Manasota Land Company Inc. is a C corporation that owns real estate. It has existed since approximately 1955. Manasota has two primary shareholders. It is owned two-thirds by Richard and one-third by Walter. Manasota owns approximately 75 acres of land in a valuable area; its estimated value is $2,500,000. The land has a basis to Manasota of only about $300,000. On part of its land, the company owns a building, which it is currently leasing to another company, but the lease is expected to end soon. Because the building is old and not well laid out, and because it is located in a fairly economically depressed area, Manasota believes it will be hard to rent out or sell but may be possible to sell or rent at a low value. The building was appraised to be worth $250,000. Its basis to Manasota is zero. Manasota has been very profitable over the years by renting out its real estate to related companies. It currently has approximately $300,000 in the bank and about $400,000 of retained earnings on its books. Assume that the $400,000 also represents its current accumulated earnings and profits. Manasota and its owners are considering trying to sell off all or part of these properties over the next 5 years if possible. However, in its current state as a C corporation, it will have corporate double taxation on any profits: once on the sale and then a second time on the distribution.

Manasota is considering a few options. One is to elect S corporation status. An S corporation can have only one tax on the sale of its assets in a liquidation, because the shareholders increase their basis as result of their share of the gain, meaning a distribution of the profits should not produce a second gain. Alternatively, Manasota is considering liquidating into a LLC or simply becoming a partnership, which would also avoid double taxation upon a sale of the real estate and the distribution of the proceeds to the owners. In any of the above scenarios, the sale of the real estate would not happen immediately. Instead, the business will continue to collect rents or other passive income until the real estate is sold. It is estimated that the business will average passive income for the coming years of an average of approximately $50,000 per year.

Discuss each of these three alternatives. Treat the S corporation as one alternative, and describe in depth the following:

• Is there any immediate tax consequence on the election up S corporation status?
• To what extent will the S election be effective to allow the owners to avoid double taxation on the sale of the real estate by the corporation, assuming they are sold in the next 5-10 years?
• What effect do the earnings and profits of $400,000 in the corporation have on the election and decision about electing S corp status?
• What is the effect of the fact that the corporation will be receiving passive income each year?

Then discuss the conversion to an LLC or partnership. Generally discuss these together as one discussion, but also point out any salient differences in converting to one type versus another. Be sure to address the following:

• What advantage, if they decide to go this route, would there be in doing this conversion?
• What would be the major downside of the conversion to an LLC or a partnership?
• Can you provide a dollar amount of the amount of income which would need to be recognized to the shareholders upon the conversion?
• What would be the major advantage of a conversion to an LLC or partnership?
• What other tax consequences would there be of a conversion?