A shareholder sells his S corporation stock and realizes a $500,000 gain. The stock had been held five years. Which of the following statements most completely describes the character of the gain?

Question

A) A long-term capital gain taxed at the 15%/20% capital gains rate. If the corporation owns collectibles, gain attributable to those assets will be taxed at the 28% long-term capital gain rate.
B) Ordinary income to the extent of the shareholder's share of the business's unrealized receivables and appreciation on inventory, with the balance taxed at the 15%/20% capital gain rate.
C) The portion of the gain attributable to unrecaptured Sec. 1250 gain taxed at 25%, with the balance taxed at the 15%/20% capital gain rate.
D) Both B and C apply to the gain from the sale of S corporation stock.

Answer 1

A) A long-term capital gain taxed at the 15%/20% capital gains rate. If the corporation owns collectibles, gain attributable to those assets will be taxed at the 28% long-term capital gain rate.

Gain from the sale of S corporation stock is taxed as a regular long-term capital gain (assuming held longer than one year), except to the extent of gain due to collectibles held by the S corporation. The gain treatment described in B and C only apply to partnerships.