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Technical topics regarding tax preparation.
#1
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4 S corporation shareholders in company A.

3 of these company A shareholders want to replace the 4th shareholder (who has a contractors license & owns 51%) of S corporation stock in company A. These 3 want to place another person in as a shareholder with a license & 51% of the stock.

These 3 also own 100% of stock in another S corp, corporation B.

The 3 are worried that either having company A purchase the stock as treasury stock, or purchasing it themselves and then quickly selling it to a new 51% shareholder will turn Company A & B into a "controlled group", with expensive consequences.

Is there a time limit whereby they could accomplish one of these methods without causing A & B to become a controlled group?

They've thought about personally loaning money to an individual with a license so he could buyout company A's 51% shareholder and become the new 51% shareholder of company A. But the loans owed to the 3 might be seen and having undue influence/control over the new shareholder and blow up the plan.

So is there a short amount of time that the 3 can hold the stock, either as theirs or treasury stock, before getting it back out to a new majority shareholder?
 

#2
sjrcpa  
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And what exactly is the problem with a controlled group of S Corps?
One Section 179 limitation - but bonus depreciation can mitigate this.
What else?
 

#3
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The group will have more than 50 employees, medical insurance requirements, as well as having employees at company B (most of their employees) move to the much higher workers comp rate that A pays; as a controlled group they pay the higher rate for ALL employees.
 

#4
sjrcpa  
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OK. Perhaps also complications with 401(k) or other pension plan.
 

#5
Nilodop  
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We usually try to avoid the step-transaction doctrine and/or the substance-over-form doctrine, but this may be a situation where we'd want to apply one or both. Can they be asserted by the taxpayer, or are they one-way streets usable only by IRS? I believe the former is possible. But we'd need to consider the Danielson doctrine too.

This useful writeup of the Complex Media case has this paragraph.
As the Tax Court’s caselaw has evolved, it has become more hospitable to taxpayers seeking to disavow the form of their transactions. But, the taxpayer has to meet an additional burden in attempting to disavow transactional form, and such burden relates not to how much evidence but what that evidence must show. In these cases, the Commissioner can succeed in disregarding the form of a transaction by showing that the form in which the taxpayer cast the transaction does not reflect its economic substance. For the taxpayer to disavow the form it chose (or at least acquiesced to), it must make that showing and more. In particular, the taxpayer must establish that the form of the transaction was not chosen for the purpose of obtaining tax benefits (to etierh the taxpayer itself or a counterparty) that are inconsistent with those the taxpayer seeks through disregarding that form. When the form that the taxpayer seeks to disavow was chosen for reasons other than providing tax benefits inconsistent with those the taxpayer seeks, the policy concerns articulated in Danielson will not be present.
. https://freemanlaw.com/recent-tax-court ... -doctrine/. Read the writeup and do some reading of actual authorities as well.

Resort to substance is not a right reserved for the Commissioner's exclusive benefit, to use or not to use — depending on the amount of the tax to be realized. The taxpayer too has a right to assert the priority of substance — at least in a case where his tax reporting and actions show an honest and consistent respect for the substance of a transaction.

Weinert's Estate v. C.I.R, 294 F.2d 750, 755 (5th Cir. 1961)
 

#6
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Not sure how to read that.

Maybe a simultaneous transaction where the old shareholder sells his stock back to the corp as treasury stock, and on the same day new shareholder purchases the treasury stock from the corp?

Whaddaya think ??
 

#7
Nilodop  
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That's what I'm getting at. Would argue it's substantively the same as new guy buying out old guy.

But same day alone is not enough. There are requirements for step-transaction treatment, especially when asserted by the taxpayer.
 

#8
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New guy buying old guy stock directly from him, with new guy taking a loan from/ giving note receivable to corp for purchase of stock from old guy ?
 


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