S-Corp Share Redemption

[orourkp]

I’m looking for some practical guidance on this issue and some reference material if anyone can help.

A shareholder (#1) in a three-shareholder S-Corp sold his stock back to the S-Corp (redeemed) and ended his ownership in the company. I am unsure how to account for this activity and prepare the appropriate tax information returns. My thought is that the following should occur:

-Shareholder #1 received $82K cash from S-Corp and should be issued a 1099-B for that amount
-Shareholder #1 has a long-term capital gain (proceeds less basis) since he held the shares for more than 1 year.
-S-Corp Common Stock is debited $1K par value and Additional Paid-in-Capital is debited the remaining $81K.
-Remaining two shareholders unaffected by the transaction

My client is the S-Corp, so I’m not too concerned about the departing shareholder’s tax situation. However, I want to ensure the S-Corp reports this transaction properly and that there is no tax impact to the remaining two shareholders.

[OldJack]

If the purchase agreement was truly a redemption then the AAA account would stay the same and now belongs to the 2 remaining.

I disagree with the reduction of paid-in-capital account as that is not a redemption or treasury account. The simple transaction you should have is a debit to an account called treasury stock for the $83k.

If you were going to "cancel" the stock by removing the $1k par value stock you can only remove the appropriate amount of paid-in-capital that was orginally associated with the purchase of those shares of stock that are cancelled and the balance as a reduction of retained earnings.

I expect examples of this type transaction would best be found in an accounting text book.

As your client is a S-corp the books should be closed to determine the appropriate amount of profit/loss to allocate on the selling shareholders 1120S-k1 for the year, otherwise the method has to be an allocation of year-end profit/loss on a number of days owned which could result in a much difference amount.

.

[rosieea]

I’m looking for some practical guidance on this issue and some reference material if anyone can help.

A shareholder (#1) in a three-shareholder S-Corp sold his stock back to the S-Corp (redeemed) and ended his ownership in the company. I am unsure how to account for this activity and prepare the appropriate tax information returns. My thought is that the following should occur:

-Shareholder #1 received $82K cash from S-Corp and should be issued a 1099-B for that amount
-Shareholder #1 has a long-term capital gain (proceeds less basis) since he held the shares for more than 1 year.
-S-Corp Common Stock is debited $1K par value and Additional Paid-in-Capital is debited the remaining $81K.
-Remaining two shareholders unaffected by the transaction

My client is the S-Corp, so I’m not too concerned about the departing shareholder’s tax situation. However, I want to ensure the S-Corp reports this transaction properly and that there is no tax impact to the remaining two shareholders.

1099-B is generally issued only by financial institutions. Issue a 1099-DIV and show the amount in Block 8, Cash Liquidation Distribution. On your books, establish an account called Treasury Stock in the Equity section, and debit the amount to that account. Don't debit Capital Stock or Paid-in Capital.

[orourkp]

Follow-up Question

There was a positive basis in Shareholder #1's stock at the redemption date. Would the proper tax reporting be to issue a distribution up to the basis and a dividend (eg 1099-DIV) for the remainder?

Thanks for the advice.

[rosieea]

There was a positive basis in Shareholder #1's stock at the redemption date. Would the proper tax reporting be to issue a distribution up to the basis and a dividend (eg 1099-DIV) for the remainder?

Thanks for the advice.

The distribution is reported on 1099-DIV as a cash liquidating distribution. The former shareholder will recognize gain or loss as basis indicates. His distributive share of income will be reported on K-1 for the period of time he remained a shareholder.

[JON]

What

Liquidating distribution from a corporation, LIQUIDATING, is 1099-DIV called a liquidating dividend. A stockholder leaving has nothing to do with a liquidating dividend. S Corp never does a 1099-DIV unless it was previously a C and had E & P from that time period.

Shareholder keeps track of his own basis and if it is not distributed his basis in the stock is increased and goes to the Schedule D to offset the proceeds to calculate the net gain.

[rosieea]

Liquidating distribution from a corporation, LIQUIDATING, is 1099-DIV called a liquidating dividend. A stockholder leaving has nothing to do with a liquidating dividend. S Corp never does a 1099-DIV unless it was previously a C and had E & P from that time period.

As I think about it, you're probably right in this case. 1099-DIV, blocks 8 and/or 9 would be issued if the Corporation was in partial or complete liquidation. If this case cannot be considered a partial liquidation, then I'd likely report the redemption on Sch K-1, Block 16, Code D, and mark the K-1 as Final. I would also attach an explanation to the K-1 as well as to the 1120S to explain the distribution as a stock redemption. I wouldn't issue a 1099-B.

[JON]

???????

As I think about it, you're probably right in this case. 1099-DIV, blocks 8 and/or 9 would be issued if the Corporation was in partial or complete liquidation. If this case cannot be considered a partial liquidation, then I'd likely report the redemption on Sch K-1, Block 16, Code D, and mark the K-1 as Final. I would also attach an explanation to the K-1 as well as to the 1120S to explain the distribution as a stock redemption. I wouldn't issue a 1099-B.

The sale is not reported on the K-1.... It is up to stockholder to report the proceeds and only he is liable for establishing the cost basis...

[rosieea]

The sale is not reported on the K-1.... It is up to stockholder to report the proceeds and only he is liable for establishing the cost basis...

You're saying, then, that the only reporting that occurs is on the Treasury Stock line of Sch L? Nice to know that some things are easier than they appear.