Question Received on “Ordinary and Necessary Expenses”

I received the following question from someone on the application of Section 162/212 of the Internal Revenue Code, asking whether expenses incurred by a Corporation in connection with a stock transfer between stockholders are tax deductible by a Corporation.

“I just read your article on Google and decided to converse with you on it. Without providing any propreitary information, here are the facts of my situation.  My taxpayer is an 1120 and is owned by 2 stock holders (50 shares each) for 100 shares.  The 2 stockholders sold their stock as a group to an independent 3rd party (1120).  100% of the proceeds from the stock sale went to the 2 stockholders (not my taxpayer).  My taxpayer does not report any income related to the stock sale.  My taxpayer paid the 100% of the expenses to effect the stock sale (feasibility Study, legal, consulting ect.).  Under IRC 162/212 my contention is that the expenses are not necessary in that they do not create/increase the income of my taxpayer now or in the future.  What do u think.”

Given the facts as stated in the question, the Corporation cannot deduct the expenses incurred in effecting the sale of the stock on behalf of the prior shareholders.  In fact, since those expenses were never reimbursed by the prior shareholders, on whose behalf they were made, they may be taxable to them as a dividend.  Ordinarily expenditures connected with issuing or selling stock are not amortizable but must be netted against the proceeds of the stock sale.  However, the transaction as depicted above does not represent the issuance or sale of the Corporation’s stock by the Corporation itself, but that of a sale by the prior stockholders to a 3rd party.  Since the shareholders had the Corporation assume the costs of their personal sale, in effect, those expenditures were made on behalf of them and constitute a unreimbursed distribution, taxable to them as a dividend.

About William Brighenti

William Brighenti is a Certified Public Accountant, Certified QuickBooks ProAdvisor, and Certified Business Valuation Analyst. Bill began his career in public accounting in 1979. Since then he has worked at various public accounting firms throughout Connecticut. Bill received a Master of Science in Professional Accounting degree from the University of Hartford, after attending the University of Connecticut and Central Connecticut State University for his Bachelor of Arts and Master of Arts degrees. He subsequently attended Purdue University for doctoral studies in Accounting and Quantitative Methods in Business. Bill has instructed graduate and undergraduate courses in Accounting, Auditing, and other subjects at the University of Hartford, Central Connecticut State University, Hartford State Technical College, and Purdue University. He also taught GMAT and CPA Exam Review Classes at the Stanley H. Kaplan Educational Center and at Person-Wolinsky, and is certified to teach trade-related subjects at Connecticut Vocational Technical Schools. His articles on tax and accounting have been published in several professional journals throughout the country as well as on several accounting websites. William was born and raised in New Britain, Connecticut, and served on the City's Board of Finance and Taxation as well as its City Plan Commission. In addition to the blog, Accounting and Taxes Simplified, Bill writes a blog, "The Barefoot Accountant", for the Accounting Web, a Sift Media publication.
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