Monetizing a C-Corporation:
The Value Trap
Lloyd Grissinger
Managing Director
CBIZ MHM, LLC
Happy Days are Here!!!
Stock Sale
Proceeds
$
15,000,000
Basis
5,000,000
Gain
10,000,000
Individual Fed & TN Tax Rate
20%
Fed and State Tax
After Tax Proceeds
2,000,000
$
13,000,000
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Forms of Transactions
Non-Tax Drivers
Asset Sale
Ownership Sale
1. Limit Successor Liability
1. Usually Avoids Contract Assignment
Consents
2. Selected Business Assets
2. Regulatory Issues
Ownership Sale -- Stock
Seller
Asset Sale
Buyer
Seller
Buyer
Generally, capital gain
recognized on sale of
stock.
Inherits preexisting
liabilities.
Gain recognized and
character depends on
the type of the asset
sold (inventory or FEE
– ordinary, goodwill –
capital gain).
Basis in assets equal
to the amount paid for
the assets. Holding
period starts over.
Avoids double
taxation if a C-Corp.
Tax basis in assets and
the holding period do
not change except for
§338.
Double taxation results
where the assets sold
are held by a CCorporation
Do not inherit any
preexisting liabilities.
Problem
Asset Sale
Stock Sale
Proceeds
$
15,000,000
Proceeds
$
15,000,000
Basis
5,000,000
Basis
5,000,000
Gain
10,000,000
Gain
10,000,000
Individual Fed & TN Tax Rate
20%
Fed and State Tax
After Tax Proceeds
2,000,000
$
13,000,000
Corporate Fed & TN Tax Rate
38.3%
Fed and State Tax
3,829,000
Cash available for distribution
11,171,000
Individual Fed & TN Tax Rate
25.2%
Fed and State Tax on Dividend
2,815,092
After Tax Proceeds
Proceeds Lost to Tax
31%
$
8,355,908
$
4,644,092
5
Sale of Personal Goodwill
•
•
•
•
•
C-Corporation or S-Corporation with C-Corp. E&P
Industries: Sales/Distribution/Service
Competition Has Low Barrier to Entry
NO preexisting Covenant Not to Compete
Owners created Personal Goodwill
– Reputation, Expertise, Relationships with Customers, etc..
• TN Resident
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Solution
Personal Goodwill
Proceeds
$
Basis
9,000,000
-
Gain
Asset Sale
Proceeds
$
Basis
5,000,000
Gain
1,000,000
9,000,000
Individual Fed & TN Tax Rate
20%
Corporate Fed & TN Tax Rate
Fed and State Tax
38.3%
1,800,000
Fed and State Tax
After Tax Proceeds
Net Proceeds from Bifurcated Sale
$
$
382,900
7,200,000
Cash available for distribution
5,617,100
Individual Fed & TN Tax Rate
25.2%
11,401,591
Fed and State Tax on Dividend
Net Proceeds from Asset Sale
1,415,509
8,355,908
After Tax Proceeds
Tax Savings
6,000,000
$
$
4,201,591
3,045,683
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Manufacturing Example
Asset Sale
Bifurcated
Asset Sale
15,000,000
$ 12,000,000
Basis
5,000,000
5,000,000
Basis
Gain
10,000,000
7,000,000
Gain
38.3%
38.3%
Proceeds
$
Corporate Fed & TN Tax Rate
Fed and State Tax
3,829,000
Personal Goodwill
Proceeds
$
3,000,000
Individual Fed &
TN Tax Rate
20%
2,680,300
Fed and State Tax
Cash available for distribution
11,171,000
9,319,700
Individual Fed & TN Tax Rate
25.2%
25.2%
2,815,092
2,348,564
Fed and State Tax on Dividend
After Tax Proceeds
Tax Savings
$
$
8,355,908
3,000,000
$
600,000
After Tax Proceeds
$
2,400,000
After Tax Proceeds
$
9,371,136
6,971,136
1,015,228
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Bonus
Bonus
Payment
$
Fed Rate
Tax
Tax Savings
$
1,000,000
Personal Goodwill
$
1,000,000
39.6%
20.0%
396,000
200,000
196,000
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Lloyd Grissinger
Managing Director
(901) 685-5575
lgrissinger@cbiz.com
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