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Jvargas07

TaxAlmanac

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C Corporation Change of Ownership

See original discussion at http://www.taxalmanac.org/index.php/Discussion:C_Corporation_Change_of_Ownership


Client bought a corporation "Restaurant" for 150K. She obtained the settlement documents and certificate stating that she owns 100% 10K shares of this corporation.

The reason why she could not start her own corporation is because she can not get the liquor license and so she had to buy the corporation with licenses, location, equipment, and everything else.

The question is: Can the client or should the client obtain a new EIN number from the IRS with the same name of the corporation so she can retain the licenses OR is she stuck with having to continue to use the EIN that the corporation has which she never got by the way. I am surprise she did not get any accounting records, financial statements, etc before she bought it.

Another owner is coming into the picture 50/50 so she will have to transfer 5K shares to this person. If she is allowed to get a new EIN for this corporation (the name has to remain the same because of the licenses), I am assuming they can elect S Corp status, correct?

Please let me know what your thoughts are. I even called the IRS and the State and they both referred me to each other. So funny how no one knows anything and they just love to say "let me transfer you to someone who can answer your question" and then you are on-hold for ever, then they want to transfer you to another person and so on..........so frustrating.

( Asked 05/17/11 10:07 PM in TaxAlmanacViews by community 9 )

Answers (9)  Comments (1)  

MWPXYZ

TaxAlmanac

is she stuck with having to continue to use the EIN that the corporation >> she does not use the EIN; the corporation uses the EIN throughout it's existence.

has which she never got by the way. As the owner of the corporation she should obtain prior tax returns, records, property, etc. Perhaps her/a lawyer can help her obtain these items (which she should have reviewed before buying the corporation).

She/they can elect S status with the old EIN.

She appears to be inexperienced in basic concepts of operating the business, make sure that she does not turn you into a lawyer in an attempt to solve all her current and future problems.

( Answered 05/18/11 12:31 PM in TaxAlmanac ,Views by community 9 )

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KatieJ

TaxAlmanac

I hope she also had legal advice confirming that the liquor license would not be affected by the change in ownership of the corporation. From a tax perspective, I trust you are aware that the change of ownership will limit the corporation's use of any previously incurred NOLs, credits, etc.

It seems odd to me that no one at either the IRS or the state tax authority could tell you that a corporation keeps its EIN, as MWP says, throughout its lifetime. That's kind of a basic principle. It makes me wonder whether you explained the situation so they could understand it.

( Answered 05/18/11 12:55 PM in TaxAlmanac ,Views by community 9 )

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Marcilio

TaxAlmanac

It sounds like the sale was a stock purchase, and as such the corporation continues without any changes to its balance sheet or tax attributes. As MWPXYZ stated, it is imperative the your client have full access to all the governing documents, tax returns, accounting records, etc. The old owner has no rights to those. They belong to the corporation.

Assuming that the corporation is currently a C corp and has a December year end, S Corp status would be available starting 1/1/2012.

( Answered 05/18/11 03:00 PM in TaxAlmanac ,Views by community 9 )

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When I called the IRS and State of MD I told them the same scenario that I posted here. The IRS said you need to call the state and see if they allow you to get a new EIN for this corporation since the state tax accounts is based on EIN numbers. The state told me that we need to contact the IRS and ask them if we need a new EIN.

Yes, I am aware of the implication that comes with changing ownership, but she (the new owner) did not. She is a good friend and if I had known what she was doing, I would have advised her to hire a lawyer, but she didn't say anything to me until after settlement. So now she is stuck. I will push to see if I can contact the previous owner and see if I can get some documents for her and the EIN number of the corporation.

In case the former owner does not provide us with anything, which is what I think is going to happen, can we contact the IRS and explain the situation and get the corporation's EIN number?

Thank-you much to everyone this is a lot better than calling the IRS.

( Commented 05/18/11 03:27 PM in TaxAlmanac ,Views by community 9)

Marcilio

TaxAlmanac

It seems that you are a bit confused regarding how the transaction occurred. It sounds like your client purchased the shares of the corporation, and not the equipment, licenses, etc. Is that right?

( Answered 05/18/11 03:51 PM in TaxAlmanac ,Views by community 9 )

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JR1

TaxAlmanac

Yeah, no kidding. From the first line or two, I'm thinking, ok, straight stock purchase, and you don't seem to get that yet. She owns the corp, the old corp, same corp as always. There is no new corp, no need to get a Fed ID#. She MUST have all the old records, for they are hers now, along with any attendant liability that came from a shyster prior owner. Under audit, when they discover the '2nd store' that was all cash, she'll be held liable for that, and good luck then suing the prior owner. I would never ever let someone buy the corp stock of a liquor store or tavern. Dumb dumb dumb.

Now, that said, this sure looks like the classic use of 338(h)(10) where she can treat her purchase as an asset buy and write off the deal with depreciation and amortization. I have no idea how that's handled with reporting or FEIN's, but assume that it's still the same corp.

Good luck. THis one really cried out for an attorney. Too late now.

( Answered 05/18/11 04:26 PM in TaxAlmanac ,Views by community 9 )

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TAMEMCPA

TaxAlmanac

And when you figure out the EIN, corporate record ownership, etc. will the client have a liquor license? Surely your state/county/city requires a notification of ownership change of a license holder.

FWIW - I would strongly suggest obtaining transcripts from the IRS for income and payroll tax returns for several years.

( Answered 05/18/11 05:48 PM in TaxAlmanac ,Views by community 9 )

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KatieJ

TaxAlmanac

Echoing MEM -- and while you're at it, get the records from the state payroll tax agency as well. Another area of significant risk is sales tax. If your client did not get a sales tax clearance from the state when she purchased the stock, she may be subject to successor liability for any underpaid sales or use taxes, whether already assessed or assessed as a result of a later audit of pre-acquisition periods. Find out if she got a tax clearance and failing that, whether there is a reasonably enforceable indemnification clause in the sale/purchase agreement.

If this client didn't have legal advice when she made this deal, she needs to get some now.

( Answered 05/19/11 12:29 PM in TaxAlmanac ,Views by community 9 )

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TAGlmpllc

TaxAlmanac

You reference settlement documents. I would start there. I hope for your client's sake that there is a "Stock Purchase Agreement" of some sort. Definitely get an attorney involved. It will help, even this late in the game.

JR1 - I thought a 338(h)(10) election was only available to a corporate purchaser.

Good Luck.

( Answered 05/19/11 06:26 PM in TaxAlmanac ,Views by community 9 )

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Jakescia

TaxAlmanac

I would consider setting up either a parent corp or brother/sister corp, to own the business, allowing the acquired corp to retain only the necessary license-----plus minimal assets to conduct whatever business it has to to maintain the otherwise-un-acquirable licenses...........just to try and minimize the repercussions of that lurking lawsuit. Keep the business operations in the new corp, and lease/borrow the necessary assets that are inside old.

ie, Try and isolate the bad apple to the extent possible.

I'm not sure whether or not a transfer of stock to the new corp at this point would allow any step up if she paid a bunch for the stock--------haven't looked at those sections for all too many years, maybe someone else can comment.

Hard to believe a total change in ownership would allow the liquor license to remain, even if owned by the corp--------I would check that real closely before putting too much business/assets into that old shell. Might be time to rape and pillage that old structure-----especially a corp with a liquor license and potential unfiled personal liability lawsuits------before any new life is breathed into it.

The cynic in me says that sounds like there is a lot of pending hassle for the probable size of a business that someone without more business sophistication would have purchased without consulting a pro.

( Answered 05/19/11 11:02 PM in TaxAlmanac ,Views by community 9 )

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