Capital Gain or Self-Employment Income

[Maria]

Hi,

My client is going to sell his corp. I haven't seen any agreement but according to him it will be a installment sale payable in 4 years. It is a sale of stock, since there is a minimum stock basis, at first I think it is going to be long-term capital gain for most part. However, he also provided that he will continue to work in the corp and receive wages income. At year end he will receive sales proceed and a 1099 showing capital gain distribution.

Since the sales is contingent on his employment with the corp, is it possible that the capital gain distribution be self-employment income? I don't think so but would like to make sure.

Thanks for your advice.

[OldJack]

Your post is not very clear as to the type of entity and just what the deal is. I'm guessing that if the client is going to receive a 1099 capital gain distribution then it must be a C-corp. If a C-corp and he sold his stock I don't understand how he could receive a distribution on stock that he no longer owns at year end.

If he is a S-corp he would not normally be receiving a 1099 distribution (unless earnings prior as a C-corp), rather a distribution would be accounted for on the 1120S-k1.

[Maria]

It is a C Corp

Thanks for your reply. It is a C Corp. I guess after the first year of sell, he will not receive any 1099-capital gain distribution, but only cash. Therefore, the first year and the rest of the year treatment will be different?

[OldJack]

It sound like he is getting a distribution from the C-corp that he does not own?

Distributions from a C-corp can only be made equally to current shareholders.

Did he maybe sell the assets of the C-corp retaining the stock ownership of the C-corp?

If he sold his stock to the C-corp (redemption) then the sale could be reported as an installment sale on this 1040 and you would have a % as capital gains each year on 1040 Sch-D. However, he would not be getting a 1099 distribution as the corporation would be reporting a 1099 sale proceeds only in the first year. A redemption of stock must be his entire shares/ownership to get capital gains or it will just be considered an ordinary taxable dividend.

Any amounts for sale of stock, dividends, or distributions coming from the C-corp would NOT be subject to self employment tax.

Any "cash" that comes out of a C-corp is going to be taxable as W2 wages, taxable dividends, maybe ground or bldg rent due the owner, or maybe non-taxable reimbursement for expenses paid by the person, or payment of a debt to the person (from purchase or stock redemption).

I guess I still don't quite understand the sale and deal.

[Mark Goldberg]

See post from 6/14

Maria, see my post about sale of Corp and accts receivables.

[BOB W]

Maria.........

........ You must wait for the sales contract to be finalized and in your hands before any planning can be done. Your client's understanding may just be preliminary dicussions.