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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29774
Experience:  Taxes, Immigration, Labor Relations
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S Corp questions: Sorry, but I have a few. 25% shareholder

Customer Question

S Corp questions: Sorry, but I have a few. 25% shareholder is selling his entire interest in the S Corp. He is selling 70% of his shares to the other shareholders, and the remaining 30% to the S Corp. How would the sale to the Corp be classified - as a
sale/exchange, or a distribution? Also, my understanding is that a portion of the sales price will be paid in cash; the rest will be notes. This is the case for both the purchasing shareholders and the Corp. How should the interest on the notes be treated
by the Corp & the other shareholders?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

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.

Any questions?

Expert:  Lev replied 1 year ago.

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