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A client is selling her entire interest in an S Corp. The S Corp is the BUYER.
Facts:
- My client is a passive investor
- She owns 38% of the S, her brother owns 37% of the S and the final 25% is owned by a non-family member
- She will have a large capital loss on the sale
- The sale proceeds will be paid in 48 monthly installments (since it is a loss it is not an installment sale for tax)
- She has a large suspended passive loss carryover
On the surface it would seem that she has a large capital loss and her suspended passive losses would now be allowed to be utilized due to a complete disposition of her shares.
I am concerned that there might be an issue of a sale to a related party. If so, how would that affect her stock loss? Her suspended passive losses?
All comments and insight would be appreciated.
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Isn't this called a redemption?
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"If" it is a redemption, do you think that makes a difference under the facts presented?
Terry53029
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I agree with @Accountant-Man it is a redemption. Here is a link with info on redemptions.
https://www.thetaxadviser.com/issues/2019/nov/stock-redemption-capital-gain-ordinary-income.html
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The "redemption" issue is concerned with whether this is a disguised dividend. I don't think you have to worry about that. But I share your concern about whether "related party" rules apply, even though I don't have an answer. Is this really an arm's-length transaction, or is she a millionaire making a gift to her less fortunate brother who now effectively gains control of the business and can squeeze out the other investor? And is he the one who will suggest an audit to IRS?
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Thanks for replies. I agree the "dividend" issue is not a problem. In regards to arms length, this is a situation where she has been a big problem to the company, caused numerous disagreements and the remaining shareholders have finally given her an offer she has accepted to basically go away.
