How to structure LLC conversion to C Corp for 1202 QSBS treatment with multiple entities

Thanks for your insight. For the section 351 transaction you mentioned - wouldn't that still be problematic since the C Corps (which are corporations) would be the ones receiving the stock? Wouldn't that trigger the same issue with 1202(c)(1)(B) since it excludes stock issued to corporations? Also, would liquidating the 3 C Corps and having the shareholders contribute the assets directly be a viable alternative?

You raise a good point about stock issuance to corporations. Section 1202 benefits apply to non-corporate taxpayers who hold qualified small business stock, so if the C Corps are the ones receiving the stock in the new company, their shareholders wouldn't directly benefit from QSBS treatment. Liquidating the 3 C Corps and having the shareholders contribute assets directly could potentially work better. This would avoid the stock-for-stock exchange issue. The shareholders would receive the assets in liquidation (recognizing gain/loss), and then contribute those assets to the new C Corp in exchange for what could qualify as QSBS. The key is ensuring this is done in separate, distinct steps rather than as part of a single integrated transaction that could be recharacterized. You'd need to be careful about the step transaction doctrine here.

Were they able to specifically address the asset contribution vs stock exchange issue? My accountant keeps giving me conflicting advice on whether equipment contributions can count toward qualifying assets for 1202 purposes.

Sounds interesting but I'm skeptical. Couldn't your tax attorney have done the same analysis? What did taxr.ai provide that was different from what a specialized tax attorney would give you?

Yes, they specifically analyzed equipment contributions in relation to qualifying assets. They provided case citations showing that equipment used in the qualified business would count toward the 80% asset test under 1202(e). They also clarified when contributions might be problematic - particularly if they're part of a series of related transactions that could be recharacterized. Their analysis was more comprehensive than what I got from my tax attorney, honestly. While my attorney gave good general advice, taxr.ai identified specific revenue rulings and PLRs directly applicable to my situation. They also modeled different transaction sequences to show which approaches would most likely preserve QSBS status. Their reports included references to specific case law that my attorney hadn't mentioned.

How does that even work? I thought the IRS phone system was completely broken. I've tried calling multiple times and never got through.

This sounds too good to be true. The IRS wait times have been crazy lately - I'm skeptical that any service could actually get through. Also, would an IRS agent even give definitive guidance on something as complex as a Section 368 reorganization for QSBS purposes? They usually just refer you to a tax professional.

It works by using specialized technology that navigates the IRS phone system and holds your place in line. When an agent becomes available, Claimyr calls you and connects you with the agent. It's basically handling the painful waiting process for you. You're right that IRS wait times are ridiculous - that's exactly why this service is valuable. When I called about my QSBS question, I specifically asked for the business tax department and got transferred to someone who deals with corporate reorganizations. While they don't give "tax advice" per se, the agent was able to direct me to specific IRS guidance documents and procedural requirements for establishing QSBS qualification that I hadn't found through my own research.

Thanks for bringing up section 1202(h)(2) - that's definitely relevant here. I'm concerned about the basis determination rules affecting qualification. If we were to liquidate the C corps first and then have shareholders contribute assets directly to the new company, do you think that would help avoid the basis reference problem? Would the liquidation create enough separation between transactions to avoid step transaction issues?

Liquidating the C corps first would likely help, as the shareholders would take a FMV basis in the distributed assets. When they contribute those assets to the new corporation, the basis carryover wouldn't be from stock-to-stock, which addresses the 1202(h)(2) concern. Regarding step transaction, timing is important but not the only factor. You'd want to establish legitimate business purposes for each step and ideally have some time separation between liquidation and the new contribution. Documentation of independent business reasons for each transaction is critical. Consider having at least 30 days between transactions and make sure operations continue normally during the interim period. The more you can show each step had its own business purpose beyond just tax benefits, the stronger your position against step transaction challenges.

Does anyone know if partial redemptions would still trigger the disqualification? Like if one of the shareholders gets partially bought out as part of this restructuring?

Yes, partial redemptions can still trigger disqualification under 1202(c)(3). The statute doesn't distinguish between full and partial redemptions - any redemption from the corporation (or related party) during the 4-year period beginning 2 years before the stock issuance can disqualify QSBS treatment. So if you're restructuring and one shareholder gets partially bought out, you'd need to carefully time this relative to when the new QSBS is issued. The redemption needs to be outside that 4-year window, or you'd need to structure it so it doesn't technically qualify as a "redemption" under the tax code (maybe as a sale to third parties instead). This is another reason why the timing and structure of your client's reorganization is so critical for preserving QSBS benefits.

Great point about the working capital safe harbor - that's definitely something that could trip up the qualification if not handled properly. I've seen situations where excess cash from asset contributions ended up disqualifying QSBS status because it wasn't properly planned for under 1202(e)(6). A PLR seems like it could be really valuable here given all the moving parts. The cost might be worth it compared to the potential tax savings from QSBS qualification, especially if we're talking about significant gain exclusion amounts. Have you had success getting PLRs approved for similar multi-entity QSBS restructurings? I'm curious about the typical timeline and whether the IRS has been receptive to these types of requests. One follow-up question on the order of operations - if we convert the LLC to C Corp first, would that potentially affect the 5-year holding period calculation for the shareholders when they eventually contribute assets from the liquidated C Corps? I want to make sure we're not inadvertently resetting any clocks that could delay QSBS benefits.