Yes, if the S corporation can obtain enough “good” gross receipts, such that the S corporation passive investment income does not exceed 25% of its total gross receipts. Good gross receipts generally come from a trade or business (which includes a trade of business of renting property, if sufficient services are being provided by the landlord); however, many sellers in these circumstances do not want to acquire an active trade or business. The solution often can be for the S corporation to invest in a publicly traded oil & gas partnership, which is considered to generate good gross receipts for purposes of the S corporation passive investment income limitations and often generates a lot of gross receipts per dollar invested.
Q. My client is an S corporation that is planning to sell its assets, and the S corporation has C corporation earnings and profits. The client would like to avoid the double tax on the gain (often corresponding to the shareholder’s share of the C e&p) and not liquidate. Rather, it prefers to invest the proceeds of sale corresponding to the C e&p at the S corporation level and limit the S distributions to the investment earnings. Can this be accomplished without being subject to the excess passive investment income limitations of §1362(d)(3) and §1375?
A.