Dissolving of S Corp

[Unregistered]

My client is dissolving his S Corp and finally retiring.

When selling his share (100% shareholder) of stock, how do you assign value to the shares?

Is it based on what the company would be sold to an individual at fair market value? Or do you value the stock based on previous income?

I'm at a loss.

TIA

P.S. The corp owns minimal depreciable assets worth about $1000 total. No other assets except cash in the bank.

[rosieea]

Is he selling the shares of the corporation, or is he liquidating the corporation? If selling, then a business valuation should be done. His gain or loss will be selling price minus basis. If he is liquidating the corporation, he will receive the corporate assets as liquidating distributions in exchange for his stock. The distributions will be at fair market value. Again, gain or loss depends on basis.

[Roland Slugg]

Please clarify

My client is dissolving his S Corp.

When selling his share of stock?

Which is it? Is he dissolving ... or selling?

If he's dissolving the corp, the amount of the liquidating distribution(s) is the total of the cash received plus the FMV of all other property received. If the S corp has no pre-election E&P, the total first reduces his basis, and the excess is taxed as a capital gain. (Code §1368(b)(2)) If the S corp does have accumulated E&P, see Code §1368(c) for the taxation priorities.

If the shareholder is selling his S Corp shares, treat the sale like any other sale of stock.

[Unregistered]

Sorry for the confusion

He is dissolving the S corp and not selling. I was a bit confused on the process.

If the money and FMV of the assets distributed to the shareholder do not exceed his basis, does the shareholder then have a long term capital loss or is the loss lost?

[rosieea]

He is dissolving the S corp and not selling. I was a bit confused on the process.

If the money and FMV of the assets distributed to the shareholder do not exceed his basis, does the shareholder then have a long term capital loss or is the loss lost?

He is, in essence, selling his stock for the cash and FMV of the assets. If his basis exceeds that amount, he deducts the loss. The S corp may have to recognize gain on the assets. The gain is passed through to the shareholder, but it also increases the shareholder's basis.

[Unregistered-KICKED OUT]

Section 1244

If he is the original stockholder-he may qualify as 1244 "small business" stock and get an ordinary loss 4797.