Which Form 1120 C Qualifying 2023-2024

In this video, we're going to talk about the tax treatment of stock redemptions. When a corporation repurchases some of its stock from one of its shareholders, we have to answer a question: is it going to be considered a seller exchange or a distribution of the shareholder under Section 301? If it is considered a seller exchange, some of the shareholder's basis will offset the gain. The shareholders will most likely want it to be considered a sale or exchange so that some of their basis in the stock can offset any gain. Let me give you an example. Let's say we have a corporation called Clean Water Incorporated that provides water bottles that desalinate ocean water. Let's say you own 60 shares in Clean Water Incorporated with a basis of $600. The other shareholder, Brooke, owns 50 shares. You own the controlling interest in the corporation. Clean Water Incorporated has earnings and profits of $100,000. Now, let's discuss hypothetical scenarios of a stock redemption. If it is a complete termination of your interest, where Clean Water Incorporated repurchases all 60 of your shares, it could be considered a sale or exchange. For example, if they buy all your shares for $1000, your gain would be $400. If it is not a complete termination, and instead treated as a dividend, the entire $1000 would be a dividend. However, even if you sell all 60 shares, you could still be deemed to own your spouse's shares due to family attribution rules. This would mean you haven't completely terminated your interest, and thus, a dividend treatment might be applicable. There is a waiver available that allows you to avoid the attribution rules if you promise not to be involved with the corporation for a certain period of time. We will discuss this waiver in a future...