In 2009, Egon Spengler wanted to sell his shares in Five Alive, Inc. a corporation that he had formed many years ago. They buyer was willing to pay $600,000. Spengler's basis was only $100,000, so he refused to make the sale.
Spengler, working with his accountant, Louis Tully, came up with a plan. Spengler and Peter Venkman formed the S&P partnership. Spengler transferred his stock in Five Alive to S&P in return for 99% of the partnership. Venkman transferred $100 to the partnership in exchange for a 1% interest. Next, Spengler formed a new corporation, Top Five, Inc., and transferred his partnership interest in S&P to Top Five in exchange for 100% of the stock. Spengler made a timely S election for Top Five.
Tully advised that the transfer of >50% of the partnership interest in S&P caused a termination of S&P. However, he also advised Spengler and Venkman that they could elect to continue the business of S&P, which they chose to do under the name of High Five, GP. Tully also advised the partners that they were eligible to make a Section 754 election. They did so, and used the Section 754 election to "step-up" the partnership's basis in the Five Alive stock to $600,000.
In 2010, the partnership sold the Five Alive stock to an unrelated third party for $650,000 (the buyer was not the person who made the $600,000 offer in 2009). The partnership reported $50,000 of gain, and 99% of the gain passed through to Top Five and from Top Five to Spengler. Spengler reported the gain as a pass-through, long-term capital gain on his 2010 return and paid the appropriate tax April 15th, 2011. His other gross income for the year was $250,000.
The IRS has advised Spengler that they are going to audit his 2010 return. Spengler is now our client, as Tully has retired. We contacted Tully and asked for information. His response was "tell the IRS 'You snooze, you loose' the statute of limitations has run." Will this defense be sufficient for Spengler?
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In 2009, Egon Spengler wanted to sell his shares in Five Alive, Inc. a corporation that he had formed many years ago. They buyer was willing to pay $600,000. Spengler's basis was only …