Question

Distributing Corporation has some assets that would produce a substantial gain if sold, and other assets that would produce a substantial loss if sold. Its goal is to transfer assets to its shareholders, but in a manner that would enable it to defer the gains, or at least deduct those losses against the gains.

If Distributing Corporation asked your advice, what issues would you raise?

Answer 1

Here it is assumed that the distriburting corporation is S corporation

The loss from the sale of some of the assets can be set off by the S corporation agains the gain recognized from the other assets sold to shareholders. The gain may be reclassified as ordinary under Sec. 1239 if the property is depreciable in the shareholder's hands. However the issue here is that the shareholders must not be related in terms of  Sec. 267(a)(1). Under Sec. 267(b)(2), a corporation and a shareholder are related if the shareholder owns directly or indirectly more than 50% of the value of the outstanding stock. Thus S corporation must make sure that the shareholders are not related so they can claim the set off of losses from the gains.