Case Studies and Articles

Converting Taxable Assets to Tax Free Corporate Income

Converting Taxable Assets to Tax Free Corporate Income

Converting Taxable Assets to Tax Free Corporate Income

  • Reposition corporate assets without tax liabilities
  • Create tax-free income
  • Generate more income and control more capital
  • Fund corporate foundations and community philanthropy
  • Learn how to give away the IRS’ money

The wealth of the U.S is primarily tied up in closely-held and illiquid business operations, and any strategy that frees up assets efficiently is worth a second look. As the ABCD Corporation streamlined its revamped business operations, Rebecca Watson (corporate CFO) decided to unload a parcel of land no longer needed for plant expansion. The good news was that the land had development potential and its fair market value was considerably higher than its tax basis. The bad news was that to sell and reposition assets in a conventional sale, Ms. Watson would create federal and state taxes on the realized gains equal to 35% of the profit in the transaction, a totally unacceptable loss of value.

Seeking tools to minimize the tax, Rebecca solicited suggestions from an estate planner who was familiar with IRC §664 Trusts*. By developing an integrated strategy and transferring the parcel of land to the trust, the corporation was able to create an immediate income tax deduction, sell the asset without tax liabilities, reposition the tax-free proceeds to a dividend paying preferred stock that generates tax-free income from 80% of the ensuing dividends. After a term of 20 years, the trust will mature and the remainder passes to fund the corporation’s foundation. By controlling more of the corporation’s “social capital”, the business will effectively shelter an extra $1.8 million from the IRS and leave their corporate foundation almost $1.5 million more value than through traditional planning.

Alternatively, a conventional taxable sale resulted in only $2.085 million to reinvest in business investments funding future expansion. The corporation lost the use of $825,000 in unnecessary tax, a hefty penalty, to get rid of an unneeded parcel of land. Instead of paying tax, the §664 Trust served to control more capital, produce more income and fund a corporate foundation that serves public affairs and community development functions for the business. As a marketing strategy, any activity that improves community relations and enhances corporate image eventually impacts on the bottom line, so when a corporate philanthropic approach evolves that also makes good economic sense, this business chose to utilize its options for enlightened self-interest.

*Contact our office for suggestions or courtesy illustrations for professional planners.

Corporate Tax Saving CRT –

Sell Asset and Pay Tax

§664 Trust

Fair Market Value of Development Real Estate



Less Cost of Sale



Adjusted Sales Price



Less Adjusted Cost Basis


Gain on Sale


Tax at 35% (federal and state)


Capital Controlled – Amount Available to be Reinvested



Annual Return from 8% Taxable (@ 34% Tax) Bond


Avg. Annual Return 7% §664 Trust Earns 8% in Pref. Stock Dividends 

** $219,809

Avg. After-tax Cash Flow From Repositioned Assets



Taxes Saved From Deduction of $755,085 @ 34% Tax Rate 


Total After-tax Cash Flow and Tax Savings After 20 Years



Increased Cash Flow to Corporation 


Asset Value Owned by Corporation After 20 Year Term


Asset Value Transferred to Corporate Foundation After 20 Year Term 


** The dividend deduction for corporate dividends is another reason why taxpaying corporations should consider using mutual funds and preferred stocks. Tax law permits a corporation to deduct from income the first 80% of dividends received on stock it owns in another corporation [I.R.C., §243(a)(1)]. Thus, 80% of a stock or mutual fund distribution that is attributable to dividends is deductible from the corporation’s income. It includes in its income only the 20% balance of the dividend, so in the 34% corporate tax bracket, only 13.2% of the corporation’s dividend income is lost to income tax.

© 1997, Vaughn W. Henry

Henry & Associates