Mary and Bob Taxpayer make an appointment with you and during your meeting with them you are informed of the following: Mary inherited S‐corporation stock from a private company owned by her now deceased father. The S‐corporation stock has basically been dormant for years except for the fact that it holds a investment account with $1,500,000 FMV of publicly traded stock at the date of her father’s passing. The basis of the publicly traded stock at the time of death was $300,000. Her father’s basis of the stock of the S‐corporation was $600,000. The publicly traded stock in the investment account is now worth $1,800,000. She has no need for the S‐corporation. She is concerned about potential taxes on the gains should she sell the stocks in the investment account. You ask if the S‐corp has a prior life as an C‐corp. Mary has no idea. She will provide all tax returns at some point in the future. Until then she would like to discuss both possibilities. What would her gain be if she did sell? Would there be a way to counter affect the gains from the sales of the stocks in the investment account if she is willing to dissolve the S‐ corporation?

Mary is married to Bob (a California Marriage) who is a minority owner of a family owned business (along with his grand‐parents, parents and two siblings) in closely held C‐corporation which manufacturers medical devices. Bob feels his fellow family shareholders are not ambitious and would like to leave the company. The company has tens of millions in earnings & profits and also holds various patents. Bob would like to be bought out his share of the family medical device business and invest in a new business. He expects a large gain as the value he will receive will exceed his basis in his stock. He is mostly concerned with obtaining one of the patents (which is an appreciated asset in the hands of the corporation) rather than cash. What are Bob’s options? What is necessary to accomplish each of his options? How would Bob’s options be affected by what is happening with Mary?

Bob feels the family business “holds him back” and thinks that they are not earning the profits they have the potential for. He recently heard from a friend who is the managing partner of an investment partnership that they have bought the patent to an older pharmaceutical drug and have raised the price from $13.50 per pill to $750 per pill overnight. He is in talks to contribute his patent for a medical device and similarly increase the price and profit margin immediately (an idea the other shareholders of the family corporation voted against which is why he wanted a patent and to leave the company). Bob may or may not have an active role in the partnership. What are the ramifications to Bob and the partnership of contributing the patent to the partnership? The partnership has substantial assets but are fully depreciated. Bob made the managing partner aware that he obtained the patent instead of receiving cash from leaving the family corporation so he has a negative cash flow and cannot keep up the extravagant lifestyle he and Mary are used to. The managing partner said this was an easy fix as the partnership would make an immediate cash distribution to him once he contributed the patent to the partnership. Also, he has been made aware that the partnership may sell off the patent in a few years. How do these facts affect Bob? Bob and Mary are looking to you to discuss their various options and the resultant affects they will have. Discuss both compliance and planning aspects.