Tax impact of withdrawal of a C corporaton shareholder

[Naveen Mohan from New York]

I have a C corporation between two brothers. Each brother owns 50%. Now one brother wants to get out by transferring his interest for $ 1000.00 to the other brother's son. The departing brother basis in the company is $ 300,000.

 

He wants to take tax write off for the loss of $ 299,000.00.

 

My concerns are as follow:

 

In order for me to treat as worthless stock, Business has to be insolvent. Business is still running but it is running at loss.

 

If I were to treat as a gift to his nephew, then he cannot take capital gain loss.

 

My proposal was to come up with the liquidation value of the business and treat 50% of the liquidation value as sale price and $ 300,000 as cost basis and do it as Long Term Capital Gain/loss deduction.

 

The client wanted it to go as 4797 transaction where the entire loss is available in 2014.

 

What is the correct and proper way of handling this is?

 

thanks for your help.

 

Naveen Mohan

[Lee B]

First you need a supportable FMV that would hold up under audit.

 

I don't see how you will get there without a business appraisal, might cost $ 6,000 to $ 10,000.

 

One you have a supportable FMV, then you can strategize.

[Jack from Ohio]

Where do you find these clients??  Shady is not a strong enough word for his ideas.

[Naveen Mohan from New York]

He is not "Shady" per se. The problem is the older brother had $ 300,000 that he invested in this Ethenic Grocery Store. Store has been constantly losing money since its inception and the older brother wants to get out to stop his losses.

 

I cannot think of any other way except stock sale back to the corporation.

 

I am very receptive to the other ideas how to resolve this problem.

 

thanks

 

Naveen mohan 

[cred65]

Are any of the shares Sec 1244 stock?

 

Is any of the investment a loan?  Maybe worthless and a business bad debt.

 

Also get an appraisal.

[kcjenkins]

He needs to have an 'arms-length' transaction to have ANY loss,  Selling to his nephew won't cut it.  Has he been taking any payments?  Or putting more in?  Did he put the whole 300K in at the start, or has he been putting in gradually over time?  In which case, if so, did he get more stock for the additional money, or were those loans?  You can not time travel to change what they started as, but you can look at what they've done recently.  But to take a loss, you need an event to establish the loss.