Question

Mr. Aslak owns all the stock in Shoes Inc., which owns 85% of Skiing Inc. Ms. Quinn, the manager of Skiing, wishes to share in the profits of the prosperous firm by buying 5% of its stock. Shoes Inc then distributes its stock interest in Skiing to Mr. Aslak, who then sells a 5% interest in Skiing to Ms. Quinn for $15,000. Assume the sale of stock to a key employee has a valid business and corporate purpose. How would the IRS view the above transaction?

Answer 1

The IRS would evaluate the sale of a 5% interest in Skiing Inc. by Mr. Aslak to Ms. Quinn as a capital gain for Mr. Aslak if the share's value increased. Proper tax treatment is expected, and the transaction is justifiable as it allows key employee share in the company's profits.

Step-by-step explanation:

The IRS would likely view the transaction between Mr. Aslak and Ms. Quinn in terms of the realization of a capital gain on the sale of Skiing Inc. stock. Since Mr. Aslak is selling a 5% interest in Skiing Inc. to Ms. Quinn for $15,000, he would be subject to capital gains tax if the value of the stock has increased since he acquired it.

The transaction is justifiable from a business standpoint as it serves a valid business and corporate purpose by allowing a key employee to share in the profits of a prosperous firm. However, if Mr. Aslak's basis (original cost) in the Skiing Inc.

stock is lower than the selling price to Ms. Quinn, the IRS would be concerned with the proper reporting and taxation of the difference as a capital gain.

Investors, including employees like Ms. Quinn, who buy stock in a company, become shareholders and have a financial stake in the success of the business. The concept of stock represents partial ownership in a firm and it's comprised of shares, which are individual portions of the company's stock.