In the above scenario, by distributing the property to the shareholder, the XYZ Inc will recognized 3K in capital gain (8K FVM – 5K cost basis).The shareholder will recognize 2K long-term capital gain upon redemption of his stock (12K stock value (8K FMV of land 4K Cash) – 10K stocks cost basis)).The corporation does not recognize gain when it distributes cash to its shareholders. On the other hand, if a corporation distributes property in connection to stock redemption, this may result in corporate-level capital gain and/or ordinary income.Also when a shareholder in exchange for cash, redeems a corporation stock, the corporation recognizes no gain. Generally a corporation will recognize capital gains when it distributes capital assets or Sec 1231 assets.Trade secrets, special processes, patents and proprietary information are among an employer’s protectable interests, but how noncompete provisions create an employer property right isn’t clear.THE PRACTITIONER SHOULD ADVISE the client to terminate employment and noncompete agreements with shareholders before liquidation.So what happens if a corporation (C Corp or S Corp) distributes property or stock other than cash to a departing shareholder?
awyers advise CPAs to have employment and noncompete agreements in their accounting practices.
The XYZ Inc has only 7K in cash and it needs to come up with additional 5K.
The XYZ Inc offers the departing shareholder NJ peace of land to cover the 5K shortfalls. The shareholder accepts the offer and receives 4K in cash and NJ land.
The Internal Revenue Code uses four tests to make this distinction: To prevent gamesmanship among related parties, Congress has added another layer of rules that must be analyzed to determine if a distribution is a redemption.
These attribution rules provide that shares owned by a shareholder’s parents, children, and grandchildren (but not siblings) are considered to be owned by the shareholder. Similarly, shares held by corporations, trusts, and partnerships are deemed to be owned by their shareholders beneficiaries, and partners, and vice versa. As a result, shares held by these family members and entities are considered to be owned by the shareholder for purposes of determining whether the distribution qualifies as a redemption.