Fall 2015—Tax II Project
Reed and Sue Richards run Fantastic—Stuff, Inc. a C corporation devoted to inventing stuff you wish you’d thought of. Reed is the CEO and Sue is the CFO. Their son, Franklin has joined the business and is the President handling the daily operations.
Reed owns 35% of the stock and Sue 25%. Sue has a basis of $80,000 in her shares, Reed $112,000. The FMV of the company is $4,700,000. The other shares are owned 20% by Ben Grimm (unrelated friend) and 20% by their son, Franklin.
Lately, Reed has felt stretched rather thin and would like to cut back. He wants to stay on as Chairman of the Board of Directors and CEO, but wants Franklin to take over more responsibility.
Sue has felt unappreciated—as if people didn’t see her at all. She will stay on as a director but otherwise wants to retire.
They will need income and so want to sell their stock and reinvest the proceeds. Franklin and Ben will take over most of the operational duties.
Reed and Sue come to you and ask what to do. They like the concept of a sale as they have some $2,000,000 in capital losses (they invested equally) from a series of poor investments (Sue’s brother, Johnny, has a series of hot ideas that turned out to be just a flash in the pan).
Reed suggests that the company redeem their shares—there is substantial cash and they will take notes for the balance. Ben is willing to buy some shares from them, about 10% ownership, but can’t do this until next year when he gets his allowance form his Aunt Petunia.
Their stock is a capital asset and they have held it for 40 years. The company has some $2,000,000 in E & P.
Reed wants to do it this year—he hears the tax rates are going up next year. Reed & Sue are in the 35% bracket today.
If the Company redeems their shares what is the actual tax result for Sue and Reed and why?
What else could they do now?
What price delay? Sue wants to go on vacation and wait ‘till next year for the redemption. Is this wise? After all, what could go wrong (other than their latest movie)?