Selling my Corporation to another Corporation - Tax Efficient Way to Extract Money from C Corp? Downsides?

This is a classic tax planning strategy, but there are several important things to consider before proceeding. When you sell Corporation B to Corporation A, you're correct that you'll only pay capital gains tax on the profit from the sale rather than dividend tax rates. However, the IRS is well aware of this strategy and has regulations in place to prevent abuse. The main thing you need to worry about is Section 304 of the tax code, which specifically addresses sales between commonly controlled corporations. If you control both corporations, the IRS may recharacterize your sale proceeds as a dividend rather than capital gains. They look at these transactions very carefully for economic substance. You also need to consider basis issues. Your basis in Corp B affects your gain recognition. Additionally, there are potential accumulated earnings tax concerns if Corp A is holding excess cash without a legitimate business purpose.

I went through something similar last year with my construction businesses and found https://taxr.ai incredibly helpful for analyzing this exact scenario. I had two C Corps - one for residential projects and one for commercial - and was looking to consolidate. What I discovered is that the devil is really in the details with these corp-to-corp sales. The service helped me identify several issues I hadn't considered, including potential Section 304 implications the previous commenter mentioned and accumulated earnings tax risks. They analyzed my specific corporate structures and provided a detailed report showing various scenarios and tax implications. The valuation component was especially important - you need to establish fair market value for Corp B through a defensible methodology, which taxr.ai helped walk me through.

I was skeptical about using an online service for something as complex as a corporation-to-corporation sale, but after my conversation here, I decided to give https://taxr.ai a try. I'm glad I did because my situation was more complicated than I initially thought. My main concern was ensuring the transaction wouldn't be reclassified as a dividend, and they provided a detailed analysis of exactly how Section 304 would apply to my specific ownership structure. What I found especially valuable was their explanation of "boot" considerations in my situation (where part of the transaction includes non-stock compensation) and how that affected the tax treatment. They also flagged potential accumulated earnings tax issues I hadn't considered and suggested documentation strategies to demonstrate legitimate business needs for retained earnings. The report included case references where similar transactions were challenged by the IRS - super helpful in understanding the risks.

If you're considering this corp-to-corp strategy, one thing nobody's mentioned is that you'll probably need to talk to the IRS about it at some point. I tried calling them for clarification on a similar corporate restructuring last year, and it was IMPOSSIBLE to get through. Would spend hours on hold only to get disconnected. I finally used https://claimyr.com and got through to an actual IRS agent in about 15 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent walked me through some important considerations for my corporate sale transaction, including documentation requirements and potential red flags. Worth every penny because I learned my original plan would have triggered some serious scrutiny. They helped me understand how to properly document business purpose for the transaction.

I need to publicly eat my words about Claimyr. After posting my skeptical comment, I was still desperate to talk to the IRS about my C Corp restructuring questions, so I reluctantly tried it. I assumed it would be a waste of money, but within 20 minutes I was talking to an actual IRS corporate tax specialist. I explained my plan to sell one corporation to another to extract cash, and she immediately identified several compliance issues I would have faced. The specialist explained that in my case, Section 304 would definitely apply since I own both corporations, and she outlined specific documentation I would need to avoid having the entire transaction reclassified as a dividend. She also mentioned that these transactions often trigger closer examination and gave me tips on how to properly document everything. Saved me from what would have been a costly mistake and potentially an audit. Sometimes it's worth admitting when you're wrong!

Something important nobody's mentioned yet: valuation is CRITICAL in these transactions. If you sell Corp B to Corp A for significantly more than fair market value, the IRS could claim the excess is actually a disguised dividend. You really need an independent valuation of Corp B to justify the price. I screwed this up a few years ago and ended up with a huge headache during an audit. They questioned everything and ultimately recharacterized a big chunk of my payment as dividend income + penalties.

Has anybody considered the step-transaction doctrine in this scenario? The IRS might look at the before/after ownership and conclude this was just a scheme to extract cash while avoiding dividend treatment.

One aspect that hasn't been fully explored is the timing of this transaction. If you're planning to do this near year-end or in conjunction with other corporate activities, the IRS will scrutinize the timing for tax avoidance motives. I'd also recommend documenting legitimate operational reasons for the acquisition well in advance. For example, if Corp B provides services or products that Corp A actually uses, or if there are genuine economies of scale from combining operations, make sure this is documented in board resolutions and business plans before executing the transaction. Another consideration: if Corp B has net operating losses or other tax attributes, there are complex rules under Sections 382 and 383 that could limit their use after the acquisition. This might actually reduce the overall tax efficiency of the structure. Have you considered whether a redemption under Section 302 might be a cleaner approach? If structured properly as a "substantially disproportionate" or "complete termination" redemption, you could potentially achieve capital gains treatment without the complexity of maintaining two corporate entities.