Deciding Between an Asset Sale or Entity Sale

Businesses can be sold, and their assets transferred, either through an asset sale or an entity sale.1 In an asset sale, the entity sells its tangible and intangible assets to the buyer, while the entity’s owners retain equity in the entity. On the other hand, in an entity sale, the seller transfers his or her equity to the buyer, who acquires the entity with all of its assets. Where the business is a sole proprietorship, the sale by default will be a sale of assets, because there is no entity apart from the owner. Where the entity is a partnership, LLC or corporation, the buyer and seller will generally have some choice over how the business should be sold.

Whether a business sale should be structured as a sale of assets or as an entity sale depends on a number of factors, not the least important of which is what the buyer is willing to accept. Other crucial factors that will weigh on both buyer’s and seller’s choice will be (1) the existence of outstanding liabilities; and (2) the disparate tax effects that would result from the sale of assets when compared with the sale of the business entity. The tax implications are especially important where the seller’s business is a C Corporation because a sale of assets might result in double taxation. Where the business is converting from an investor owned or closely held C Corporation to an employee owned business, the incentive to sell the business’ equity to the employees is increased, because Section 1042 of the Tax Code provides significant tax benefits to qualifying companies that transfer equity into employees’ hands.

Unfortunately, tax and liability considerations often pit seller and buyer against one another. For tax purposes, as described below, typically, the seller would prefer to transfer equity, while the buyer would prefer to buy a pool of assets. Moreover, where both parties have agreed to an asset sale, the parties’ interests often conflict as to how the sales price should be allocated across assets.

In the cooperative context, these concerns may be less pronounced, especially where the seller intends to stay on as a worker-owner, employee or consultant.

Outstanding Liabilities and Method of Sale Choice

As a general rule, after a business is sold, any of the business’ outstanding liabilities will follow the business entity, but will not follow the business’ assets. Thus, when a buyer purchases a business entity, he or she will be stuck with the business’ outstanding liabilities. On the other hand, in the vast majority of cases, if the buyer opts to purchase the business in an asset sale, he or she can buy the assets free and clear of outstanding liabilities.

The only exception to the “free and clear rule” is a doctrine known as successor liability, which applies only in some states, but only in the manufacturing context. For these states, if the buyer purchases a manufacturing business through an asset sale, and continues engaging in substantially the same type of production, he or she may be held liable for tort claims stemming from the seller’s manufactures. In any case, because outstanding liabilities and debts follow a business entity, where such liabilities exist, the buyer will likely be much less inclined to purchase the business through an entity sale.

Tax Considerations in Method of Sale Choice

When a business owner decides to sell his or her business, he or she must carefully consider the various tax rates that might apply. The applicable tax rates will significantly impact which transactional structure the seller should seek (i.e., an asset or entity sale), and may even affect the final sales price and business valuation. The potentially applicable tax rates include: (1) ordinary income tax rates, which max out at 39.6%; (2) corporate income tax rates, which range from 15% to 35%; (3) long-term capital gains tax, which range from 0-15%; and (4) the real estate recapture tax rate of 25% for all non-accelerated depreciation.

Which tax rate applies will depend upon a number of factors including the ultimate form of the transaction (i.e., whether the sale is an entity or asset sale), the terms of sale, whether the value of the business’ capital assets have been written off, what entities are involved, the business’ income, and the seller’s present and future personal income, among others.

Capital Assets, Capital Losses, and Noncapital Assets

Capital Assets

Capital assets include equipment, real estate, good will and some types of intellectual property. Some capital assets, known as Section 1231 assets, can be depreciated. These typically consist of business real estate, furniture, fixtures and equipment held by the business for over a year, and intangible property that can be amortized under Section 197.

