Posted by JOHN K HASLACH, CPA, MST on June 15, 2004 at 13:05:25:
Generally, there is no gain on transfers between spouses if the transfer is because of divorce. However, there may be other issues. Often there are substantial numbers involved. It is well worth the cost to discuss with a competent professional.
Divorce and transfer from SCorp to LLC - Posted by Sue (NC)
Posted by Sue (NC) on June 14, 2004 at 16:22:57:
My husband and I are splitting, but have substantial assets currently in an SCorp. Our assets will be divided, and I will be setting up a new LLC to take title to the properties I receive in the settlement.
Does anyone know the tax implications of a transfer from one business entity to another under a divorce settlement?
I currently own 50% of the outstanding shares of the company, but in an LLC there will be no equivalent (but I will be the sole member).
Any advice appreciated!
Re: Divorce and transfer from SCorp to LLC - Posted by Roger Garay, E.A.
Posted by Roger Garay, E.A. on June 25, 2004 at 21:59:41:
IRC Section 708(b)(2)is relevant here: A merger or consolidation of two or more partnerships into a single partnership or a division of a single partnership into two or more partnerships will generally have no tax consequences, provided all newly formed partnerships are owned by partners who owned more than a 50% interest in the capital and profits of the old partnership(s).
See also Revenue Ruling 84-52: No gain or loss is recognized by the new partnership upon receiving a contribution of capital in connection with a conversion of one interest for another.
The allocations between you incident to the divorce will have no tax consequence as CPA Haslach has stated.
Now the assets are in your hands and you place them into an LLC (the new partnership albeit a single member entity). Physical (depreciable) assets must be transferred into the LLC at their depreciated basis on date of transfer (or your basis coming out of the divorce – which could be different) – and, if the said assets are encumbered, their attached liabilities must be likewise transferred. The capitalization of the LLC would be the transfer value of the assets so distributed and contributed, plus any new capital.
In a non-divorce split, Revenue Ruling 95-37 would apply: Converting an existing partnership to an LLC is a tax free event as long as the conversion does not result in a shift of partnership liabilities among the members. A shift in partnership in partnership liabilities is deemed to be a distribution of money to the partner. If it exceeds the adjusted basis of the partner’s interest, gain is recognized.
As CPA Haslach stated the fact that the split is within the divorce allows you to distribute liabilities in different proportions since a divorce settlement is deemed an equal division of all other marital assets.
Hope this helps.
Roger Garay, EA