William and Bill jointly own a business. William hates Bill and had decided to sell his share of the business to Bill to avoid seeing him daily. However, he is concerned about gift taxation and their buy-sell agreement. Under what condition would there be owed taxes?

Question

Quizplus · Accepted Answer

Generally, there is no gift taxation unless the buyout agreement gives the purchaser an unqualified present purchase right at a contract price below fair market value. The selling owner sells a capital asset subject to capital gain treatment. However, there is usually no capital gain treatment because the buyer receives a stepped-up basis at fair market value. The selling party is taxed on the proceeds of the business as dividends, to the extent of the corporation's earning, unless the corporation qualifies for IRC Sections 302 and 303.

William and Bill Jointly Own a Business