C Corporation S/H wants to Gift all stock to Employee

C Corporation S/H wants to "gift" all 200 shares to Employee who has managed
business for years & walk away from business. No consideration.

It is my understanding that the S/H cannot make a "gift" to an employee; correct?

Would the S/Hs stock basis be considered compensation to the employee??

Is there another way to structure this as a "transfer" of all stock without
tax ramifications to employee?

On the books the Common stock is $68K and total RE is approx. $81K including CS.

Have not dealt with this scenario before; any direction or guidance would be appreciated!!

Thanks

26 USC 102(c).

Book value is not relevant. What is the FMV of the stock?

26 USC 102(c).

Book value is not relevant. What is the FMV of the stock?

What if private and not traded on a public exchange?

Value is value, you have to know what it's worth. And IRS will consider this comp to that manager/recipient.

The only way for it not to be taxable to the employee is for the employee to pay for it.

It doesn't sound like there is not
much wiggly room on this : (
Soo once a FMV is established;
the current S/H walks away
with a gain or loss on their shares transferred?
Entity stays intact (C Corp)?
Struggling a bit with this.
Thanks
S

Yes, current s/h is selling his stock,or redeeming them to the corp. New s/h is acquiring them. Whether in money or via comp accomplishes the same thing. It's just not free.

Take a real hard look at section 83(h). And reg. 1.83-6(d).

Depending on the numbers, needs of the parties, etc., you could do part of the transfer this year and part of it next year (or even over a longer time period). Potentially lessen the tax burden.

Thank you all!!

S

There's enough conflicting stuff above that it might help to go through some of it.
It is my understanding that the S/H cannot make a "gift" to an employee; correct? . Correct in almost all cases. If, for instance, the employee happens to be s/h's child, maybe not. I'll assume there's no gift.
And IRS will consider this comp to that manager/recipient.. I agree.
Soo once a FMV is established;
the current S/H walks away
with a gain or loss on their shares transferred? . No, not how it works.
Yes, current s/h is selling his stock,or redeeming them to the corp.. I disagree.
On the books the Common stock is $68K and total RE is approx. $81K including CS.
. OK, so only $13k in retained earnings (which for simplicity I'll assume is same amount as accumulated E&P). And let's also assume FMV of the C corp. is $100k. And that his tax basis in the stock is $68k.

Please tell us your understanding of the taxation of this "gift" to all parties, i.e., present stockholder, employee, and C corp.
Is there another way to structure this as a "transfer" of all stock without
tax ramifications to employee?
Don't think so, but if we keep exploring the facts a bit more, we may get some tax back at some level.

Ok; using above facts;
I would think S/h leaving would recognize a LT gain of $32K ($100K less $68,000)
Manager would have increase in compensation for $100 perhaps allocated over 2 years.

New S/H basis would be $100K in business.
Based on Nilodop response above; I assume I am incorrect?
Imagine I can't see the forest for the trees?
Guidance would be greatly appreciated!
S

I would think S/h leaving would recognize a LT gain of $32K ($100K less $68,000). No. He hasn't sold or exchanged the stock and he hasn't realized any gross income from the transaction.

Manager would have increase in compensation for $100 perhaps allocated over 2 years.
. Yes to the $100k compensation income (which I think requires withholding; not so easy), but I'm unclear on where the two years comes from.

New S/H basis would be $100K in business.. Yes, if by "business" you mean stock.

Guidance would be greatly appreciated!. Happy to help. You've overlooked a big corporate deduction. Have you read the code and regs. section I mentioned above?

And can you state in your own words the real reason you think s/h is being so generous?

Nilodop I believe by corporation deduction; you would be referring to the compensation expense of $100,000 for
Manager which will be included in Mgr's gross income... (1.83-6) Correct?

Was using 2 years as possible spreading of income for Mgr tax liability; 100 shs each year..

Big take away for me is the S/h leaving & not having any tax ramifications on her individual return...

Real reason S/H being generous; Manager been running business for years & S/H considers her like a daughter &
family.

Thank you for your guidance.

S

Interesting. So if a daughter worked as an employee of her father’s company and the father gifts shares to the daughter, the daughter would have compensation income?

Shareholder cannot make a gift of stock? He is leaving not staying as a shareholder! Where does it say this transaction is prohibited?

Jon;

The Manager is not a daughter of the S/H.
It is my understanding that you can not give a Gift to an employee..
only a family member.

S

Dellpaul:

That is an interesting question for sure; daughter is employee; stock gifted..
I would think NOT compensation but haven't researched that angle at this time..

I have not look at his in a long time, but you cannot issue stock from the corporation to an employee without it being taxable -Sec 83 and others offer other treatment. Gift from one to another, i have not had that, but I am surprised at the conclusion.

Agree stock issue to employee would be taxable as compensation
unless he pays cash..