A different type of tax sale purchase - Need some help

[Dave2]

Background:

I have often said that if you contribute you may get some rewards you don't expect and recently it has become true.  We all get enough email garbage but occasionally there are exceptions.  It looks like this is one of them and I have an interesting decision to make.

While I don't know all of the details it would appear about 3 plus decades ago a few rather smart  businessmen not too far from my neck of the woods decided to form a tax sale purchase partnership.    The partnership had all the necessary elements financial, legal and
real estate sales with deep pockets and what they did not know themselves they could buy the right engineering and planning talent.  Obviously the exact details will not be public.

Like some of the oldtimers here they took a long term view.  To day it appears some people on this board get upset if they can't flip the property in six months.  As I am finding myself in the rural municipalities things don't always move at Toronto paces.  

As far as I can determine these guys did most of their buying around a quarter plus century ago and held many of them for a long time.  They gradually sold them to the market 1 - 2 a year for income.  Like all human beings though time moves on and the majority of the original
members have died off and the survivors are in failing health.  They have sold off of the easy to sell their original porfolio and now want to disolve the partnership.  The remnents are rural soon to be urban land but I am clear of all of the the McGuinty challenges like oak ridges morraine.  .

They have sold all of the easy stuff and the remainder has great potential but needs some work. Its like buying beef direct from the farmer.   There is no doubt that it is grade A angus beef I can touch and feel it.  However it will need a lot of work by a skilled butcher to turn it into the steaks we all want.  Like buying a herd of cattle I will have have to be patient and wait for some of the critters to grow up.  

Their terms are simple; regular real estate deal, all or nothing; cash payment.   Pricing is very attractive however as they just want to wrap things up.   Its a little closer to Toronto then my regular stomping grounds but in the right direction and within commuting distance.

Question:

Never having been through this before my question is a simple one.  What are the pro's and cons of buying (the shares) of the partnership versus the land direct for both them and me?  The final price remains to be set but they don't want to screw around to put it bluntly and they expect the same in return.  

[DF1]

You should be able to get a lower price if you buy the shares, since the sellers will pay less tax, but you take on any liabilities of the company, including any litigation that could crop up from the past.Any debt should be easy enough to ascertain, but who knows what lawsuits could be lurking. Talk to a lawyer about seperating the company's liability from your personal or other buisiness interests. If it is a partnership, not a corporation, rules may be diferent.

[ErnestBidder]

Dave:

  What I've done in the past, (without fruition, though) was to ask the sellers to consult with their own accountant/tax expert as to how to do the deal in their own best interest, then take their proposal to your own expert to see if you can live with the sellers' wishes. You may wind up with 2 or more different proposals from the ownership group, but I've always understood that buying the shares was a better idea from the tax point of view.
  You do have to be careful about not assuming any old liabilities that may show up in the future.

[Dave2]

Check with a lawyer, but if you buy the shares of the company, you are buying all of the assets (good) and all of the liabilities (really bad). There is no telling the extent of the liabilities - especially over 20 - 30 years!

They want to sell the shares so that the shareholders will pay tax on capital gains instead of paying income tax on the money they take out of the company from the sale of the land.

Netpred:  

This is pretty well my own expectations.  If I could / can limit liability to lots in question probably not a high risk.  (no commercial or industrial history and currently vacant land).  We have all seen enough horror movies about something emerging from the grave and you are correct it is almost impossible to assess it given circumstances.  

Actually If I was into conspiracy theories I would think one of the board participants put them up to it.  Interesting way to knock out competition make them so full they can't eat anything else.  (Like lions after a big successful hunt, all you want to do is lie around in the sun and sleep.) I wonder which of you put them up to it.   If we really end up doing it probably eliminates me from the market arena here for 2 plus years.

One of the big issues on this one is cash flow considerations.  You are probably 3 - 7 years away from main payouts which of course is the reason they want to sell.  (it's a true counterpart of the urban legend of the Chinese bamboo.)

 You will of course have some unexpected events like what happened to my Bother 's father-in-law when they brought an angus bull in to do his thing with their herd of cattle.  The three men thought they had control of the situation but unfortunately the wind was blowing toward them from the herd. Once he caught the scent the bull decided to take the straight line approach.  

There were 5 rows of fencing to repair as a result    although I understand they did have a good calf crop the next year.

Checks so far are okay and I have a good lawyer so this is one he will earn his money on.  Guess I will have to get out the grinding wheel and make sure the knife is really sharp.  

[Pfm1011]

. Your lawyer can try to protect you with indemnifications from the principles of the company, but you would still have to run around and try to collect if there ever was a problem.

That wont happen unless they have had strokes and then it  wouldnt be legal as they are clearly insane , Only a fool would give a personal guarentee for a corp.

   I would not walk but RUN away from the share option as you have no clue of potential liabilitys. You have to audit every piece of land this company ever  bought , sold leased  or had any interest in since the corp was formed.  This would include phase one environmentals  on every piece past and present.  The potential outstanding liabilities are unlimited . How do you know if someone left a transformer with PCB's on a piece these guys sold 25 years ago?? 

If the land is cheap enough , buy the land but dont touch the share option under any circumstances. 

[link]

No expert here, but have had experience thansfering assets between multiple corporations my first thought I would consider that may limit liability from the past and to save the seller from the tax man would be for the seller to form a new numbered corporation have the partners transfer their personal shares of the original corp to the new company .The new company would then own the original corp and the partners would own the new one, transfer the properties you would like to purchase to the new company this should not be a tax issue as the two corporations are taxed the same unlike personally, the new corp could then sell the shares of the original  back to the partners (worthless) to put on the shelf in their lawyers office until they decide to dissolve it and you can purchase the shares of a clean new company to hold the properties .
 This is only a idea and I have no idea how large a package this is and the variables that contribute to making it worth persuing such as if the properties are mortgaged ,number of properties and values and  potential tax liability of the partners

[Josh]

Dave2, a couple of things to clear up first, in your initial post you mention partnership not corporation.  All of the advice you have received here has been for a corporation, not a partnership.  Partnerships are not considered separate entities for tax purposes, all of the income/losses flows directly to the partners in the year it is incurred.  A corporation on the other hand can hold undistributed income for a long period of time making corporations very tax efficient in comparison to partnerships.

Before you pursue this further, determine if they are selling you the partnership interests or a corporations shares as the planning for the two are very different.  Once you have determined this, contact a good accountant who has dealt with this in the past.

[Dave2]

Bottom Line:

This board and I personally agree.  Buy the land not the corporation/partnership. 

Still working through this one.  Tough decision particularly with a provincial election this year as I am worried about a new round of provincial controls.  (As I have said in the past Oak Ridges Morraine 2. )

http://multimedia.thestar.com/acrobat/fb/20/3ea9c8cc47a787b54632e8551c91.pdf)

Big concern is time required.  originally though 5 -7 years, more likely 7 - 10.  These guys are crazy like a fox.  Wave an irrestible bait in front of the fish (me).  Great deal but problem is time.  If I could accurately forecast that I would have retired long ago. 

Big cost to me is I did not properly attend to the bird in hand.  Worth a separate post called "Boy am I stupid"