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which case the gain or loss from the sale will be free of entitylevel income taxes, and the buyer will obtain the desired increase in the tax basis of the assets acquired

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Figure 3-10

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In an asset sale, the buyer agrees to purchase all or a select group of assets from the selling entity, usually subject to all or certain liabilities of the business If both the acquirer and the selling entity are corporations and the sales price is solely voting stock of the buyer, the transaction may constitute a tax-free reorganization (discussed later in this chapter) Otherwise, unless the proceeds of the sale are reinvested in a transaction qualifying as a like-kind exchange under Code Section 1031 (which is unlikely), the selling entity will recognize taxable gain or tax loss with respect to the sale of each asset equal to the difference between the amount realized for each asset sold and its adjusted tax basis If the selling entity is a C corporation, it will pay federal and state income taxes on the net taxable gain from the asset sale If the corporation then wants to distribute the proceeds to its shareholders, each shareholder will be taxed on the amount distributed to him or her If the distribution is a dividend, the amounts distributed to the shareholders will be taxable as such (subject, in the case of corporate shareholders, to a special exclusion known as the dividends received deduction ) If the distribution is in liquidation of the distributing corporation, each shareholder will recognize taxable gain equal to the difference between the amount distributed over its adjusted tax basis in his or her stock in the distributing corporation If the selling entity is a pass-through entity, it will determine its gain or loss for each asset sold, determine the character of the taxable gain or tax loss for each asset, and allocate the gains and losses out to its owners If the selling entity is an





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offset: Offset at which to insert the new string arg: The new string to be inserted Description: Inserts the given string into the node s text data at the given offset Returns: Nothing Exceptions: INDEX_SIZE_ERR Raised if the specified offset is negative or greater than the number of characters in data NO_MODIFICATION_ALLOWED_ERR Raised if this node is read-only

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S corporation, it will not owe any federal income taxes as a result of the sale, except perhaps the BIG Tax The owners will then report their allocated gains and losses on their personal tax returns and bear the income tax consequences If the selling entity then wants to distribute the proceeds of the sale to its owners, it may generally do so on a tax-free basis Here are some strategies to consider regarding the sale of assets: To avoid the double tax and to minimize or avoid transfer taxes, a C corporation should avoid asset sales Instead, the owners should seek to sell their stock Pass-through entities should avoid asset sales The buyer will be able to obtain an increase to the adjusted tax basis of the assets of the business in any event, and structuring the sale as a sale of equity should minimize and may even avoid transfer taxes If a sale of multiple assets is to occur, the seller should endeavor to have the buyer agree to a favorable allocation of the sales price among the assets to be sold Consider negotiating for the buyer to pick up the tab for all or a portion of the transfer taxes, which is customarily done

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