Tax Services Business Plan
October 16th, 2007
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Question: Are the Boyers correct in their analysis of the tax consequenses of the redemption?
Fifteen years ago, Mr. and Mrs. Boyer created Brovo, a regular corporation, through which to operate a service business. The Boyer’s own all of Brovo’s 1,000 shares of stock with a $1.6 million aggregate tax basis. The corporate business has been extremely successful; at the beggining of the year, Brovo’s balance sheet reflected over $2 million retained earnings. According to a recent appraisal, its stock is worth $2.5 million. The Boyers want to withdraw $500,000 cash from Brovo for their personal use, but they do not want Brovo to pay them a dividen. Instead, they plan to have Brovo distribute $500,000 in exchange for 200 shares of their stock. They Boyers believe that they will recognize a $180,000 gain on this reemption, which will qualify as a capital gain. Are the Boyers correct in their analysis of the tax consequqnces of the redemption?
Answer: No, the IRS will re-categorize it as a dividend. See section 318(a)(1) et al.
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