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This hasn't happened yet and hopefully won't for years, but I was wondering how it would work...

My husband own's c-corp stock with two other people. When he leaves the company he is required to give the stock back to them. He paid a very small amount for this stock. According to his contract their is no buy in (although he did pay a small amount for the stock) and no buy out of the stock. However, it does say in the contract that he would be paid the balance of his receivables, less 10%, as compensation over a 32 month period. Is this right? Can they do it this way?

Shouldn't they have to pay for the stock to get it back? Shouldn't the value of the stock be the receivables? Then they could give it in installments or lump sum, but NOT withhold taxes? And we would get long-term capital gain treatment instead of ordinary tax treatment?

Sorry for all the questions when I really don't have this issue yet, but it just seems strange to me.

Thanks,
e
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My husband own's c-corp stock with two other people. When he leaves the company he is required to give the stock back to them. He paid a very small amount for this stock. According to his contract their is no buy in (although he did pay a small amount for the stock) and no buy out of the stock. However, it does say in the contract that he would be paid the balance of his receivables, less 10%, as compensation over a 32 month period. Is this right? Can they do it this way?

I'm not a lawyer, but AFAIK, competent parties can enter into a contract for any lawful purpose and include whatever terms they want. I hope your husband got legal and accounting advice when he set this up. If he didn't, I'd strongly encourage him to do so when it's time to deal with the issue.

TMF ExRO
Phil Marti
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>>According to his contract their is no buy in (although he did pay a small amount for the stock) and no buy out of the stock. However, it does say in the contract that he would be paid the balance of his receivables, less 10%, as compensation over a 32 month period. Is this right? Can they do it this way?
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There's a very good reason why the "buyback" is set up as it is. As the corporation collects those receivables after your hubby leaves, the corp will be treating them as ordinary income. It would hardly be fair to the remaining partners to report those receivables as ordinary income and pay out to the exiting partner in a fashion that doesn't allow them an offsetting tax deduction. This is a standard way of handling buyouts with partners exiting any personal service/professional type of business, which I assume is what your husband's is.
Regards,
Gregg SeaPA
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Thank you both.

e
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