Stock Sale, Discussion

[geekgirldany]

I am posting this as more as a discussion because I did not handle this for my former client.

Client sold S-Corp business to two employees.The client's lawyer recommended for them to sale the stock to the employees because it would be better for the client tax wise. They lawyer recommended a CPA. The CPA agreed with the lawyer.

The sale was setup that the new stockholders (former employees) would buy the stock. They could not pay the whole amount up front so my client financed it. The new stockholders pay $1,000 a month to my client on the sale of the stock.

Well the new stockholders went to another CPA. This CPA has stated that the $1,000 a month the new stockholders pay will have to be treated as a distribution and taxes will have to be paid on that money. That the new stockholders are investing in stock. He used the example that my client is like Home Depot and the new stockholders are investing in the coroporation.

Is this correct? I thought that the new shareholders bought the stock from the old owner. This made them new shareholders of the business. Therefore they own it. They could not pay the whole amount. So the old owner financed it. I advised my client (old owner) to go to a CPA because I did not feel my knowledge was enough to do a sale of this kind.

I would just like to know which is correct.

Thank you

[Bird Legs]

Stock Sale

Are the buyers, employees, paying the seller out of the corporation? If they are, then
this would be distributions, salary, to them, the buyers.
The original owner did not sell the equipment. He/she sold the stock owned, capital asset,
Sched. D, installment sale, form 1040.
The buyers should be paying the installments out of their own pocket.

[geekgirldany]

I just looked at the last QBs file they gave me and they have been paying it out of the corporation.

The new owners should have been paying the old owner themselves not out of the corporation. Makes alot of sense. So since the money came out of the corporation paid to the old owner this is like the new owners took the money out as distributions... personal. Then turned around and gave it to the old owner as a payment.

Would it have been better if only the assets had been sold? The new owners still needed to pay it themselves not out of the corporation.

Thank you for responding

[geekgirldany]

To add to the message. My client came by today and is wanting me to complete their personal tax returns.

On the sale of the stock... they would have a basis in this stock correct? Would this be their shareholder basis?

[Bees Knees]

The way I read your posts, it sounds as though the two new owners are paying off the old owner using funds from the corporation. I also do not see in any spot where they came up with any of their own money to buy the corporation. All funds are coming from the corporation itself to pay an installment note.

If this is the case, then there has to be something in the purchase agreement where the new owners somehow acquire shares of stock. They have to pay tax on the money used to acquire their shares of stock in order for them to have a basis in their share of stock. If they have no basis, then any distributions that come out of the corporation are taxable to them.

[geekgirldany]

I'm sorry I guess my last post wasn't very clear. The client I am speaking of is the one that sold the corporation to the new owners. The new owners have actually went to a CPA. The seller of the S-corp. is my client.

I did a little research and it does appear that the shareholder basis will equal stock basis. But I know this hasn't been kept up with. I did the S-Corp taxes for about 3-4 years. But I will have to go back to the beginning of when the corporation started. There has been atleast 5 accountants since 1995 when the S-Corp was started.

I asked my client/seller yesterday if there was anything in the sale papers stating their basis in the stock. He said it states that the basis is the sale price. I'm not so sure though.

As I said I really wish they would go to another preparer as I am not very knowledgable in the sale of S-Corps. I can learn though.

[Bees Knees]

The seller’s basis in S corp stock is what he originally contributed, plus and minus all income and expense items passed through to him on the K-1, minus distributions, plus additional capital, plus any direct loans, minus any direct loan repayments, minus non-deductible expenses…etc…

Did I miss anything?

You have to go all the way back to the beginning when he first started and look at the K-1s for every year since to determine his basis. The sales agreement is irrelevant when it comes to stock basis.

[geekgirldany]

Thank you so much!

That is what I thought. I am forunate that they did actually keep copies of all their S-Corp returns