In 2000, SELLER A and BUYER B went out on there own as independent lumber brokers. Each created their own corporation and together they created a partnership each owning 50%. The partnership owns the land and the building where these brokers conduct business. SELLER A’s corporation was setup using the Accrual Basis accounting method, whereas BUYER B’s corporation utilized the Cash Basis accounting method. SELLER A’s corporation has numerous brokers (independent contractors) working for it, to include BUYER B’s corporation. Over the years, BUYER B would only take advances on his receivables from SELLER A as needed. This created a $15 million (approximate) payable to BUYER B on SELLER’s books and receivable on BUYER’s books. This practice enabled SELLER A to purchase a greater amount of lumber for future sales, etc. As stated above, SELLER A is accrual-based accounting and BUYER B is cash-based accounting. Therefore, BUYER B has not paid taxes on his receivable from SELLER A. Today, BUYER B wants to purchase SELLER A’s corporation and remaining 50% ownership in partnership. The following questions are created: 1. Is it possible for BUYER B to own both corporations and continue operations as in the past? (i.e. cash based accounting corp selling lumber under the accrual based corp). Thereby keeping the receivable/payable on each corporation? 2. If the above fails the related party test, would the scenario change if BUYER B was to transfer ownership of his corporation to his son?
Ownership of 2 corporations with different accounting methods
Accounting and tax issues are minor problems compared to the way these two individuals are carrying out their businesses. These two individuals are obviously enthusiastic traders who are so involved in "doing business" that they don't find the time, nor have the interest, in seriously looking at the solidity of their financial situation, the flexibility of their financial resources or the planning for a contingency plan if needed.
Unless they are able and willing to realize the situation into which they have maneuvered their businesses, they will find patch work solutions to fix occasional problems. Don't expect any major decisions from them. Those decisions will not be made by them, but will eventually will be imposed by events that will be beyond their control.