You need to purify a corporation of its bad assets so that the corporation’s shares will be qualified small business corporation shares for the purposes of the $750,000 capital gains exemption. Let’s assume that you are confident about the values of the assets involved, so that you can leave bad assets with a value equal to exactly 10% of the total gross value of all assets of the corporation. How do you calculate the amount to remove, given that what you remove reduces both the gross value of the bad assets and the gross value of all of the assets of the corporation? The following formula seems to work:
x = (10y – z)/9
where
x is the value of the bad assets to be removed from the corporation;
y is the value of the bad assets before anything is removed from the corporation; and
z is the value of all assets of the corporation before anything is removed from it.
