Employee stock option sale

[Guest Rebecca Howell]

Upon termination of employment, stock granted under stock option plan was sold back to privately held S corp. Market value for sale of stock was determined by CPA firm as of 1/1/00. Upon receipt of K-1 for 2000, the tax basis of stock at 1/1/00 was substanially higher than market value determined by CPA firm. Was the stock undervalued for buy back by company?

[BeckyMiller]

Not necessarily. As an S corporation, tax basis increases every year by any undistributed income. Market value is a function of the market. So the two items don't necessarily move in any kind of harmony.