Sell C Corp stock

[Harvey Lucas]

Client forms a C Corp Jan 1st 2013.

He puts in $1000 cash for stock.

During his 1st year he generates $200,000 of profit buying and selling widgets.

There is no ending inventory.

His 2013 Taxable income will be $200,000, his Corporation income tax will be $61,250.

His net income after he pays the $61,250 of Income Tax is $138,750.

On December 1st 2013 he uses this $138,750 to buy land.

So his corporation balance sheet on 12/31/13, per his 1120 schedule L is:

Assets are : Cash $1000, Land $138,750, total $139,750

Liabilities and Equity are: Stock $1000, Retained Earnings $138,750, total $139,750

He has no income or expense for 2014 and 12/15/14 he sells the stock of his corporation for $250,000.

On his 2014 1040 Schedule D he reports long term sale of his stock, sale price $250,000.

What is his cost basis in his stock?

[Corduroy Frog]

Only $1000

Harvey from your post it appears the corporation will continue to function even after its sale to another party.

Since it is a C corporation, his basis is limited to his investment in capital stock of $1000. We assume as there is no mention of further contributions or withdrawals (dividends) that there are no further adjustments to the stock since the creation of the corporation.

The fact that the corporation did well, and invested its profits in real estate are all matters at the corporate level, not at the ownership level. This would be different if this was an S corp, but a C corp is its own entity. The fact that the C corp had to pay $61K in corporate taxes does not benefit the owner's basis. Because it was not the owner who paid it, it was the C corp.

He has a long-term capital gain of $249,000. Guy might have done better with some tax advice in setting up an S corp.

[Harvey Lucas]

Thank you Corduroy.

$249,000 gain is what I was thinking too, however, I was having a hard time wrapping my head around why he gets no benefit for his retained earnings....just the nature of the C Corp beast I suppose...

In this example, what if he he had liquidated his C Corp in 2014 instead of selling his stock?

[Lion]

If he sells his stock, he uses his outside stock basis. In your post, he has done nothing to increase or decrease his basis in his stock.

If the C-corp had sold its assets, the C-corp would use its adjusted basis in those assets, and the C-corp would report its gain or loss.

[mactoolsix]

He puts in $1000 cash for stock.

During his 1st year he generates $200,000 of profit buying and selling widgets.

So, we are all wondering what were the widgets that generated $200K in one year?