Key Employee

Technical topics regarding tax preparation.
#21
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Are you saying the Key Employee gets no basis for his stock?

Yup, I sure am. Instead, he gets to keep the basis, as discussed a coupla posts back.
. I was referring to the 100% owner. I forget who "your guy" is, but the guy receiving compensationdefinitely gets basis equal to the amount of compensation.

And what he gave 100% of his stock to the Key Employee?
. What's the exact question? What are the exact facts?

Eagles 14-0 end of first quarter.
 

#22
Posts:
5700
Joined:
21-Apr-2014 7:21am
Location:
The Land
Eagles 14-0 end of first quarter.


Famous last words…but a pretty good game all the way around…we’ll see how my Browns do next year.

So if Key Employee gets basis, isn’t there a fiction, as described here:

So, is it like this: After shareholder transfers 30% of his stock to the corporation, the corporation is deemed to pay $16,027 in cash compensation to the Key Employee…who is deemed to contribute that cash back to the corporation in exchange for his shares, thus giving the Key Employee a $16,027 basis in his stock?. That's pretty close, IMO. But there is no deemed cash in or out. It's compensation in the form of property.


In other words, when the corp debits Salaries, shouldn’t it credit APIC or Capital Stock?

What's the exact question? What are the exact facts?


Pretend a sole shareholder just gives 100% of his stock to a Key Employee…
 

#23
Pitch78  
Posts:
706
Joined:
22-Apr-2014 7:17am
Location:
Oklahoma City
Jeff-Ohio wrote:
Eagles 14-0 end of first quarter.


Famous last words…but a pretty good game all the way around…we’ll see how my Browns do next year.



Baker Mayfield has turned that place around... Boomer Sooner!
 

#24
Pitch78  
Posts:
706
Joined:
22-Apr-2014 7:17am
Location:
Oklahoma City
BTW, why would you not go with $50k as the full enterprise value if that is what they were willing to pay for 100%? That would make the 30% only $15k before discounts.
 

#25
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Pretend a sole shareholder just gives 100% of his stock to a Key Employee…
Compensation? Gift? Some of each? Why? And does the stock still all get sold to the new owner, or only 70%? Is this It was really the buyer that wanted the Key Employee to stick around. still a fact? Did the Eagles win? Could they have?
 

#26
Posts:
5700
Joined:
21-Apr-2014 7:21am
Location:
The Land
BTW, why would you not go with $50k as the full enterprise value if that is what they were willing to pay for 100%? That would make the 30% only $15k before discounts.


$50k would imply that the cash buyer bought 100% of the stock…and then cash buyer is the one that effectively gave 30% to the Key Employee. That is the practical reality of the situation. But the Agreement states that the seller gave 30% of the stock to the Key Employee…and then the seller sold his remaining 70% to the cash buyer for $50k.

So, if we went with $50k as the 100% value, wouldn’t it be somewhat hard to defend, given the language in the Agreement? Further, and as noted, the cash buyer is on her deathbed. She may be deceased by now, I’m not sure. So getting an affidavit from her won’t happen.
 

#27
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
No matter the % involved (30 or 100), we still need to deal with the legal reality (being stuck with the chosen form of the transaction) and the practical reality (see my #4 for a suggestion). The tax results of each are different.
 

#28
Pitch78  
Posts:
706
Joined:
22-Apr-2014 7:17am
Location:
Oklahoma City
Jeff, that makes sense.
 

#29
Posts:
5700
Joined:
21-Apr-2014 7:21am
Location:
The Land
No matter the % involved (30 or 100), we still need to deal with the legal reality (being stuck with the chosen form of the transaction) and the practical reality (see my #4 for a suggestion). The tax results of each are different.


Maybe so. But to test the logic of a particular tax provision, we need to throw a lot of examples at it. Seems the concept that applies when an existing shareholder “gifts” stock to a Key Employee is: deemed capital contribution of said gifted stock to the corp and then the corp is deemed to make a compensatory property payment to the Key Employee. That is one alternative, but it is the one current law has adopted. Part of this is that the shareholder’s basis in his stock remains unchanged – no part of it “goes away” with the deemed capital contribution.

My question is: If he gave away 100% of this stock, would we apply the same concept to his basis? That is, if his basis remains unchanged, what do we do now, given that he no longer owns any stock? Does his basis vanish, with no loss deduction, or does he get a loss deduction?

