I need help in understanding what would be the tax consequences of the two options to the three sisters, who are active in managing Delray.
Amanda, Sue, and Mary each own 100 of the 300 outstanding shares of Delray Corporation stock. Amanda wants to sell her shares, which have a $40,000 basis and a $100,000 FMV.
Either Sue and/or Mary can purchase her shares, 50 shares each, or Delray can redeem all of Amanda's shares. Delray has a $150,000 E&P balance.
Effect to Amanda:
The result to Amanda is identical regardless of who actually purchases the shares. She will sell at $100K, and her basis of $40K will result in a $60K capital gain transaction to her personally. The character of the gain will be determined by her holding period.
Effect to Sue and Mary:
After the transaction, they each will be a 50% owner which follows the spirit of their former relationship with other shareholders. I mean: no dilution of interest to either of them. The only discussion is the source of the cash to fund the purchase of the stock. An uncomplicated transaction would have them each write a check to Amanda for $50K. Their basis in the new stock would be cost.
If Sue and Mary decide to take a dividend distribution from Delray to provide the funding for the purchase of Amanda's stock, they will be required to report $50K each of ordinary income (dividends) in order to get their hands on the funds. See the discussion ...
The 649 word solution gives a comprehensive explanation for the several ways the stock purchase transaction might be handled. The solution is subdivided into sections to show the effects to each of the three shareholders and then to the corporation itself.