When a business acquires a Section 1231 capital asset, it is permitted to depreciate, otherwise known as “write off,” the value of the asset over the period of its anticipated useful life. A business accomplishes this by allocating the asset’s depreciation as an expense on the company balance sheet, in accordance with the General Accepted Accounting Principles.2 Additionally, there are different methods to depreciate assets. The “straight-line method” allows a business to depreciate the asset by allocating the same dollar amount of depreciation as an expense each year of the asset’s anticipated useful life.3 The business may also use an accelerated method of depreciation, in which a greater portion of the asset’s value is written off in the early years of its anticipated useful life.4 Intangible personal property outlined in Section 197 has a minimum authorized useful life of 15 years.5 Other properties may be depreciated in 3, 5, 7, 10, 20 or 25 years, as set forth in the tax code.6

Regardless of the business’s depreciation method, at the end of an asset’s anticipated useful life, its entire value will have been written off and its book value will be zero. Of course, this does not actually mean that the asset is without value, so long as it can be sold for some price. (See the Depreciation Recapture section, if an asset is sold for more than its book value.)

Lastly, if a business sells a capital asset after holding it for over a year, and the asset is either not eligible for depreciation, or has not been depreciated, all proceeds resulting from its sale will be taxed at the long-term capital gains rate (which is typically 15%).

Capital Losses

When the sale of capital assets leads to net capital losses, sellers may subtract the loss from their ordinary income for up to $3000 a year ($1500 if married and filing separately) until the capital loss is used up.

Noncapital Assets

Noncapital assets are assets the IRS does not categorize as capital assets.7 Noncapital assets include: inventory, promissory notes given to the business, accounts receivable and real estate or other depreciable trade or business property held for less than a year. Proceeds from the sale of noncapital assets are treated as ordinary income or loss.

Depreciation Recapture

Where some portion of a capital asset has been depreciated and the asset is sold for more than its book value, it is subject to a recapture tax on the amount of the sales proceeds exceeding the book value. Depreciation recapture taxation enables the IRS to tax the full value of capital assets whose book value has been depreciated below the sales price. Recapture taxation is thus inapplicable in sales of capital assets that (1) cannot be depreciated, (2) have been held for less than a year by the current owner, or (3) have been sold for an amount equal to or less than the asset’s book value.

With the exception of real estate, where a Section 1231 asset is sold, any sales proceeds that exceed its book value will be taxed at the ordinary income rate. For real estate, any accelerated depreciation must be recaptured at ordinary income rates, while non-accelerated depreciation is taxed at a 25% capital gain rate.

Effects of Entity Form

Pass-Through and Taxable Entities

The pass-through characteristic of a business entity greatly affects the sale of a business’s assets. A pass-through entity is an entity that does not pay income tax. Instead, the entity’s tax burden is “passed through” to the shareholders or interest holders, who are then individually taxed on the portion of the business income they receive, at their applicable personal income tax rate. Pass-through entities include sole proprietorships, partnerships, S-corporations, and LLCs that have not elected to be taxed as C-corporations.

This is in contrast to a non-pass through entity, which is subject to double taxation. In a non-pass through entity, the entity is subject to direct taxation on its income stream at the corporate income tax rate, and when the entity then distributes its profit to shareholders or interest holders, the shareholder or interest holder must pay taxes on the business’s distribution at the dividends tax rate, which is usually 15%.

In an asset sale, this difference is very significant. If a business is not a pass-through entity, the proceeds resulting from an asset sale will be subject to double taxation. First, the proceeds from the sale will be taxed as corporate income and, second, the owners will be taxed for their individual shares of the sale proceeds, at their applicable dividends tax rate.

On the other hand, when pass-through entities sell their assets, the amount of proceeds attributable to each interest or shareholder will be subtracted from the sales price, paid to that interest or shareholder, and only taxed once at his or her personal income tax rate. This “pass-through” feature greatly affects the amount of the final sales’ proceeds and will, thus, influence the sellers’ willingness and/or motivation to agree to sell the business as a collection of assets.

In situations other than an asset sale, a business may benefit from double taxation– for instance, if the corporation distributes all annual profits as employee compensation, or if it invests back into the business and takes advantage of favorable retained earnings tax rates for earnings under $100,000. On the other hand, where a corporate taxed entity engages in the sale of capital assets, it is subject to the same double taxation, but without the corresponding benefits. Proceeds from the sale will be taxed first as corporate income at the applicable corporate income tax rate, then the owners will be taxed for the share of proceeds distributed to them individually, at the dividends tax rate.

