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Shares that S-corporation purchases from shareholders are treasury shares .
When shares are repurchase by the corporation - they become treasury shares - these are shares owned by the corporation - these shares are IGNORED for distribution purposes as if they were not existed.
How the corporation will use these shares later - is not important - they may be awarded to employees as compensation, sold to investors, etc.
The shareholder who sold shares will report the sale transaction on his tax return as (selling price) MINUS (basis) = (capital gain)
The corporation may NOT deduct the purchase price - that is capital expense - and treasury shares will be on the balance sheet as capital asset.
That amount is NOT reported on K1 - and that is not income for the corporation - but that information is provided on attached note to K1 shareholder.
When the corporation sell these shares - it will recognize capital gain or loss based on the selling price.
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