Advanced Marketing Forum Question

Deferring Gain on Sale of Business

Question:
I have a client that is selling his company for $15,000,000. He is 40 years old and is currently drawing an income of $150,000-200,000. He is a 75% shareholder of a C-Corp and has two other shareholders. He is interested in sheltering as much money as possible. He would like to know what are some options. Any ideas?

Reply:
There are a couple of ways he can defer taxation on the sale of his C Corporation.

First, if he feels confident that the business will remain financially stable in the hands of the buyers, an installment sale can stretch out capital gains over the term of the note. The buyer may be allowed to deduct the interest for either investment or business purposes.

You don’t mention whether it is an outside buyer, his partners or family members that are buying him out. If family members are involved, a self canceling installment note might be preferred because if the seller should die before the note is paid off; the unpaid balance is not included in the seller’s estate.

Second, there is also a concept called a charitable bailout in which the stockholder donates his stock to a charitable remainder trust. The trust in turn sells the stock back to the corporation or to an outside party. The CRT trustee reinvests the sales proceeds and pays a lifetime income to the former stockholder. He pays taxes on income as he receives it. Whatever is left in the trust after he dies is paid out to a charity. This technique depends on the assumption that no sales agreement between the buyer and the seller is finalized before the donation. Otherwise the IRS might throw the whole thing out.

Third, the client may qualify for Sec. 1202 treatment. This section was created in 1993 to stimulate investment in small businesses. Original stockholders may be able to exclude 50% of their gain on the sale of qualified small business stock held for more than 5 years or they may be able to rollover the gain on the sale of qualified small business stock by reinvesting in other QSB stock within 60 days of the sale. You can get more details from the IRS publication 550, Chapter 4 on the IRS website http://www.irs.ustreas.gov

Tere D'Amato, CLU, ChFC
Director Advanced Planning
Ext: 9168
E-mail: tdamato@commonwealth.com

* The foregoing is for broker/agent use only, and is intended solely for informational purposes. Nothing contained herein should be construed as legal or tax advice, and should not be relied upon for such. Legal and tax advice should only be obtained from your attorney or qualified tax professional.

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