Question

Steve owns Barb, Inc. and has grown the business over the last 15 years and is the sole owner. He decides to sell 40 percent of the corporate stock (all outstanding stock) on July 1, Year 1 to an ESOP for $8 million. His adjusted basis for his entire interest in the stock was $3 million. On February 4th, Year 2, Steve uses all $8 million to buy shares of Apple Stock. Which of the following statements is correct? a. Steve will not have a capital gain in Year 1 for tax purposes. b. He will have a capital gain of $5.0 million in Year 1 for tax purposes. c. Steve's transaction does not qualify for non-recognition of gain treatment. d. He will have a capital gain of $6.8 million in Year 1 for tax purposes.

Answer 1

Answer:

a. Steve will not have a capital gain in Year 1 for tax purposes.

Explanation:

Since Steve (the owner of Barb) sold his stocks to an ESOP (employee stock ownership plan), then he will be able to avoid capital gains taxes at least for the first year. ESOPs are qualified retirement plans and when they invest in stocks of the same sponsoring company, the transaction is not taxed if the seller reinvests (buys other stocks). As long as ESOP holds at least 30% of the company's stocks, then Steve can defer his taxes.