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    #1

    Price to pay.....

    Client has 4 shareholders in an S corp. Husband (H = 25%), wife (W = 25%), friend (F = 25%), Brother of this friend (B = 25%)

    Loan contributed buy each shareholder is $27,000. Capital contribution is $250 each.
    This is their second year in business.

    As expected in many family situations, something went wrong and "B" wants to be out. So here is what client wants to do.

    (1) Pay off B's Loan
    Company should write a check for this repayment as loan was made to company by "B"

    (2) F would buy out B's stocks for $16,000. Since F wants to pay $16,000 to "B"
    This would increase F's % to 50%. "F" would report capital gain of $15,750. Should Company issue 1099-B? Can F take money as distribution to pay $16,000 to B. F does not have money. What about H & W? To be fair they should take $16,000 also!

    (3) Is it better for F to pay from his pocket or should company pay for the stocks. If company pays then it will be treasury stock and it will not increase F's share in the company. How would company record $16,000? Is this an expense for the company?

    (4) What happens to H & W. According to them they are the victims because F promised $16,000 to B.

    Any help would be appreciated.
    Tags: None
    #2
    Originally posted by TAX
    (2) F would buy out B's stocks for $16,000. Since F wants to pay $16,000 to "B"
    This would increase F's % to 50%. "F" would report capital gain of $15,750. Should Company issue 1099-B? Can F take money as distribution to pay $16,000 to B. F does not have money. What about H & W? To be fair they should take $16,000 also!
    Why would "F" report capital gain? Isn't "F" the one making the payment? Did you mean "B" has capital gain?

    In an S corporation all shares must have identical rights to distributions. You'll violate the one-class-of-stock rule if you distribute $16,000 to one shareholder and not the others. There could, however, be a loan between the S corporation and the shareholder.

    Be careful. If the shareholders are arguing over this, that's not a tax problem. Don't set yourself up by taking sides. Make sure you define who your client is.

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      #3
      Originally posted by Armando Beaujolais
      Why would "F" report capital gain? Isn't "F" the one making the payment? Did you mean "B" has capital gain?

      In an S corporation all shares must have identical rights to distributions. You'll violate the one-class-of-stock rule if you distribute $16,000 to one shareholder and not the others. There could, however, be a loan between the S corporation and the shareholder.

      Be careful. If the shareholders are arguing over this, that's not a tax problem. Don't set yourself up by taking sides. Make sure you define who your client is.
      You are right. I ment B would report capital gain. If F buys B's stock personally then it is o.k. I think this is the only way F would increase his % from 25 to 50.

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        #4
        Previous post from Tax

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          #5
          I think it is best to have F buy B's stock. Only question is does F need to issue 1009B to "B" for selling stocks?

          Comment

            #6
            Originally posted by Unregistered
            I think it is best to have F buy B's stock. Only question is does F need to issue 1009B to "B" for selling stocks?
            No. 1099B is generally issued only by brokerages and the like.

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