Yes, it’s so simple that:
commentors requested guidance concerning the treatment of earn-out payments received by option holders in connection with a corporate transaction.
But anyway, let’s just keep it simple. Let’s just throw $3.5m of comp on the guy’s current year W2. And we’ll have the corp deduct it. Not quite a symmetry there, to the optionee, with respect to the deduction, unless he already owns 100% of the stock (which he doesn’t). And then when he only collects $2m on the note, I wonder the IRS will say when he files for a claim of right adjustment? What if he is left with a $1.5m capital loss?
Seems to me the “other” shareholders really might want that $3.5m deduction (depending on the Ordinary Income otherwise showing on their K1’s, W2’s, etc.). Fair enough. If they don’t take it now, and liquidate, they may never get that deduction. But that might leave the optionee in a real tenuous position.
Seems we might have competing interests here, but no meeting of the minds.
It does seem, though, that the “shareholders” were already willing to forego the deduction, whether or not they knew it. But then Wiles caught it.
Since Gator speaks of the “client,” if my client is in a position to get a W2 hit in Years2 and 3, I’m not so sure I’d tell him to bring the matter up to his fellow shareholders. Unless, of course, there is some mechanism for him to be made whole in the event he reports $3.5m of compensation income (which his fellow shareholders deduct) and only later collects $2m. What if optionee brings the matter to the other shareholders’ attention, angling for a negotiation in case he loses his ass, but the other shareholders say, “Wow! Thanks for brining it to our attention. We’ll value it at $3.5m. And no, we won’t reimburse you.”
Could there be a shareholder suit if the optionee believes he should report $3.5m, but stays quiet, to protect his own ass, full knowing that a $3.5m deduction might best serve his fellow shareholders?