Originally Posted by garfieldave
I am a minority owner in 4 different, closely held (by family) S corps. All 4 are located in Wyoming. I am considering trading my shares in 3 of the S corps for a majority interest in the 4th business. I realize we would pay capital gains if we sold the shares to each other. do we pay capital gains if we trade shares in this way? How does this work?
There are two ways that a S corp shareholder can dispose of his stock in the company: sell it to another person or sell it back to the company. The latter transaction, known as a stock redemption for tax purposes, is often the more common method of disposition in the S corporation context. This section considers a redemption to be either a “sale or exchange” or a “distribution,” and, depending on the form applied to the transaction, it will have different tax consequences to the taxpayer as well as the company. for a redemption to be treated as a “sale or exchange,” the transaction must; the transaction must result in a complete redemption of all of the S corporation stock owned by the selling shareholder;immediately after the redemption, the selling shareholder must own less than 50% of the total voting power of the company and the percentage of the company’s voting stock owned by the selling shareholder immediately after the redemption must be less than 80% of the company’s total voting stock owned by the shareholder immediately prior to the redemption ;the redemption is not essentially equivalent to a dividend. a minority shareholder whose relative interest in the company is minimal i.e., less than 1% and who exercises no control with respect to the corporate affairs would generally be considered to have a meaningful reduction upon his sale of some of his shares back to the company. The redemption would, therefore, be treated as a “sale or exchange,” and you would realize a capital gain in the transaction