Forced sale of s-Corp stock

[Gail in Virginia]

Taxpayer owned minority interest in s Corp with multiple shareholders. New management had a personal problem with taxpayer and persuaded a majority of shareholders that taxpayer had to be forced out of ownership. Taxpayer sold half his stock to unrelated party and gave half his stock to a related party to comply with majority stockholders wishes. Taxpayer thought giving up stock for nothing would be a loss offsetting gain on shares sold. I don’t think it works that way. I have never had a shareholder forced out before. Is there any tax break available?  

[Edsel]

Hi Gail - it seems there are two separate transactions.  I'll address the sale to unrelated party only.  There is a code section for small business stocks that exempts or postpones the gain if the company qualifies.  I dunno what it is, maybe 1222 or something like that.  The smart folks on this board will jump in and tell us.

I don't know what to make of the related party sale - but it sounds like it might not even be an arms-length transaction.

[Gail in Virginia]

I don't think that the 1202 exclusion for small business stock would apply in this case because I don't think that is available for S-corps, only for C Corps.  I was hoping something about the involuntary nature of the sale would offer some relief.  But maybe I am wrong about 1202.  Right now I could be wrong about almost anything. 

[jklcpa]

Unless the corporation was a C corp at the time the stock was issued, and if it was always an S corp, that would rule out 1202. 

[DANRVAN]

On 4/12/2020 at 7:19 AM, Gail in Virginia said:

gave half his stock to a related party to comply with majority stockholders wishes.

 

On 4/12/2020 at 7:19 AM, Gail in Virginia said:

persuaded a majority of shareholders that taxpayer had to be forced out of ownership.

Sound like there might have been involuntary conversion but I think you will need evidence that he was forced into the transaction.

Was there a buy/sale agreement?

Was a lawyer involved?

[Gail in Virginia]

I think he can substantiate involuntary conversion, but is there a tax advantage to that for stock as opposed to real estate and tangible personal property?