S Corp Stock Sale

[Benton]

Hello. An S-corp with two members has one outgoing member. He leaves on 10/31/23. Each member has a stock basis as of this date of $18251.92. The outgoing member on this date received the title to a business asset with a depreciable value of $16,055.00, a non-cash distribution. In addition, the outgoing member received a distribution check that officially "zeroed out" the outgoing member's equity in the company. 100% of the equity now belonged to the remaining member, and no capital gain or loss on the stock should have been passed to the outgoing member. 

Now, finishing the tax return on this transaction has been a nightmare. Because distributions must be taken equally by both members, I need guidance on how to proceed without throwing Schedule M-2 out of whack. Can anyone help? 

[abctax55]

1) Asset *distributed* is actually a sale at FMV. 

2) If the Corp 'bought' the shares, you have Treasury Stock - not a distribution

3) If one shareholder bought the other shareholder's stock.  THAT isn't reported on the S-Corp - other than adjusting shareholder ownership percentages.

[Benton]

So, to clarify (please correct me if I'm wrong): the FMV of the asset was $22,000, and the gain would then be split evenly between the two members just like normal.

1)  Because this sale at FMV is to the outgoing shareholder, this would be listed as a related party transaction correct?

2) Because the shareholders agreed this would be the way the remaining member would "buy" the outgoing member's stock, is it ok for the outgoing shareholder's K-1 to show a stock basis at the end of the year, even if it is his final K-1? 

[qbteachmt]

"the shareholders agreed this would be the way the remaining member would "buy" the outgoing member's stock"

"Because distributions must be taken equally by both members"

But neither of these makes sense. You cannot buy out the person using their own distribution, because that would already be part of their ownership position. What you might try is treating that as a Loan to Shareholder (the other shareholder), who buys out the other shareholder as a personal event. See how the S Corp's resources are not used to pay the person leaving; it's a sale that is outside of the S Corp. Then the remaining shareholder repays the S Corp, now being the sole shareholder, with a distribution offset.

At least, I think that's what your shareholders intended, if they had better guidance in advance of their "agreement."