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Converting a C-corp to a S-corp when stock held by an IRA.


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A C-corp is owned 25% by Owner A, 25% by Owner B and 50% by Owner B's IRA. The corporation now wants to convert to S-corp status. Questions:

1. Does the current ownership structure constitute a PT?

2. How does Owner B get the stock out of his IRA? Can he take a distribution, sell the stock and roll the proceeds into another IRA within 60 days?

Thanks.

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  • 2 weeks later...

I don't agree with QDROphile regarding the IRA owning non-publicly traded stock. I strongly believe it is permissible, if you can find a trutees willing to take non-publicly traded assets - which you obviously did. I think the issue may be that the IRA cannot be a shareholder of an S-corp. But that's something your lawyers could easily determine.

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I agree that it is possible that getting stock into an IRA creates a prohibited transaction. I have also seen situations where it does not.

Assuming that it was permissible for the IRA to hold the stock, you have to get it out (preferably without creating another prohibited transaction.) The easiest way is to take a distribution. But that may also be the most expensive way.

IRAs are subject to the prohibited transaction rules similar to 401(a) plans except that the penalty is disqualification of the IRA, rather than the excise tax. Disqualification means taxation of the entire IRA balance and any associated penalties.

You may want to look at recent PTE requests. There have been several granted recently involving IRAs selling stock to related parties to enable an S corporation election.

In your situation of taking the distribution, selling the stock and rolling the proceeds, remember that the prohibited transaction rules apply to both direct and indirect prohibited transactions.

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To QDROphile. I did some IRA PT research as you suggested - thanks for the prodding. As BeckyMiller said sometimes yes, sometimes no. I guess I've been lucky with the situations and lawyers I've dealt with in that the IRA investments were not considered PTs. And sometimes they could be as I now have discovered. I love "gray" when I'm giving advice :).

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