Liquidating a company to avoid tax

24-Aug-2016 21:55 by 9 Comments

Liquidating a company to avoid tax - Granny chat oom

If the operating company is an LLC, it might also be possible to have the VC fund make an equity investment in the LLC through a wholly owned C corporation formed by it to make the investment (such a C corporation is sometimes referred to as a “blocker” corporation)..VC funds are often reluctant to utilize complicated investment structures or blocker corporations to invest in S corporations or LLCs.

An investment by a VC fund in an S corporation automatically terminates the corporation’s S status under Code Section 1362(d)(2) on the date on which the investment is made (because the VC fund is not a qualifying S corporation shareholder and because, if the VC fund acquires preferred stock, the corporation now has more than a single class of stock).

If an S corporation taxable year of the corporation has begun, the last day of the S corporation year is the day before the investment by the VC fund.

The remainder of what would have been the S corporation taxable year is a short C corporation year.

The tax items for the year of the termination are allocated between the short S and C portions on a pro rata basis (by numbers of days in each portion) under Code Section 1362(e) unless (i) all of the shareholders consent to the application of normal tax accounting rules to the two periods or (ii) there is a sale or exchange of 50% or more of the stock in the corporation during the year. Revenue Ruling 84-111, 1984-2 CB 88 describes three methods of incorporating a partnership and the tax consequences of each of the three methods.

Maxed-out universal life insurance tax laws refer to the Tax Equity and Fiscal Responsibility Act of 1982, Deficit Reduction Act of 1984, and the Technical and Miscellaneous Revenue Act of 1988.

Collectively, these are known as "TEFRA," "DEFRA" and "TAMRA." Combined, they outline how a life insurance contract can be funded.

Violation of these funding guidelines can cause your universal life insurance contract to become a modified endowment contract and it will lose all of the tax benefits associated with life insurance.

Business entities often look to outside investors for funds they need to achieve their objectives.

For better or worse, tax considerations often factor into preparing for, structuring and effecting an investor financing.

This article considers how various tax rules may bear on financings. They also typically seek preferred equity positions in their portfolio companies.

Venture capital (“VC”) funds are typically organized as limited partnerships and often include among their limited partners tax-exempt entities (such as pension funds and universities) and non-U. Because they are partnerships and acquire preferred equity positions, they are not able to hold shares in S corporations. Structuring an investment by a VC fund in an S corporation or LLC as debt with equity-like features (such as contingent interest or convertibility) and/or a warrant might be worth considering if continued S corporation or LLC status is desirable and agreeable to the VC fund.

They also tend not to want to invest in limited liability companies (“LLCs”) engaged in U. trades or businesses because operating income of the LLCs flowing through them to their limited partners constitutes (i) “unrelated business taxable income” (sometimes referred to as “UBTI”) in the hands of their tax-exempt limited partners and (ii) income that is effectively connected with a U. trade or business (sometimes referred to as “ECI”) in the hands of their non-U. In that case, though, care needs to be taken to ensure that the form of the arrangement will be respected for tax purposes.

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