I believe we run into a similar conundrum in certain redemption situations – like the one when a family member is completely redeemed out, but because of family attribution (that doesn’t get waived), the transaction is treated as a dividend. That redeemed shareholder is gone, but what happens to his stock basis?
 

#30
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Not to mention the absurdity that a corporation (even if momentarily) owns 100% of its own stock. Is that a liquidation?
 

#31
Posts:
3299
Joined:
21-Apr-2014 7:01am
Location:
Near the fridge.
The premise of Section 83 is that something is transferred "in connection with" services that are performed. Can Section 83 and "gifting" be used, together, to describe the tax results of what is deemed to have happened?
 

#32
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
And we still do not have a clear and direct answer to whether this was a gift (asked in #18 and #25). And we still need to deal with whether the transfer was for services performed for the giving shareholder, or to be performed for the new shareholder, or a combo of both, or even a combo of three (adding gift).
 

#33
Posts:
5700
Joined:
21-Apr-2014 7:21am
Location:
The Land
And we still do not have a clear and direct answer to whether this was a gift (asked in #18 and #25).


Definitely not a gift. Gift case is real hard to make in an employment context, as you know.

And we still need to deal with whether the transfer was for services performed for the giving shareholder, or to be performed for the new shareholder, or a combo of both


Why? Doesn’t Sec 83(h) automatically grant the deduction in the same year that the Key Employee brings the amount into income?
Can Section 83 and "gifting" be used, together, to describe the tax results of what is deemed to have happened?


Possibly. I suppose you could have a single transfer to one person partially “in connection with” services and partially as a gift.
 

#34
Pitch78  
Posts:
706
Joined:
22-Apr-2014 7:17am
Location:
Oklahoma City
[quote="Jeff-Ohio"][quote]

Why? Doesn’t Sec 83(h) automatically grant the deduction in the same year that the Key Employee brings the amount into income?
[quote]


It says they are taken at the same time, however, the corp may be on a fiscal year.
 

#35
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Doesn’t Sec 83(h) automatically grant the deduction in the same year that the Key Employee brings the amount into income?. The deduction goes
... to the person for whom were performed the services in connection with which such property was transferred, ...
.

Gift case is real hard to make in an employment context, as you know.
. Absolutely, no doubt, unless maybe they are related, like maybe parent and child.
 

#36
Posts:
5700
Joined:
21-Apr-2014 7:21am
Location:
The Land
The deduction goes ... to the person for whom were performed the services in connection with which such property was transferred, ...


Well, that’s a question about who gets the deduction. I think we’d have to vote for the corporation in all cases. But you never know: I might give some of my ABC Corporation stock to a Key ABC Employee, but for services he agrees to render to XYZ Corporation, which is an entity I intend to form 10-years from now…

What kind of language is that anyway – “For whom were performed the services” - ???

I mean, did Hemingway say, “For whom was tolled the bell” - ??? – I don’t think so.
 

#37
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Apparently you are unimpressed with my suggestion in #4, so let's look at what supdat says in #5. Would the deduction given by section 83 occur in the part of the taxable year of the S corp. when it is owned by the old guy(s) or by the new guys?

I think Spell worked on Ways and Means staff back then, and he refused to allow 83(h) to say "... to the person the services were performed for and which such property was transferred in connection with,...". Hemingway's publisher wanted the title to be "Who the bell tolls for" but Ernie refused to allow that. BTW, what is this whole thread for?
 

#38
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
I believe we run into a similar conundrum in certain redemption situations – like the one when a family member is completely redeemed out, but because of family attribution (that doesn’t get waived), the transaction is treated as a dividend. That redeemed shareholder is gone, but what happens to his stock basis?

