Business buy out

[Redneck]

Client received $250,000 buyout of his share of a flooring corp from brother. As far as I can tell he has no basis. He worked off and on for the company over the past 30 yrs. Received a W-2 for what was paid at the time. How would ya'll treat the monies?????????

[Kram BergGold]

Form 8594

The two brothers need to fill out a Form 8594. The information on this form will tell you exactly what to do.

[rosieea]

The two brothers need to fill out a Form 8594. The information on this form will tell you exactly what to do.

8594 is for an asset sale. This sounds like a stock sale, which the seller reports on Sch D. The buyer assumes the seller's shares and has $250K basis in them.

[Kram BergGold]

Sorry

I missed the part where it said corp. So the seller has a $250,000 capital gain.

[OldJack]

Well the post didn't say if this was a C-corp or S-corp.

If it is a C-corp it might be §1202 or §1045 stock. If qualified for §1202 the taxpayer may be able to exclude 50% of the gain but the exclusion would be limited to basis amount. If qualified for §1045 the gain may be able to roll over and exclude the gain by buying new stock in a small business company.

Another example of C-corp over S-corp benefit.

[Roland Slugg]

Don't forget seller's basis

So the seller has a $250,000 capital gain.

Well, the seller probably has some amount of basis in his shares, so the gain would be reduced by that basis.

§1202 or §1045 stock

§1202 is a joke. Yeah, you can exclude up to 50% of the gain (60% in some cases), but the taxable part is not taxed as a capital gain. Instead it's taxed more like the gain on "collectibles," which are taxed like ordinary income but at a tax rate not to exceed 28%. Thus, the effective federal tax rate on a §1202 gain can be as high as 14% (28% of the taxed 50% of the gain). In addition 7% of any excluded gain is a tax preference, possibly creating (or increasing) an AMT liability and further increasing the effective overall tax rate on the total gain. Perhaps most importantly, §1202 is only available for gains on stock issued after 8/10/93, but the original post says the selling brother has been active in the business for 30 years.

§1045 could conceivably appeal to this particular taxpayer, or to any of our clients in a similar situation. It's actually sort of a specialized version of a §1031 exchange, but without the intermediary requirements or the 45-day ID period. However, the reinvestment period is only 60-days.

I'd like to thank Old Jack for mentioning these two Code sections. They may have limited application or appeal, but it's good to be reminded of them