S Corporation had two shareholders. First shareholder buys all the shares of the second shareholder for $1000. The transaction took affect at the end of the calendar year, to make the calculating of the basis easier. The second shareholder ended the year with a total basis of approximately $10,000. What happens to the $10,000? Does the company pay the second shareholder the $10,000?

asked 05 Apr '11, 23:43

KACK's gravatar image

KACK
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When the second shareholder sold his shares to the first shareholder, his basis is $1,000. The second shareholder now has a sale of a security for $1,000, with a basis of $10,000, producing a $9,000 loss. The treatment of the loss as capital or ordinary is based on various circumstances. For example, were the shares bought for cash at the company's inception? Could this generate an ordinary loss? Maybe. But the $10,000 basis "dissapears" for tax purposes when the shares are sold to shareholder 1.

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answered 06 Apr '11, 15:52

Jeff%20K%201's gravatar image

Jeff K 1
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What was in the accumulated adjustments account? THe AAA account is undistributed taxable income. The second shareholder's basis is increased for their share of AAA. AAA is also considered a corporate level account so to the extent that the secons shareholder had undistributed taxable income, that amount does not transfer to the first shareholder upon sale.

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answered 06 Apr '11, 16:38

Brent%20Berkman's gravatar image

Brent Berkman
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Unless the corporation repurchased the stock this transaction was outside of the books of the corporation. The shareholder who purchased the stock should have paid for the stock with personal funds.

From this day forward you will have to track the inside basis and outside basis of the shareholder who remains. His inside basis will include the $10K that remained in the corporation from the shareholder who's shares he purchased.

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answered 06 Apr '11, 20:33

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Gina 1
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Asked: 05 Apr '11, 23:43

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Last updated: 06 Apr '11, 20:33