Sole Proprietorships and Single Member LLC’s

Where the business entity is a sole-proprietorship or single member LLC, the business will be sold as a collection of assets, and proceeds from the sale will be treated as the seller’s personal income. However, this does not mean that all of the sale’s proceeds will be taxed at the personal income rate.

For some assets, the seller will pay long-term capital gains tax (if those assets have been held for over a year), while for others the seller will pay the ordinary income rate. For instance, the seller of a sole proprietorship or single member LLC will pay long-term capital gains tax rates – most often 15% – for gains stemming from the sale of inventory and equipment held for over a year, for which no depreciation has been taken.

On the other hand, on equipment assetss for which a depreciation has been taken, the recapture rule applies. In such an instance, where the asset is sold for a price that exceeds the asset’s depreciated value, all gains above the depreciated value will be recaptured and treated as ordinary income.

Partnership and Multi-Member LLCs

Entity Sale

In the sale of a partnership or LLC with more than one member, each partner or member’s ownership interest that has been held for more than one year is treated as a capital asset. Typically, each member’s share of the sales proceeds is based upon his or her interest, and generally subject only to the long-term capital gains rate, typically 15%. On the other hand, if the partner or member has held his or her interest for less than one year, it will be taxed at the ordinary income rate.

Asset Sale

Where a partnership or LLC with more than one member is sold in an asset sale, the entity itself will not be taxed. The portion of the proceeds due each partner or member, based upon his or her interest, will pass-through and be subject to either the long term capital gains tax rate, or to the applicable income tax rate, depending on how the sale price is allocated among the different classes of assets.

Corporations

Entity Sale

The sale of corporate equity is treated as the sale of a capital asset. Thus, in an entity sale, where the equity holder owned the stock for over a year, proceeds from the sale are taxed at the long-term capital gains tax rate. Where the shareholder held the equity for less than a year, on the other hand, proceeds are taxed at the applicable individual income tax rate.

Where the sale of a corporate entity results in a net loss for the seller, the loss will be treated as a capital loss, an ordinary loss, or both. An ordinary loss is a loss that directly lowers one’s taxable income. Thus, if the seller of a business suffered a net loss of $75,000 and earned $100,000 the same year, an ordinary loss would reduce the seller’s taxable income to $25,000. This would have the corresponding benefit of reducing the seller’s overall tax rate.

While most losses will be treated as capital losses, Section 1244 of the Tax Code enables certain small business shareholders to treat the first $50,000, or the first $100,000 if filing jointly with a spouse, as an ordinary loss. To treat loss as ordinary (1) the seller must have been the first purchaser of the stock; (2) the stock must have first been issued by a small business corporation in exchange for cash or other property, excluding securities or stock; (3) the stock must have been issued to the seller as an individual; (4) no more than half of the corporation’s gross receipts from the past five years may have come from passive income; (5) the total amount the corporation received for all Section 1244 stock may not have exceed $1 million; (6) the corporation must be a U.S. Company.8

Where the six conditions required for proper designation as Section 1244 stock are not present, the seller’s losses will be treated as a capital loss. In such an instance, the seller may only subtract $3000 a year, or $1500 if married and filing separately, from his or her ordinary income, until the capital loss is used up.

Asset Sale

Although S and C corporations are subject to the same types of taxation if sold as entities, where a business organized as a corporation is sold in an asset sale, whether it is an S or C corporation can have a big difference on the tax rate that will be applied to proceeds of the sale.

S Corporations

Because an S Corporation is a pass-through entity, selling an S corporation through an asset sale will not result in double taxation at the federal level. Rather, each shareholder will pay taxes on his or her share of the proceeds at the long-term capital gains rate and/or the applicable individual income tax rate, depending on how the sales price is allocated.

Nonetheless, S Corporations may be subject to additional taxation that other pass-through entities are not. Thus some states will tax the entity itself on the proceeds resulting from an asset sale, leading to double taxation at the state level. Additionally, if the S corporation has been converted from a C corporation within the past decade, it might be subject to a “built-in gains tax,” which is computed at the highest corporate tax rate of 39%. This “built-in gains tax” may occur if the corporation held assets whose fair-market value exceeded their tax basis.

