Discussion:SCorp buys back Stock
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12 September 2007 | |
| I have a situation where 3 guys own an SCorp. Two brothers own 35% each and one other person owns 30%. They do not have a buy/sell. The 30% shareholder is getting out as of Oct 07. He is being given 50K. They are all asking me what would be the best way to structure the sale for tax consquences. If we treat it as a stock sale the 30% shareholder pays capital gains - right? What happens to the SCorps books. The guys left behind do not want to have a 50K expense with no deduction. Someone has told them if the 30% shareholder takes part in distribution and alittle for the stock it will be better. I have looked all over and I can't find anything that says that. Also when I ran a trial return through my Lacerte program the 30% shareholder's K1 was blank. Should he get a K1 up until he is no longer shareholder or is the stock sale a 1099 event. I have never done one of these (which I have shared with them) and I don't want to advise them wrong. Would it be better if he took a distribution and what happens on the side of the SCorp as far as filing. Thanks for you help | |
| September 12, 2007 | |
| You've got a lot going on here. Let me start....ok, first off, yes, generally, you elect to close the books the day he's done, and he then gets his K1 at year end for his share of the profit/loss thru that date (and all the other k1 items, interest, cap gains, s179, etc.).
As to the sale, you have two choices: either the corp buys the stock (entry is TStock for 50k), or the other two buy the stock themselves. They get no value for that right now, either way, but by buying it personally, it increases their basis for later sale or loss pass-thru, etc. So generally, we like the s/h's to buy the stock rather than the corp. Now, tax will be paid by the seller no matter what. To the extent he gets cash, it first reduces his basis (after the current year income on the k1), and leftover is merely cap gain. | |
| 12 September 2007 | |
| Thanks so much for your quick reponse. I have one more question though the two shareholders that are left seem to be intent on getting a deduction for buying back the stock. Is there anyway to structure this thing as something other than a stock sale so they can get a deduction in the year of payment. Thanks again | |
| 12 September 2007 | |
| JR1, If this was an installment sale would you still recommend that the related S/H buy the stock directly rather than a corp buy-back? Just curious. | |
| September 12, 2007 | |
| I don't think that matters. What are you thinking about, Will? The interest? | |
| 12 September 2007 | |
| Was thinking about that question in section three of the 6252 that has you report when the shares change hands again. I had one this year but the original purchase was by the corp and I was able to check the box saying so. If it had not been a corp buyback, but a direct related S/H to S/H transaction, I would have had to attach an explanation on how this transaction was not a tax avoidance scheme (lol). I felt grateful to being able to check the quick answer box and be done with it... (I admit to not knowing the complete ramifications of section 3 or what the services looks at there).
I believe what originally led these two brothers to a corp buyback to begin with was the purchasers desire to keep the prom note inside the corp rather than being directly responsible to his brother for it... Im really just bored and waiting on client info to finish my last 1120-S, hope you have had a good summer back in Chicago. Will | |
Phil Moody (talk|edits) said: | 13 September 2007 |
| In the end, it is like buying a used car.
Buyers and Sellers negotiate the sales price of everything. The major items we usually see negotiated are: final salary: non compete: price of stock: Each of these have a different impact on buyers and sellers. Yes, some are deductible by the sellers. There must be justification for determination of each amount; ie, each must be determined in an arms length transaction. If family is involved, it is more difficult. You must watch your actions, and determine upfront, who you represent. The Corp? The shareholders, or just one shareholder? In any event, get a full disclosure engagement letter that everyone signs: officers, directors, shareholders, and all individuals involved. | |
| 13 September 2007 | |
| Really good point about the disclosures, Phil.
I was involved with such a deal a few years ago, and even with the disclosures as you suggest, things have gotten adversarial now and I find I need to resign as accountant for one of the parties. I kind of wish I had insisted on one of the parties getting their own accountant from the start. | |
| 13 September 2007 | |
| JR1, to further expand on the corporation buying back the stock, I had a situation where the attorney retired the stock, now it is no longer Tstock and you must reduce Cstock and AAA proportionally creating double taxation. In my case, the shareholders sold their stock for a note (the corporation did not have enough AAA). In the following year, the notes were paid off and the current shareholders had to recognize the income on their K-1. | |
9 January 2013 | |
| Does an s corp issue a 1099 when it buys shares from its shareholders? | |
| 9 January 2013 | |
| So the shareholder doesn't receive anything showing the proceeds? | |
| 9 January 2013 | |
| So the shareholder doesn't receive anything showing the proceeds?
Not on a 1099B. That is only for brokers who trade stock in the ordinary course of a trade or business. | |
| 9 January 2013 | |
| Does the s corp report the proceeds on any form distributed to the shareholders? | |
| 9 January 2013 | |
| So when the shareholders have their personal taxes done they don't have any paperwork showing the proceeds from their buyout? | |
| 9 January 2013 | |
| You mean other than the check they got, the stock redemption agreement, the footnote on the K1, and/or the amount being shown as Distributions on the K1? | |
