Closely held corporation stock buyback
W hen a corporation redeems its own shares, the selling shareholder must report either capital gains or dividend income; IRC section decides the type of income to report.
Under IRC section a a taxpayer is deemed to own the stock owned by family members. The Tax Court recently considered how this exception works. Richard Hurst owned all the stock of Hurst Mechanical Inc. He and his wife Mary also owned all the stock of RHI, a sister corporation. In , when Richard decided to retire, he and his wife sold all the RHI stock to HMI. Richard received installment notes in payment for the stock. The Hursts continued to lease the building housing HMI and RHI to the two corporations, and Mary continued as an employee of HMI, receiving a salary and fringe benefits.
As the Hursts believed Richard had completely terminated his ownership, they reported the sales of their stock as long-term capital gains. IRS objected to this treatment.
Closely Held Stock in a Corporation. Corporate Law and the Shareholder.
Normally, in determining the tax results of a stock redemption, taxpayers are considered to own all the stock they own directly and all the stock they own by attribution, including stock owned by their children. There is an exception: Taxpayers who completely terminate their interest and have no relationship with the corporation other than that of a creditor can waive the family attribution rules. Likewise, the provision that a default on either note would be treated as a default on both notes was acceptable because this provision was a reasonable condition and the note payments were independent of the financial performance of the corporation.
Therefore the notes were true debt and did not violate the requirements for the attribution waiver.
The IRS then argued the building lease was a prohibited interest. The court viewed the lease as a separate transaction designed to guarantee income to the Hursts while reducing the cash-flow issues of the corporation.
Therefore, it was not a financial stake in the corporation and so the transaction was acceptable.
Closely Held Corporations - Buy Sell Agreement - qoxoxoxiqel.web.fc2.com
It was, therefore, not a prohibited interest. In its reply brief the IRS argued that the sale of RHI stock to HMI was a redemption taxable as a dividend because of the sections and overlap sale of the stock to a sister corporation.
The Tax Court did not hear this argument, which came after all evidence was admitted. For the court to fully explore this argument, new evidence would have been needed.
Had the court addressed the issue, it would have clarified section rules as they apply to sales of stock to controlled corporations. Commissioner, TC no. Prepared by Edward J.
Schnee, CPA, PhD, Hugh Culverhouse Professor of Accounting and director, MTA program, Culverhouse School of Accountancy. University of Alabama, Tuscaloosa. Management accountants in the United States face significant challenges as companies prepare for the far-reaching change. This report looks at the standard, common challenges companies are likely to face and first steps to consider.
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This quick guide walks you through the process of adding the Journal of Accountancy as a favorite news source in the News app from Apple. Toggle search Toggle navigation. All articles IFRS Internal control Private company reporting SEC compliance and reporting U. Redeeming Closely Held Stock BY EDWARD J. SPONSORED REPORT Gearing up for the new FASB lease accounting standard Management accountants in the United States face significant challenges as companies prepare for the far-reaching change.
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