Compensating C corp key employee before takeover

Client's sole owned C corp has been losing money for several years, funded by my client. She's expecting a substantial offer in next week that would be much more than she's invested in the company.

if deal goes thru, and don't know yet if it's a stock purchase or asset purchase, client wants key employee to get 20% of the sale price.

Not trying to get cap gains for employee or ord deduction for my client, just so my client doesn't pay tax on the money going to the employee.

If it's an asset purchase, shortly after receipt of sale proceeds the C corp could pay a bonus to the key employee an amount that reduced for medicare tax, would equal the 20% target. C corp's NOL increases and evaporates when C corp liquidates. C corp sole shareholder, my client, reports smaller gross proceeds and smaller capital gain.

if a purchase of stock, it gets trickier since corp has no money.

The sales contract could reduce the stock purchase price by the cost of the corp paying the bonus. Don't know if the bigger loss would be usable by the acquirer.

Shareholder couldn't pay it personally to the employee because it looks more like an investment expense than a cost of sale.

if it's tax free stock for stock exchange, or some cash and rest stock, still risky having shareholder personally pay the employee.

Any thoughts on how to structure this?

Come back when you know more facts.

Here are a couple reactions.

... client wants key employee to get 20% of the sale price.. if a purchase of stock, it gets trickier since corp has no money. Give employee 20% of the stock. And see section 83(h) and its regs.

Don't know if the bigger loss would be usable by the acquirer.. With 381 and 382, how valuable is that NOL anyway?

Fact pattern isn’t all that uncommon. It often goes down just as Nilodop says: Give 20% of the stock immediately before the transaction, perhaps directly issued by the corp to keep it clean. That’s a taxable event under Sec 83, as Nilodop points out. Debit wages $100, credit withholding $20, credit common stock $80. Since EE is getting a gross amount for the stock (i.e. the full 20%), he is usually responsible for covering his own withholdings. So you’d debit Receivable $20 and credit Common Stock for $20k. Deduction now sits at $100, along with common stock, and EE will forward $20 to the corp to take down the receivable. ER will then remit it to the taxing authorities to eliminate the withholding liability. In terms of the EE’s sale, his basis would equal his gross consideration, no gain or loss there.

Or, as you say…view it as an obligation of the corp, so it’s basically a purchase price adjustment.

if it's tax free stock for stock exchange, or some cash and rest stock, still risky having shareholder personally pay the employee.

Having the shareholder pay the employee is off the table.

Also, not sure if Sec 1202 is applicable here, as to the original shareholder. It might be.

Not sure if you need to look into the Parachute rules.