C Corporations

Because C Corporations are not pass-through entities, proceeds from the sale of assets held by a C corporation will generally be subject to double taxation: the proceeds will first be taxed at the long term capital gain, depreciation, or corporate income tax rate, depending upon how the sales price is allocated. If most of the corporation’s assets are noncapital assets, they will be taxed as ordinary income, and any proceeds distributed to shareholders will be taxed at the dividends tax rate, typically 15%. Thus, where a business organized as a C Corporation is sold in an asset sale, the shareholders could potentially receive less than half of the proceeds earmarked for them if the assets are noncapital assets.

Section 1042

Section 1042 of the tax code enables business owners to reduce the amount of taxable proceeds resulting from the sale of equity to employees.

As discussed above, when a business is organized as a C Corporation, the seller would do better to sell the business by transferring equity to the buyer, rather than transferring the corporation’s assets. This is because structuring the sale of the business as an equity sale – as opposed to an asset sale – will enable the seller to avoid double taxation. Section 1042 increases the incentive for structuring the sale of a C Corporation as an entity sale when the business is being sold to its employees, as it further reduces the amount of taxable proceeds resulting from the sale of equity.

Section 1042 enables some business owners that sell their company to employees to defer capital gains taxation, and potentially avoid it altogether. In order to qualify for Section 1042 deferral the seller must (1) have owned the stock for more than three years prior to transfer; (2) have transferred at least 30% of the company’s overall equity, and at least 30% of each class of outstanding stock, to his or her employees; and (3) issue a written statement to the IRS consenting to certain tax rates and requirements.9 Two or more shareholders can combine their sales in order to meet the 30% requirement, so long as the sales are part of a “single, integrated transaction.”10 Moreover, the 30% requirement may be met over a series of multiple transactions – but only the transaction that facilitates employee ownership of 30% or more of the company will qualify for Section 1042 treatment.11 After the initial 30% threshold is reached, all subsequent transfers to the ESOP or eligible worker cooperative will qualify for Section 1042 treatment.

In addition to the seller requirements, Section 1042 is only applicable where (1) the selling business is a C Corporation at the time of the sale (although some businesses other than C Corporations may be able to take advantage of Section 1042 by converting to C Corporations), (2) the equity is transferred to an ESOP or an “eligible worker-owned cooperative,” and (3) the seller reinvests the proceeds of the sale in “qualified replacement property.”

The seller has a 15-month period within which he or she can reinvest the proceeds or the equivalent amount in qualifying property: a three-month period before the sale, and a twelve-month period afterwards.12 After rolling over the proceeds or their equivalent, if the seller chooses to hold the replacement property until death, he or she can avoid taxation on the proceeds from the 1042 sale altogether.13 Nor will the seller be taxed if he or she gifts the qualified replacement property,14 or if he or she transfers the property to a living trust15 or a grantor retained annuity trust.16

Eligible Worker Cooperative

In order to qualify for Section 1042 tax deferral, the selling business owner must transfer his or her equity to an ESOP or an eligible worker cooperative. There is currently no administrative decision or guidance on the precise definition of an eligible worker cooperative beyond the text of Section 1042 itself. Section 1042 provides that to qualify as a worker coop, part I of Subchapter T must apply to the organization, a majority of the voting stock must be owned by the members, a majority of the members must be employees, and a majority of the Board must be elected by the members on a 1 person 1 vote basis.

In addition to these requirements, Section 1042 (c)(2)(E) provides that “[t]he term ‘eligible worker-owned cooperative’ means any organization . . . a majority of the allocated earnings and losses of which are allocated to members on the basis of patronage, capital contributions, or some combination thereof.” While this provision expressly requires that most earnings or losses allocated to members be apportioned on the basis of patronage or capital contribution, it does not require that most of the company’s earnings be allocated in the first place.

