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Purchasing a corporation

Expert: Robert M. Chaggares

Dara asked:

We are purchasing a corporation that holds Class A shares and Class B preferred shared. The preferred shares are the result of the 1992 rollover (section 88) and hold a value of $4.

How does that affect us as new shareholders of the corporations?

Robert M. Chaggares answered:

There really isn't any significant impact of the preferred shares on your ownership of the corporation. When a tax election is filed to transfer personal assets into a corporation or corporate assets from one corporation to another, some share consideration must be given up by the receiving corporation.

This share value is normally of nominal value, the remaining value of the assets transferred is then made up with notes payable or other similar instruments. It appears that the $4.00 of preferred shares that you have acquired or will be acquiring have no real value beyond the $4.00 face value.

These can either remain on the books of the corporation or can be redeemed for $4.00 of proceeds with no real tax consequences as the paid-up capital of the shares likely equals their face value.

About the author

Robert M. Chaggares, CA, CFP from Rumley & Chaggares CA.

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