to give his son total control now. And probably not a good idea, either. Not because of taxes, tho.

[michaelmars]

he doesn't have to give his wife 1/2 they can make a joint gift of $26,000 to their son.