Importantly, because the express terms of Section 1042 do not give any guidance as to how non-allocated earnings or losses should be distributed, there is nothing within the provision that suggests that a majority of the company’s non-voting stock must be owned by employees. This is important, as it provides owners with the option of financing the sale of their business to their employees, while retaining a majority ownership until the committee pays off the first seller-financed installment. For an example of such a transaction, see the Select Machine case study below.

Qualified Replacement Property

In order to take advantage of Section 1042, a qualifying seller must reinvest, or “rollover,” the proceeds from the sale or an equivalent amount into qualifying replacement property.17 Qualified replacement property includes stocks, bonds, notes and securities of operating corporations, incorporated in the U.S.18 Preferred shares may also qualify as replacement property, but only if convertible into common stock at a reasonable price.19

1042 for Entities Other than C Corporations

While a business must be a C Corporation to qualify for Section 1042, some businesses may be able to take advantage of Section 1042 by converting into C Corporations.

S Corporations

S Corporations may simply revoke the S Corp election and elect C-status. This enables shareholders selling to an ESOP or qualifying cooperative to take advantage of the 1042 tax deferral.20 Moreover, five years after the sale, the corporation can reelect S status.

Whether converting to a C Corp is advantageous will likely depend upon whether the selling shareholders have a high “basis” in their shares.21 If the selling shareholders have a high basis in the S Corp stock, there is typically not a great advantage to revoking the S Corp election and taking the 1042 deferral.

To compute an S Corp shareholder’s basis in their shares is a technical process that varies based upon how the shareholder acquired the stock, which requires knowledge of multiple provisions of the tax code and access to a wide swath of company records.22 Generally speaking however, a shareholder’s basis is his or her initial capital contribution, plus or minus the flow through amounts from the S corporation.23 The initial capital contribution is determined by how the shareholder acquired the shares. If the shareholder acquired his or shares by forming the corporation, the initial capital contribution is the sum of both cash and the adjusted tax basis of property contributed to the formation of the corporation. If the shareholder acquired the stock through purchase, the initial capital contribution is generally the cost of acquiring the stock. Different rules apply for stock that was gifted, inherited, or converted from a C Corp.24 After determining the S Corp shareholder’s initial contribution, the shareholder’s basis is increased by his or her share of the business’ income, and correspondingly decreased by his or her share of the loss.25

Because of the complexity of determining a shareholder’s basis in stock of an S Corp, and because of the importance of other tax considerations, S Corps considering converting to C Corps in order to take advantage of Section 1042’s tax deferment should work closely with an accountant or other tax professional.

Partnerships and Other Ownership Interests

Outside of the corporate context, the IRS may count the holding period of a seller’s non-corporate ownership interests towards Section 1042’s three-year requirement once the ownership interest has been converted into corporate stock. While there is nothing directly in the code that supports this proposition, prominent organizations endorse it,26 and an IRS private letter ruling lends some support as well.27 However, sellers should be cautious, since the private letter ruling dealt with an LLC that had elected to be taxed as a C corporation from the outset, and private letter rulings are not binding precedent.

Allocating the Purchase Price in an Asset Sale

The IRS Categories of Allocation

When a business is sold by asset sale, the parties must allocate the sales price across seven categories provided by the IRS. The manner in which the sales price is allocated can significantly affect what tax rate will apply. The seven categories include: (I) cash and cash like assets; (II) securities, including share certificates, government securities, readily marketable stock or securities, and foreign currency; (III) accounts receivables and debt instruments; (IV) inventory; (V) other tangible property, including land and buildings, furniture, equipment and fixtures (improvements permanently attached to buildings); (VI) and other intangible property, which includes covenants not to compete, intellectual property, customer or client lists and licenses or permits granted by the government; and (VII) goodwill and going concern value.28

Conflicting Interests

Generally speaking, the seller will retain class I and II assets. Because the buyer typically does not purchase these assets, none of the sales price will be allocated to classes I and II assets. Additionally, the seller often retains all class III assets because of the risks associated with collecting on accounts receivable, unless the seller might incentivize the purchase of accounts receivable by selling them at a discount. In either case, there is not typically a strong preference to maximize or minimize the value allocated to class I through III assets on either the buyer’s or seller’s part.

