S Corp Stock

[S T]

T/p in a divorce settlement received 30,000 shares of S Corp stock, cost basis $.01 per share The S Corp is now buying back the shares at $1.00.

Do I report on Schedule D?

Thanks

Sandy

[dsi]

Yes, report on Sch D like any other stock transaction.

[OldJack]

T/p in a divorce settlement received 30,000 shares of S Corp stock, cost basis $.01 per share The S Corp is now buying back the shares at $1.00.

Do I report on Schedule D?

Thanks

Sandy

Well... is the S-corp owned by the X-spouse... if so this may not be a redemption/buy back for Sch-D, rather a non-taxable distribution of profits to a related party treated the same as if the spouse received a distribution because the husband/wife owned 100% before the divorce and husband/wife still owns 100% after the divorce and redemption of shares. Also, did these shares exist before the divorce with a cost basis of 1¢ or were they issued for the divorce as 30,000 shares is commonly the full 100% amount of shares authorized by some states?

[S T]

Well

Well... is the S-corp owned by the X-spouse... if so this may not be a redemption/buy back for Sch-D, rather a non-taxable distribution of profits to a related party treated the same as if the spouse received a distribution because the husband/wife owned 100% before the divorce and husband/wife still owns 100% after the divorce and redemption of shares. Also, did these shares exist before the divorce with a cost basis of 1¢ or were they issued for the divorce as 30,000 shares is commonly the full 100% amount of shares authorized by some states?

Ex husband is 30% S Corp owner, shares issued in his name only at $.01 per share. Total shares outstanding approximately 360,000, one half (180,000 shares) given to wife (t/p) in divorce settlement and issued in her name.

The S corp has bought back 30,000 shares in 2006 at $1.00 per share from t/p.

????

Sandy

[dsi]

You need to get the FMV at the date of the divorce(separation). NO! that's wrong. Her basis in the stock (as part of the property settlement) is his basis. But then, as old jack said...read his post above.

[S T]

S Corp

The S Corp is closely held and was afraid that the t/p (my client) that received 180,000 shares in divorce would sell off to someone outside of the S Corp, so it was decided to buy back her shares and cash her out.

so far in 2006, they have only purchased 30,000 shares of the 180,000 and are on "waiver" for the rest of the shares, apparently a bad cash flow year into 2007. We will deal with that in 2007.

So now for 2006, how to report?

Sandy

[Bees Knees]

Shares in an S corp that were originally issued at 1¢ per share are not going to have a basis of 1¢ per share for very long. Basis increases and decreases each year per K-1 items that passed through to shareholders.

Are you sure at the time of the divorce the basis was still only 1¢ per share? The ex-wife gets her ex-husband’s basis at the time the stock was transferred from him to her. The basis continues to go up or down for all activity after such shares were transferred.

So unless the stock was originally issued at 1¢ per share, then they get a divorce, then the S corp buys back the shares, all in ONE day, I don’t think her basis is going to be 1¢ per share at the time the S corp buys back the stock.

[OldJack]

Well... you see there is a problem here as this is a S-corp and all distributions of profit (AAA account) have to be distributed/paid on a "per share" basis. X-husband is probably taking distributions after the divorce without giving the same to her.

Her stock basis is not just the penny paid for original issue of stock, it is that plus the AAA account that her shares have paid 1040 tax on over the years. Her right to that Tax-Free AAA account distribution is gone when she sells her stock. The most proper thing for her is to receive her share of the distributions and then sell her shares to the x-husband for capital gains on 1040 Sch-D.

True if you report it on Sch-D with the full cost basis you probably have the same end result, but X-hubby then gets the full AAA account for tax-free distributions as the AAA account is not owned by any one shareholder but all shareholders at the time of distribution.

[S T]

Getting there slow but sure

Thanks Bees and Old Jack for your posts. You provided me with questions that I didn't know how to ask. No the transaction did not all happen in one day. In fact the ex wife is still holding approximately 150,000 shares, that might not ever be re purchased, so that will be an issue to be continued into 2007.

The S Corp is buying back the ex-wifes stock issued through the divorce, so that she won't sell to someone else. So only 30,000 shares of approx 180,000 were repurchased by the S corp in 2006. There have been two waivers of buy back issued as the Corp has no extra money (so they say).

As a result of a lot of phone calls and emails, the attorney for the S Corp, contacted me today, and understood perfectly what was needed, and is reqesting that the Accountant/Tax Person forward the basis of the ex spouse (husband) information for the shares that were transferred to the ex-wife through the divorce. So I am in hopes it provides more than the $.01 per share basis for my t/p the ex wife.

Again, thank you for your posts!

Sandy

[lbbwest]

S Corp Stock

Even if he owned the stock solely, it is still considered marital property. She does not have to pay taxes on property settlement of marital property. In fact there is a SIX year rule affording her tax free liquidation of marital assets. Cement the deal in writing to protect her from future "bad cash flow" years.

[S T]

Where can I read about this

Ibbwest,

Even if he owned the stock solely, it is still considered marital property. She does not have to pay taxes on property settlement of marital property. In fact there is a SIX year rule affording her tax free liquidation of marital assets. Cement the deal in writing to protect her from future "bad cash flow" years.

Thanks for your post, so where can I read about more,

I found a reference in TB page 12-10

"Property Settlements and Transfers" No gain or loss recognized - Gain or loss is not recognized on transfers between spouses or on transfers between former spouses if incident to divorce. This rule applies even if the transfer is in exchange for cash, release of marital rights, assumption of liabilities or other consideration.

and

Transfer to third party - A transfer to a third party on behalf of a spouse is treated as two transfers. Gain or loss is not recognized by the transferring spouse if the transfer is required by a divorce instrument or requested or consented to in writing by the non transferring spouse. The non-transferring spouse may be required to recognize gain or loss on the transfer to the third party. See Regulation Section 1.1041-1T

It seems my taxpayer (ex-wife) received her share of the 1/2 stock of 180,000 shares, and then is transferring/selling back to the S corp (third party) so she would be required to recognize whatever gain there is once we can determine the (ex husband's basis in these shares)

I don't think it meets the stock redemption rules as the corporation was not involved at the divorce agreement level. The S corporation became involved after the divorce property settlement as they were concerned about the stock remaining in the Corporation and not an outsider purchasing from the ex wife.

Sandy