Dissolved C Corp xferred in Estate Sells Real Property
Former shareholder (“Gramps”) owned a California "C" corporation with one asset, undeveloped real property with an inside cost basis for tax purposes of $1,000. There was no real income from the property and consequently the “C” corp was not required to file U.S. tax returns. Gramps fell ill and failed to file the necessary paperwork required to keep the corporation in good standing and California administratively dissolved the corporation. Shortly thereafter, Gramps passed away.
In Gramps will, Gramps left the stock of the “C” corp owning the property to his grandson (“New Shareholder”). At the time of Gramps passing, the property was estimated to have a market value of approximately $20M and the “C” corporation stock (given the imputed $8m corporate tax liability at 40%) was estimated to be worth $12M. The estate was settled and presumably paid all pertinent taxes; giving the New Shareholder a “step-up” in the basis of the stock.
Three years later, the market value of the undeveloped property has fallen to $12M. Developer approaches New Shareholder and desires to acquire the real property. New Shareholder (as President of the dissolved corporation) deeds the property to himself, “…for $10 and other valuable consideration.” with the intent to convey the property to the Developer for $12M in the next three months.
Question (1): “Does the administratively dissolved corporation escape the Californian or U.S. Federal Capital Gains tax on the distribution of the property to the New Shareholder?”
Question (2): “If so, would the corporation’s capital gains tax on the distribution be based on the value at the time the estate was resolved (i.e. @ $20M) or the market value at the time administratively dissolved corporation deeded the property to the New Shareholder, personally (i.e. @ $12M) ?”