Redemption of S Corporation Stock - Spidell

Redemption of S Corporation Stock

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Message Board Redemption of S Corporation Stock

  • This topic has 2 replies, 3 voices, and was last updated 3 months ago by William Dewberry.
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    • #256777
      Joy Soulier
      Participant

      Taxpayer is the majority shareholder in a S corporation that engages in only one business; architecture.  All of the flow through income is active business income and this has been true for the entire existence of the S corporation.  The Corporation was never a C corporation.  Taxpayer is actively involved in running the business.  Minority shareholders have bought in to the business.  Taxpayer received proceeds for a redemption of some of the shares in 2019.  This will happen each year until all of the shares are redeemed which is anticipated to take between 5-7 years.  Is the capital gain from the redemption subject to net investment income tax.  Taxpayer’s flow through income is not subject to this tax.  Taxpayer would be eligible to use the simplified method as outlined in the regs.  I believe the answer is no since there is virtually no income that flows through that is subject to NIIT.

    • #257896
      David Ellis
      Participant

      Section 1368 governs s Corp redemptions unless the redemption quailfies as a sale or exchange under the rules of section 302b……generally you see sale treatment under 302b when there is a complete termination of the shareholder’s interest…..so in the case as described… since you only have partial redemptions until the last year….you would not qualify for the 302b rules…and you would default to the section 1368 rules….which means tax treatment depends on stock basis….however….a few years ago we had a client sell a 100 percent interest in his active s Corp stock….and the software added the NIIT tax …and I could find no authority that they were wrong…..you might want to try running a dummy return and see what your software does with it……anyway, I have never seen anything that says the sale of active business interest is exempt from NIIT tax…..but then again, I am sure there are lots of things in the tax world that I have not seen.

    • #257897
      William Dewberry
      Participant

      I agree, no NIIT tax; sell C corp stock, yes NIIT; sell partnership or S stock, no NIIT.

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