Well, reg. 1.302-2(c) discusses this, and it goes way back, maybe to 1960. But then there are proposed regs. in 2002 that are not finalized and I don't know their standing, force, or effect. What year was a law passed that limited proposed regs. to, I think, 3 years, after which they had to either be finalized or become a nullity, or something along those lines? The preamble to the proposed reg. says about the existing reg.
The current regulatory regime preserves, and prevents the elimination of, basis in transactions subject to section 302 where a proper adjustment may be made to the basis of the remaining stock of the redeeming corporation and in transactions subject to section 304 where, immediately after the transaction, the seller owns stock of the acquiring corporation. In certain transactions, however, taxpayers have taken the position that certain adjustments are proper, even if they shift basis from a person that is not subject to U.S. tax to a person that is subject to U.S. tax or to stock other than stock of the redeeming corporation. Notice 2001–45, 2001–2 C.B. 129, describes a type of transaction with respect to which taxpayers have taken the position that, under § 1.302–2(c), all or a portion of the basis of stock redeemed from a person that is not subject to U.S. tax or is otherwise indifferent to the Federal income tax consequences of the redemption of the stock is added to the basis of other stock in the redeeming corporation owned by a taxpayer that is subject to U.S. tax to create a loss on the disposition of the other stock. Although the IRS intends to challenge the adjustments claimed in such transactions, the IRS and Treasury believe it is desirable to revise the rules that govern accounting for unutilized basis attributable to redeemed stock to better reflect the purposes of the relevant Code provisions.
The preamble goes on to say about the proposed reg.
Certain transactions that, in form, involve the redemption of shares are economically identical or similar to distributions to shareholders that do not involve any redemption of shares. For example, if a single shareholder owns all of the stock of the redeeming corporation, the redemption of some shares from that shareholder for cash is economically indistinguishable from the mere distribution of corporate cash to the shareholder. In recognition of this, section 302 taxes these transactions as corporate distributions notwithstanding their form as redemptions. The underlying premise of section 302 is that distribution treatment is called for in these cases because, in effect, the redeemed shareholder still owns (or is treated as owning) its stock in the corporation, even if it may have turned in some physical shares.

Although section 302 does not provide any explicit guidance regarding the share-holder’s basis of the shares redeemed, in deriving a regulatory regime to address the treatment of the unutilized basis of redeemed stock, it is appropriate to consider what happens when a shareholder receives a distribution and keeps its shares, because that analogy underlies distribution treatment under section 302. Because the Code does not permit basis to offset any portion of the redemption distribution that is treated as a dividend, and because such an offset is not available when a corporation distributes a dividend and the shareholder retains its shares, the redemption date is not the appropriate time to recover the unutilized basis of the redeemed stock. However, if the shareholder receives a distribution and retains its shares, it also retains its basis, which it can recover later in situations other than dividends, such as the sale of the shares. Accordingly, the unutilized basis of the redeemed stock should not disappear and should be taken into account for Federal income tax purposes at some time. In addition, any tax benefit associated with the unutilized basis of redeemed stock should remain with the taxpayer that made, or succeeded to, the investment that gave rise to the unutilized basis. Accordingly, these regulations propose that, in any case where a redemption of stock is treated as a distribution of a dividend, an amount equal to the adjusted basis of the redeemed stock is treated as a loss recognized on the disposition of the redeemed stock on the date of the redemption. That loss is taken into account as described below.
. It goes on in detail from there. Here's where I found the proposed reg. REG-150313-01
 

#39
Posts:
5700
Joined:
21-Apr-2014 7:21am
Location:
The Land
Apparently you are unimpressed with my suggestion in #4,


Cash buyer is on her deathbed. She may have passed along by now.
Would the deduction given by section 83 occur in the part of the taxable year of the S corp. when it is owned by the old guy(s) or by the new guys?


See the first paragraph of #13. The -1 regulation addresses this:

Determining shareholder for day of stock disposition. A shareholder who disposes of stock in an S corporation is treated as the shareholder for the day of the disposition. A shareholder who dies is treated as the shareholder for the day of the shareholder's death.

If transaction is treated in accordance with the Agreement language (i.e. existing shareholder, and not the cash buyer, is the one deemed to give the Key Employee 30% of the stock), then the deduction would hit on the date the 30% gets transferred, which is the same date existing shareholder sells his remaining 70% to the cash buyer. So, the existing shareholder would get the deduction. It becomes less clear if we treat the cash buyer as having bought 100% and then she is the one deemed to convey 30% of what she just bought to the Key Employee. But that is not how we decided that things will go down.
BTW, what is this whole thread for

It is to figure out, as best we can, all the issues at play, which are numerous…have we touched on Reg. Sec. 1.83-6(d) yet?
 

#40
Nilodop  
Posts:
18753
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
It is to figure out, as best we can, all the issues at play, which are numerous…have we touched on Reg. Sec. 1.83-6(d) yet?. I knew what the thread is for, I just asked in order to lay with the thingy about Hemingway and not ending a sentence a preposition with. As to the reg., I surely thought we had covered its substance, but as always, I am here to be enlightened.
 

PreviousNext

Return to Taxation



Who is online

Users browsing this forum: HowardS, itssewtaxing, JoJoCPA, JR1, lckent, ManVsTax, MAPCPA60, msmith7305, sjrcpa, SumwunLost, TaxDude, Terry Oraha, Treetopclimes and 222 guests