Most of the conflict between buyer and seller pertains to class IV to VII assets. As will be explained, the seller would like to minimize the amount of the sales price that would be allocated towards noncapital and depreciable tangible capital assets, while maximizing the allocation towards real estate and intangible capital assets. On the other hand, it will typically be in the buyers’ best interest to minimize the amount of the sales price allocated towards real estate and intangible capital assets, while maximizing the amount of the sales price allocated towards depreciable tangible capital assets and non-capital assets.

Seller’s Interests Explained

The seller typically aims to minimize the sales price allocated towards both noncapital and depreciable tangible capital assets, and maximize allocation towards both real estate and intangible capital assets.

This occurs because much of the sales price allocated towards noncapital and depreciable tangible capital assets may be taxed at the seller’s ordinary income tax rate, instead of the capital gains tax rate.

Less favorable to the seller, any allocation towards noncapital goods will be taxed at his or her ordinary income rate. Additionally, any allocation towards depreciated tangible assets will be subject to recapture taxation at the applicable personal income tax rate, and thus will increase the seller’s exposure to tax liability. Because much of the common depreciable capital assets that a business is likely to possess can be written off in under 7 years, many of these assets are likely to be substantially or fully depreciated. As such, a significant amount of the sales price allocated towards these assets may be taxed at the seller’s ordinary income tax rate, which is the applicable corporate tax rate if the seller is a C corporation, or an entity that has elected to be taxed as a C Corporation. If the seller is a pass-through entity, the proceeds will be taxed at the the interest or share holders’ applicable personal income tax rate.

Instead, the seller seeks to maximize allocation toward both real estate and intangible capital assets to be taxed at the applicable long-term capital gains tax rate. To do this, the seller allocates the maximum amount towards non-depreciable capital assets held for over a year, Additionally, the seller maximizes the amount allocated toward other intangible assets, which are less likely to depreciate. Although “goodwill and going concern value,” and other intangible assets listed in Section 179 can be depreciated, they cannot be fully depreciated for at least 15 years. Thus, there is greater likelihood that the asset will not be substantially depreciated, and, if the amount allocated toward these assets does not exceed the book value, the proceeds will only be taxed at the long-term capital gains rate. Lastly, by maximizing the amount allocated toward real estate, the seller can ensure this portion of the proceeds is taxed at the real estate recapture rate of 25%, which often falls below the applicable ordinary or corporate income tax rate.

Buyer’s Interest in Class IV-VII Assets Explained

Generally, the buyer’s interests are served by a markedly different allocation of proceeds than the seller’s interests. For one thing, although the seller’s interest is focused on the taxes of the sale, the buyer receives no proceeds from the sale, and thus does not directly bear the tax burden of the sale.

Instead, while the seller may minimize his or her tax burden by allocating proceeds toward assets with a longer timeline of depreciation, the buyer benefits by allocating a greater portion of the proceeds toward capital assets with a shorter depreciation timeline.

This is so because the buyer will be able to use the amount of proceeds allocated towards the assets as their future taxable basis, and will be able to fully write off the value of the asset in the allowed amount of time. Where the allowed timeline for depreciation is shorter, the buyer can quickly reduce his or her tax burden going forward. Also, while inventory is not a depreciable capital asset, it is a short-term asset that can be written off quickly, thus decreasing the buyer’s tax burden in the near future.

