Question

Steve is the sole owner of Barb, Inc. (a C-Corp) and has grown the business over the last 15 years. He decides to sell 40% of his non-publicly-traded corporate stock on July 1 of this year to an ESOP for $8 million. His adjusted basis for his entire (100%) stock position was $3 million. On February 4th, the year following the sale, Steve uses all $8 million to buy shares of Apple Stock. Which of the following statements is true?

a. He will have a capital gain of $5.0 million this year (year of the sale) for tax purposes
b. He will have a capital gain of $6.8 million this year (year of the sale) for tax purposes.
c. Steve will not have a capital gain this year (year of the sale) for tax purposes.

Answer 1

He will have a capital gain of $6.8 million this year (year of the sale) for tax purposes.

Step-by-step explanation:

He will have a capital gain of $6.8 million this year (year of the sale) for tax purposes. i.e. sale proceeds $8 million - value of stock $1.2 million = $6.8 million.

value of stock = (40/100) x $3 million = $1.2 million.

Answer 2

b. He will have a capital gain of $6.8 million this year (year of the sale) for tax purposes.

Step-by-step explanation:

Steve's entire stock position the year of the sale at 100% is $3 million.

On July 1 of same year, he sold 40% of $3 million to an ESOP for $8 million.

40% of $3 million is $1.2 million worth of non-publicly-traded corporate stock that Steve sold. His capital gain is : $8 million - $1.2 million = $6.8 million. Steve will therefore have a capital gain of $6.8 million the year of the sale for tax purposes.