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S Corporation shareholders to surrender stock to S

corporation (all with basis) on...
S Corporation shareholders to surrender stock to S corporation (all with basis) on 1-1-18 which will terminate S election and now stock re-issued to 4 operating companies as a C Corporation. Is there any impact to surrending shareholders? Tax basis is only $75k. Does the surrendered basis become "outside basis" for any of the current S Corp owners?
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Answered in 29 minutes by:
9/20/2017
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,482
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Is any cash or other property being received? Distributions received by the shareholder are treated as payment in full for the exchange of stock. The shareholder’s adjusted basis in the stock is subtracted from the cash and fair market value (FMV) of other property received from the corporation.

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If the stock surrendered in the liquidation qualifies as Sec. 1244 stock, the shareholder may be able to claim an ordinary loss rather than a capital loss.

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The liquidation process itself does not terminate the company’s S election.

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If there's no liquidation and you simply revoke by shareholder consent, ( no AAA/E&P balance from a pre-existing C-Corp) then basis DOES become basis in the C-Corp stock. Still need the revocation letter and 8832

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I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice 1986.

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Customer reply replied 5 months ago
No cash or property is being received. Thought the loss on surrender would be treated as related party & there for non-deductible?

The general rule is that a shareholder’s stock basis is determined as of the end of the S corporation’s tax year. It appears that the adjusted basis of stock held in a liquidating corporation is adjusted for current-year passthrough items prior to determination of gain or loss from the receipt of the liquidating distributions (see Regs. Sec. 1.1367-1(d)(1) and Letter Ruling###-##-####.

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But other than that, if there's basis and no distribution...

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If the shareholder has different bases in different blocks of stock, the computation of gain or loss depends on whether there is a single distribution or a series of liquidating distributions (Rev. Ruls. 68-348 and 85-48). The shareholder recognizes gain when the adjusted basis of each block has been recovered, while loss is not recognized until the corporation has made its final distribution

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Customer reply replied 5 months ago
Is this really liquidating as the corporation will still exist but with different owners. So when the existing shareholders surrender their stock, have basis but in a related party, the basis (say $25,000 each) is deductible or non-deductible transaction?

Non-deductible. (can be used to allow for operating losses in the final year ... can, in fact, be used up) but becomes basis in the C-Corp stock (outside basis).

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I don't understand how you're using related party. 267 doesn't really apply here

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,482
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