Question

How do I enter the non-taxable gain of a section 355 split-off of real estate property

Forum|Forum|3 years ago
September 6, 2022
2 replies
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We did a Split-off of our corporation and created 5 sub-corporations then transferred real (rental) property to each of these sub-corporations. Some of the 69 shareholders tendered some or all of their stock in exchange for one of these sub-corporations through a section 355 split-off. Where do I enter the shares tendered and how do I remove the property that was disposed of but not sold?

TurboTax Online

Critter-3

You really need to find a local tax pro for such a complicated situation.

M

Mike9241

the bookkeeping entry is a debit to treasury stock.

for a qualified 355 transaction

ExistingCo must be in “control” of NewCo prior to the distribution of NewCo stock.
ExistingCo must distribute enough of NewCo stock to the departing shareholders so as to constitute “control” to the departing shareholders.
Both ExistingCo and NewCo must be engaged in the “active conduct of a trade or business” immediately after the distribution and for a 5-year period preceding the transaction.
ExistingCo’s distribution of NewCo stock must not have been used principally as a “device” for the distribution of the earnings and profits of any of ExistingCo or NewCo.

Additionally, non-statutory limitations generally require the following:

The split off must be carried out for an “independent corporate business purpose.”
ExistingCo’s shareholders (as of prior to the split off) must maintain adequate “continuity of interest” in each of ExistingCo and NewCo after the transaction.
The “continuity of business enterprise” test must be met with respect to ExistingCo and NewCo after the transaction
there are other rules and caveats

Section 355 is a complex provision with a number of landmines and nuances that provide for various exceptions, limitations and qualifications to the general requirements summarized above. Thus, parties should seek the advice of a tax advisors in order to ensure a favorable tax treatment.

your statement raises a red flag in that it seems the activity of these new corporations is primarily rental real estate.

see the line in bold above, especially the words “active conduct of a trade or business”

both iRS reg 1.355-3 states

The active conduct of a trade or business does not include -

(B) The ownership and operation (including leasing) of real or personal property used in a trade or business, unless the owner performs significant services with respect to the operation and management of the property.

I agree with @Critter-3 see a pro to review the transactions.

K

KozytAuthor

We did hire a professional to facilitate the break up under section "D" of Section 355, where the distributing company, a real estate investment/management c corp, created five control companies on Jan 1st, then transferred some of it's real property into the control companies. Then some of the stockholders tendered their shares of the distributing company for shares of the control company. The remaining property was all sold by 12/28/21, but with a mortgage on all the remaining property for the next 5 years, which means that the 25K paid to the attorney for the split-off is capitalized until the final dissolution of the distributing company. The problem with the debiting the capital stock is that the total capital stock is still the 25K that is was when it was first sold a $1.00 per share, and the stock tendered was valued at $1,000.00 a share, so the total stock tendered was over 800K, which would leave a negative balance in the capital stock account of over 775K. I have called a couple of CPA's but they don't want to touch it. It's easy to know how much they know, I just ask if the attorney fees for the split-off should be put into legal fees, and if they answer "Yes", I know they don't know enough about a 355 reorganization. That's why I thought I'd ask here, and maybe someone would know how to do this. Thanks for you reply, at least you know something about it.

K

KozytAuthor

Sorry, I missed the "Treasury Stock" and was stuck on "Capital Stock". Therefore I should Credit "Treasury Stock" the 800K, debit the Newly Formed LLC's for the remaining basis to zero the asset, then put the remaining amount into "Non taxable income. Thanks Again. Sometimes I just get a stuck with a brain fart. Thanks again!