* Also Admitted in Tennessee
** Also Admitted in Georgia

         Despite the repeal of the General Utilities doctrine as a part of TRA '86, taxpayers currently experience an overall better tax situation for most transactions involving the purchase or sale of a business than before that repeal. The General Utilities doctrine was part of a landmark case that allowed C corporations to sell their assets, liquidate within one year, and generally pay only one layer of tax. In addition to the repeal of this doctrine, the lower income tax rates for individuals added to the attractiveness of S corporations. True, the repeal of the General Utilities doctrine increased the difficulty and tax risk often associated with trying to avoid double taxation when the assets of a C corporation (or an S corporation that has potential built-in gains tax problems) are sold. Many planning ideas, however, provide ample ways to avoid a double tax.

         Below is a checklist of planning ideas that can be implemented to minimize the tax impact of a business sale transaction.

1. Determine whether an asset sale or sale of ownership interest is better. Buyers generally want to buy assets, and sellers want to sell stock from a tax and nontax standpoint. From a tax standpoint, however, it is often possible to have a modified asset sale that is palatable for the sellers. Likewise, a modified stock purchase can often be accomplished and still get buyers their deductions.
   
   
2. Look for win/win opportunities or give something to the other party that is more valuable to that party than it is to the party giving it up. Tax advisors can often bring the parties closer together on price/terms by softening the tax implications.
   
   
3. Non-competition agreements can be used to give buyers a 15-year write-off and get dollars allocated outside the company. Watch out, however, for the ordinary income to the sellers. Shareholder intangibles can give rise to capital gains treatment.
   
   
4. Salary continuation payments can get immediate write-offs to the buyers and allow benefits to continue to the seller. Sellers need to weigh the one layer of tax with the ordinary income and payroll taxes vs. capital gains.
   
   
5. Consulting agreements are generally preferred over salary continuation. The issue of who pays the second half of the self-employment/FICA tax must be addressed first. But, the seller has the opportunity to set up a defined benefit or other qualified plan with consulting agreements. Being able to defer tax and get a current tax deduction with a qualified plan can make consulting agreements more attractive than receiving proceeds that will receive capital gains treatment.
   
   
6. Consider prolonging liquidation, sale, or redemption until after basis step-up is received. This can be particularly attractive with elderly business owners.
   
   
7. The IRC §1202, 50% exclusion is now available in some transactions.
   
   
8. The buyers may need to step-up asset basis with a IRC §754 election if a partnership or LLC interest is purchased.
   
   
9. Installment sale treatment can defer tax for sellers. But, this puts the seller into a fixed income investment as well as subject to a lot of risk. Yet, a partial installment sale is often necessary to close many deals. (The provision not allowing the installment sale treatment for accrual-method taxpayers has been retroactively repealed.)
   
   
10. Allocating cash down payment to depreciation recapture assets when using an installment sale can minimize the upfront gain that needs to be recognized.
    
    
11. An asset appraisal is a must when electing S status. The appraisal can set a cap on the exposure to the built-in gains tax. (The valuation should be done at "fair market value" not the potential higher "investment value.")
    
    
12. Remember to reduce built-in-gain tax by loss and credit carryovers in the S corporation.
    
    
13. Consider selling built-in loss assets in a year built-in gains are recognized in an S corporation asset sale.
    
    
14. Reduce taxable income to zero in a year built-in gains are recognized in an S corporation. However, the built-in gains carry forward, so it may be necessary to reduce taxable income in future years also.
    
    
15. Revoke S status prior to an asset sale if the built-in gains tax is too onerous. This takes the "risk" out of electing S status for existing C corporations. The shareholders can always switch back if a C corporation is better.
    
    
16. Consider paying out the balance in the AAA if switching from an S to a C corporation.
    
    
17. Bonuses for prior "undercompensation" can be a significant planning idea to avoid double tax with C corporation asset sales for gains that must be allocated to the corporation. Double tax can be avoided, albeit at ordinary rates and with FICA and Medicare tax implications. (Note that accrued prior undercompensation can also create a built-in loss for S corporations to offset built-in gains.) Undercompensation should be documented in the minutes and elsewhere to justify large bonuses if there ever is a sale.
    
    
18. Allocate adequate amounts to assets owned outside the business, such as shareholder intangibles (see Martin Ice Cream Co., 110 TC 189, and Norwalk, TC Memo 1998-279, RIA TC Memo 98279, 76 CCH TCM 208) which generate capital gains income, and may include customer relationships, company and industry know-how, customer lists, and relationships with suppliers.
    
    
19. Increasing the interest rate on installment sales and making a corresponding reduction in the purchase price can increase the buyer's ordinary deductions. Pre-payment restriction will protect the seller if this idea is implemented.
    
    
20. Move activity generating built-in gains assets to a new entity to set the stage for an S election. This idea may need to be implemented well before S status is elected and a potential sale.
    
    
21. The tax on installment obligations distributed in liquidation can be deferred.
    
    
22. A stock-for-stock exchange, followed by the acquiring company's ESOP purchasing some or all of the transferor's stock and a tax-free election by transferor to purchase publicly traded securities, can be a powerful idea if the buyer has an ESOP.
    
    
23. A company can be put in a sellable position by implementing deferred compensation agreements and nonqualified stock options to set the stage to reduce gain on a future sale. These can be triggered and accelerated at the time of a sale.
    
    
24. Switching to flow-through taxation when there is no longer a need to retain earnings or the company is "super profitable" and there could be significant tax problems on an asset sale or trying to get money out of the company without double tax is part of keeping the company in a sellable position. There is also the idea of having two entities-one a C corporation, to take advantage of lower corporate rates especially at taxable income levels below $100,000, and the other a flow-through entity to channel the remainder of the profits through to the owners.
    
    
25. There is a provision to roll over the proceeds from the sale of publicly traded securities into specialized small investment companies under IRC §1044.
    
    
26. Likewise, rollover of proceeds from a sale of qualified small business stock to another qualified small business is available for a handful of companies under IRC §1045.
    
    
27. A partial or full tax-free stock-for-stock exchange should be considered where sellers are comfortable with holding a significant amount of the buyer's stock.
    
    
28. Transferring stock to a charitable remainder trust prior to a transaction can defer taxes on the sale or liquidation of stock. The charitable remainder trust can also be set up at the company level.
    
    
29. Making gifts to lower-bracket taxpayers prior to a transaction can shift some tax.
    
    
30. A "bootstrap" is an alternative to a complete stock sale. This involves selling a small amount of stock with a simultaneous redemption of the remaining stock. This allows for payment of the company out of the company's assets. In C corporations, there is the opportunity to use the lower tax rates to finance the purchase.
    
    
31. There are "asset recovery" companies that are willing to buy C corporations where the assets are sold and they have significant gains at the corporate level. These companies will pay more than the shareholders can net on a liquidation.
    
    
32. Consider using IRC §851 "regulated investment company" status after a C corporation asset sale to avoid personal holding company status and two layers of tax.
    
    
33. Use limited partnership "wrappers" for C corporation assets. Doing so can reduce the value of assets distributed in a liquidation-in the same way as family limited partnerships are used to reduce the taxable value of gifts.
    
    

         Armed with these planning ideas, tax advisors can often arrange for an acceptable tax result on business sale transactions even where business owners used the lower C corporation rates for companies that needed to retain earnings to grow or expand. These business owners can take advantage of the C corporation lower rates during the operating years and set the stage to have a "not so taxing" sale down the road. The shareholders often can receive one layer of tax, with a good bit at capital gains rates. At the same time, buyers can maximize deductions.

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