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C12-Chp-06-8-Hurst-Stock Redem-S Corp-2005

C12-Chp-06-8-Hurst-Stock Redem-S Corp-2005 - Page 1 of 10...

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0cb83e8ec30bfa8cb0a5b70374ebf4cb739f47f5.doc. Page 1 of 10 Richard E. and Mary Ann Hurst, S corporations: 2-percent shareholder: Taxable benefits. 124 TC --, No. 2, February 3, 2005. [Appealable, barring stipulation to the contrary, to CA-6. --CCH.] [ Code Sec. 302 ] S corporations: Stock redemption: Capital gain: Redemption in termination: Control. -- An S corporation's purchase of its outstanding shares qualified as a redemption that terminated the sole shareholder's interest in the company and, thus, could be treated as the sale of his long-term capital assets. The related security and collateral arrangements did not give the shareholder any ongoing interest in the corporation other than that of a creditor. The promissory notes that the corporation issued in exchange for the shares merely gave the shareholder a permissible security interest in the redeemed stock and were consistent with similar seller-financed trans- actions. The corporation's agreement to continue to lease property from the shareholder was reasonable, and its subsequent surrender of its option to buy the property was made only after adversarial negotiations between the parties. The corporation's employment contract with the shareholder's wife and the inclusion of that agreement in various cross-default provisions that were part of the redemption merely protected the shareholder's interest as a creditor of the corporation and did not serve as a ruse that allowed him to continue to control the company. --CCH. [ Code Sec. 304 and Tax Court Rule 151] S corporations: Stock redemption: Control: Related corporation: Attribution rules: Practice and pro- cedure: Deficiency notice: New matter: New argument. The IRS impermissibly raised a new matter, rather than a new argument, in its post-trial brief when it argued that an S corporation's simultaneous redemption of shares and acquisition of a related company removed the entire transaction from the Code Sec. 302(b)(3) safe harbor for termination redemptions. Under the attribution rules, the shareholder's wife may have controlled both corporations, so that her continued employment by the acquiring corporation was a prohibited interest. However, the IRS's failure to raise this issue during the trial deprived the taxpayer of the opportunity to present evidence to the contrary. --CCH. [ Code Sec. 1372 ] S corporations: 2-percent shareholder: Taxable benefits. An individual was taxable on the value of health insurance that an S corporation provided under her employment contract. Although she owned no stock directly, she was treated as a two-percent shareholder because shares owned by her husband and her son were attributed to her. However, she was also entitled to deduct a portion of the premiums that the corporation paid on her behalf. --CCH. In 1997, as part of their retirement planning, Ps sold their stock in R Corp. to H Corp. H Corp. redeemed 90 percent of P-husband's stock in H Corp., and P- husband sold the remainder to his son and two third parties. Both the redemption and stock sales provided for payment over 15 years and were secured by the shares of stock being redeemed or sold. Ps continued to
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