Purchase Of Scorp Stock

[BHoffman]

There is a difference between AAA and shareholder basis. Here is a pretty good example of why AAA does not always equal the shareholder basis:

http://www.reallifeaccounting.com/pubs/Article_Theme_S_Corporations.pdf

Ed Zollars is very reliable. Here he discusses AAA and offers the cites:

http://www.edzollars.com/2008-07-07_AAA.pdf

If an SCorp has no prior CCorp accumulated earnings and profits (it's been an S since day one), the the AAA account is basically irrelevant. It's the shareholder stock basis that determines the amount of available tax free distribution, not the AAA. You cannot reliably reconcile the total shareholder basis to the AAA account.

[BHoffman]

One other thing - I'd probably be inclined to use his NET paycheck as the basis rather than his GROSS because the stock would then have been purchased with before-tax dollars and that doesn't seem right.

[Maribeth]

One other thing - I'd probably be inclined to use his NET paycheck as the basis rather than his GROSS because the stock would then have been purchased with before-tax dollars and that doesn't seem right.

I hear what you all are saying but I would still take the $136,000 as basis. That is the amount that he took into income in order to acquire the stock, that is the amount that he was taxed on and being taxed on something creates basis.

If you look on a W-2 that has been prepared for an employee with a stock option. The paperwork that the employee receives has the gross amount on it, less the taxes, less the payment.

Then on the W-2, the amount listed under -- oh darm, is it code V -- will have the gross amount.

Maribeth

[Gary2]

I hear what you all are saying but I would still take the $136,000 as basis. That is the amount that he took into income in order to acquire the stock, that is the amount that he was taxed on and being taxed on something creates basis.

If you look on a W-2 that has been prepared for an employee with a stock option. The paperwork that the employee receives has the gross amount on it, less the taxes, less the payment.

Then on the W-2, the amount listed under -- oh darm, is it code V -- will have the gross amount.

Code V is for non-statutory stock options only, usually creating a taxable event on exercise. It's not a gross up by itself; it's the fair market value of the options (or often stock, if the option value can't be determined), minus out of pocket exercise costs. I've never seen a case of these where there was a gross up; usually they forcibly sell some of the stock to pay the taxes.

What that means is that you can't apply the full amount of the code V increment to the stock retained by the recipient. You have to compute the per share basis, use up some of it on the Schedule D for the stock that was sold, and only apply the remainder to the stock that was actually kept.

If the company handled the transaction themselves, without going through a broker, there may not be a 1099-B for the sale, in which case the IRS will never know about it, and you'll never get dinged for the missing Schedule D. And since the IRS can't track basis, they won't be able to correct you when, in some years, the stock that was kept is sold and you use the wrong basis. But it's still wrong.

[Maribeth]

Okay, I get it. I went back and looked at one of my engineers stock option. Indeed, the amount on his W-2 was only the gain and did not include taxes. I think I understand.

Thank you so much for your explanation.

Maribeth

[ChEAr$]

Bump up for more opinions........

Just now reading this thread again. Bob is talking about outside basis of a non publicly held corporation, thus market value doesn't matter. Probably is no such thing for closely held stock.

[BOB W]

Harlan, thanks for the bump up.