  1. This section draws heavily from Fred S. Steingold, Sell Your Business, The Step by Step Legal Guide, 4/2-4/13 and 9/2-9/19 (Marcia Stewart and Jake Warner eds., 1st ed. 2004).
  2.  See 7: Property, Plant, and Equipment, 2002 WL 31118534.
  3. Jerry J. Weygandt et al., Basic Accounting 430 (Christopher DeJohn and Brian Kamins eds. 8th ed. 2007).
  4. Jerry J. Weygandt et al., Basic Accounting 432 (Christopher DeJohn and Brian Kamins eds. 8th ed. 2007).
  5.  See 26 U.S.C. § 197 (a) (“The amount of such deduction shall be determined by amortizing the adjusted basis (for purposes of determining gain) of such intangible ratably over the 15-year period beginning with the month in which such intangible was acquired”).
  6.  See IRS Publication 946, 32 – 33, available at http://www.irs.gov/pub/irs-pdf/p946.pdf.
  7.  IRS Publication 544available at http://taxmap.ntis.gov/taxmap/pubs/p544-012.htm#TXMP6d1fb63b
  8. 26 U.S.C. 1244.
  9.  See 26 U.S.C. § 1042
  10. Scott Rodrick, An Introduction to ESOPs, Kindle Edition, Location 274, (Nat’l Cent. for Emp. Ownership, 14th ed. 2014).
  11. Corey Rosen and Scott Rodrick, Understanding ESOPs, Kindle Edition, Location 364 (Nat’l Cent. for Emp. Ownership, 2014).
  12.  ESOP Tax Incentives and Contribution Limits, nceo.org, http://www.nceo.org/articles/esop-tax-incentives-contribution-limits (last visited March 20, 2015).
  13.  ESOP Tax Incentives and Contribution Limits, nceo.org, http://www.nceo.org/articles/esop-tax-incentives-contribution-limits (last visited March 20, 2015).
  14. 26 U.S.C. 1042
  15. I.R.S. P.L.R. 9141046 (Oct. 11, 1991).
  16. I.R.S. P.L.R. 200709012 (Mar. 2, 2007) (“Provided that the Taxpayer is treated as the owner of the QRP held in the GRAT under sections 671 and 675 at the time of the transfer, the transfer of QRP to the grantor retained annuity trust does not constitute a disposition of the QRP under section 1042(e)”).
  17. I.R.S. P.L.R. 200709012 (Mar. 2, 2007).
  18. Corey Rosen and Scott Rodrick, Understanding ESOPs, Kindle Edition, Location 269 (Nat’l Cent. for Emp. Ownership, 2014).
  19. 26 U.S.C. 409 (l)(3).
  20. Corey Rosen and Scott Rodrick, Understanding ESOPs, Kindle Edition, Location 565 (Nat’l Cent. for Emp. Ownership, 2014).
  21. Corey Rosen and Scott Rodrick, Understanding ESOPs, Kindle Edition, Location 595 (Nat’l Cent. for Emp. Ownership, 2014).
  22.  See S Corporation Stock and Debt Basis, irs.gov, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis (last visited March 24, 2015); see also Meredith A. Menden, The Basics of S Corporation Stock Basis, Journal Of Accountancy (December 31, 2011) http://www.journalofaccountancy.com/issues/2012/jan/20114319.htm.
  23.  See S Corporation Stock and Debt Basis, irs.gov, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis (last visited March 24, 2015); see also Meredith A. Menden, The Basics of S Corporation Stock Basis, Journal Of Accountancy (December 31, 2011) http://www.journalofaccountancy.com/issues/2012/jan/20114319.htm.
  24.  See Meredith A. Menden, The Basics of S Corporation Stock Basis, Journal Of Accountancy (December 31, 2011) http://www.journalofaccountancy.com/issues/2012/jan/20114319.htm.
  25.  See S Corporation Stock and Debt Basis, irs.gov, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis (last visited March 24, 2015).
  26. Corey Rosen and Scott Rodrick, Understanding ESOPs, Kindle Edition, Location 292 (Nat’l Cent. for Emp. Ownership, 2014). (“if a seller received the stock as a gift or acquired it in a tax-free exchange (e.g. a partnership interest converted to stock when the partnership incorporated) the three year holding period includes the prior holding period of the donor of the partnership interest”).
  27. P.L.R. 200827018 (July 4, 2008) (ruling that the time period that sellers had held ownership interest in an LLC partnership that had elected C Corporation tax status and subsequently converted into a C corporation would be counted towards S. 1042’s three-year requirement).
  28.  IRS Publication 544, available at http://www.irs.gov/publications/p544/ch02.html#en_US_2014_publink100072483.
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