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6 Wyo. Law. 1 (1983)

handle is hein.barjournals/wymlawy0006 and id is 1 raw text is: A THE WYOMING L YER Vol. VI, No. 1 Official Publication of Wyoming State Bar (USPS 379-950) April 1983 ANNUAL MEETING The 1983 Annual Meeting of the Wyoming State Bar will be held on September 14-16, 1983 at the Holiday Inn in Sheridan. Registration informa- tion will be mailed to all members of the Wyoming State Bar this summer. Reservations for accommodations at the convention may be made by contacting the Holiday Inn at Sugar- land, 1809 Sugarland Drive, Sheridan, Wyoming 82801 307-672-8931 TAXATION OF COLLAPSIBLE CORPORATIONS by Lee Karavit's Editor's Note: Mr. Kara, tis is an associate in the firm of Morane & Bostwick in Casper and a member of the Bar's Special Committee on Tax- ation Law. This article is the second in a series of articles on taxation 1.1w which will be written by the membeis of the Committee. As a general rule, the gain from the sale or exchange of the stock of a corporation, held for one year or more, is taxed as long term capital gain Thus, in representing a client who desires to dispose of his incor- porated business, the practitioner will normally regard a sale of corporate stock as the most desirable alter- native from the standpoint of simplic- tv and favorable tax treatment. Vhile somewhat more complicated, similar favorable tax treatment may, in many cases, be achieved by a liq- uidation of the corporation and sale of the assets. Section 341 of the Irnernal Rev- enue Code is an intricate and often overlooked exception to the general rule. Under Section 341, the gains from the sale or exchange of stock of a collapsible corporation, distrib- utions in liquidation of a collapsible corporation and non-dividend distrib- utions in excess of the shareholders basis in collapsible corporation stock will, to the extent such gains are nor- mally considered as long term capital gains, be considered as ordinary in- come A collapsible corporation is de- fined as a corporation formed or availed of principally for the manu- facture, production or construction of property, the purchase of Section 341 assets, or to hold stock in collapsible corporations with a view to the sale or exchange of stock or distribution to the shareholders before realization by the corporation of a substantial part of the taxable income to be de- rived from the property and realiza- tion by the shareholders of the gains attributable to such property Any corporation may be a collap- sible corporation The fact that a cor- poration has been in existence for a number of years and has not, in the past, been a collapsible corporation does not insure that the corporation is not collapsible. The test of collap- sibility is applied at the time of the particular sale or distribution under examination. Section 341(c) provides a rebuttable presumption that a cor- poration is collapsible if the fair market value of its Section 341 assets is 50% or more of the fair market value of its total assets and 120% or more of the adjusted basis of such Section 341 assets. Section 341 assets are stock in trade, inventory, property held pri- marily for sale in the ordinary course of business, unrealized receivables and fees and real or personal proper- ty used in trade or business (Section 1231(b) assets), held for less than 3 years. The 3 year holding period com- mencing upon the completion of the manufacture, production, construc- tion, or purchase of the property. In order to be a collapsible corpor- ation, there must be a view on the part of those in control of the cor- poration, whether by majority stock ownership or otherwise, to sell the corporate stock or liquidate before the corporation has realized a sub- stantial portion of the income from the property The Regulations provide that if the sale or liquidation is con- templated or a recognized possibili- ty the view' requirement is satisfied. If the decision to sell or liquidate can be attributed solely to circumstances which arose subsequent to the manu- facture, production, construction or purchase of the property the corpora- tion is not collapsible Because of the factual nature of the view require- ment, a view defense can be main- tained in most cases where the col- lapsible corporation issue is raised. A corporation is not collapsible if the corporation has realized a sub- stantial portion of the gain from the property Neither the Code nor Reg- ulations provide a test for determin- ing whether there has been a substan- tial realization. In Commissioner v. Kelly, 293 F.2d 904 (CA-5, 1%1), the realization by the corporation of 330 % of the potential gain was held to be substantial. In Heft v. Commis- sioner, 294 F 2d 795, (CA-5, 1961) a 17% realization of gain was not sub (continued on page 2) Digitized from Best Copy Available