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Key Employee

Technical topics regarding tax preparation.
#1
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Looking at an S-corporation stock sale agreement. Client owns 100% of the stock. In the agreement, he sells only 70% to buyer for $50k. Per the agreement, seller also “grants” the other 30% of stock he owns to Key Employee.

I said, “This sounds like a taxable event…fiction is, you contributed capital to the corp and then the corp made a compensatory wage payment to the Key Employee, etc., etc.” You know, Section 83 stuff. So now there’s 2 shareholders and only one of them, my client, sold his stock. In terms of the amount of the deemed wage, it would be [($50k/70%) - $50k = $21,429]. So enterprise value would be $71,429 and 30% of that is the $21,429.

Client says, “Well, I was going to receive $50k no matter how much I sold – 70% or 100%. That was my agreement with the buyer. So as far as I’m concerned, it was really the buyer that “compensated” the key employee. It was really the buyer that wanted the Key Employee to stick around. We just wrote the agreement the way we did, with me granting 30% of my shares to the Key Employee, to make it easy.
 

#2
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Agree with your fiction. It's not a sale, exchange, or gift to employee.

Jeff-Ohio wrote:We just wrote the agreement the way we did, with me granting 30% of my shares to the Key Employee...


But without any professional guidance before finalizing the transaction, it would appear.

Jeff-Ohio wrote:to make it easy.


I find it easier to to my own dental work too. However, "easy" doesn't result in 'best', 'effective', or even 'adequate'.
~Captcook
 

#3
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But without any professional guidance before finalizing the transaction, it would appear.

That’s what’s strange. Our firm prepares the corporate return, but not the shareholder’s 1040. The attorney that drafted the agreement should have known better. We’ve worked with that attorney on other matters and the agreement language came as a big surprise. We were told that the shareholder was selling all of his stock. It wasn’t relayed to us that he was selling all of this stock, but only after he “gifted” 30% of it to the Key Employee.

I find it easier to do my own dental work too.


Maybe not a great analogy there. The dental results aren’t subject to interpretation. Hopefully in my case, there is some subjectivity.
 

#4
Nilodop  
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Have the lawyer write a clarifying amendment to the original agreement, and get all parties to sign it. The agreement would "clarify" that they actually did what the last paragraph of OP says they intended. To the extent the paperwork (stock transfer, e.g.) is different, agreement should say it was done as agent for buyer.
 

#5
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I think the value of the shares transferred to the employee is a compensation deduction for the S corporation, and the taxable income of the S corporation is allocated based on per share per day unless closing of the books is elected. Assuming closing of the books is elected, the question would be whether client or buyer gets the benefit of the deduction. I think the sales agreement would govern as to whether the buyer or seller should get the benefit of the deduction for the transfer of the shares to the employee.
 

#6
jon  
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The stockholder transferred the shares not the corporation. where is that attorney? A REDO!
 

#7
Nilodop  
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The stockholder transferred the shares not the corporation. where is that attorney? A REDO!. But no, there's a deemed capital contribution and transfer of the shares by the corp. That's what OP's saying in second paragraph of OP. The reference is section 83(h).
 

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The attorney that drafted the agreement should have known better.


I just learned this was not the seller attorney’s work. Seller (client) had his attorney, the good one that our firm has a history with, draft the agreement. Buyer forwarded it to her attorney and lo and behold, we have a new agreement, as prepared by buyer’s attorney, that seller client just went along with, like a dumba**.

There’s even a typo in the agreement…
 

#9
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dont forget minority and lack of marketability discounts for the stock.
 

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Pitch78 wrote:dont forget minority and lack of marketability discounts for the stock.

Good point. We were talking about that late last night. It seems to me that if $50k is the benchmark (i.e. if 70% of the stock is worth $50k…then 30% is worth $21,429)…the lack of marketability is already imbedded in the $50k, since that was the price negotiated between unrelated parties, with respect to this unmarketable, privately held stock. But, the $50k is also associated with a majority interest (i.e. control). So it seems to me we could lob off x% of the $21,429 to account for minority interest…and that’s it.

This is a really weird situation.

Individual sells stock, as previously described. There are two new owners of the stock: the 70% cash buyer and the 30% key employee. These two people proceeded to wind down the bank account and then they formed Newco [a partnership] and basically operated the newly acquire business out of Newco, even though what they acquired was S-corporation stock.
 

#11
Pitch78  
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Either the buyer was paying $50k for a controlling interest, which makes the 30% worth less than $21,429, as you state, or as your client stated, it was $50k for the whole thing, which makes the 30% interest worth less than $15k.

Discounts can get pretty large.
 

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What a flashback!! Years ago, decades ago, and I can't remember how many, I got trapped into having to explain IRC Section 83(h) and its repercussions to a lawyer, one of those mature, educated, credentialed, intelligent, experienced, ego-driven, sometimes deaf, professional business advisors, some of whom may occasionally refuse to acknowledge the existence [or maybe just the value] of **double-entry accounting**. Wow!!

Section 83(h) is marvelous. It creates a deduction for an entity that is neither the transferor nor the transferee of something valuable. Is it possible that Section 83(h) is unique, in that it is the only place in the tax code where that happens? I mean, just finding the word "transfer" used in the tax code is quite surprising, I realize now, many decades later.

8-) :cry: ;) 8-)
 

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Thanks, Pitch. I think where we’re ending up is here: We’re going with the language in the agreement as written. This means we’ll use an enterprise value of $71,429 (70% of which is the $50k). Starting point for Key Employee’s income inclusion would be the $21,429. We plan on lobbing off 25% as a minority interest discount. This would make the EE’s income inclusion $16,072. Corp would get a deduction for that, which we’ll allocate entirely to the selling shareholder under Sec 1377(a)(2). We’ll also get the Key Employee’s consent as to the 1377(a)(2) election, which shouldn’t be a problem. We already have the consent of the selling shareholder and the cash buyer shareholder. The corporation will issue a 1099 to the Key Employee, which is the best we can do at this point without a lot of hassles.

Then there is the liquidation to deal with…as stated, the cash buyer (primarily) and the Key Employee basically shut down this corporation they just acquired and started operating as a newly formed LLC (taxed as a partnership). I think this is a taxable liquidation involving a corporation with value. In computing inside value as to the S-corp liquidation, we plan on using the $71,429 (no discounts available on the inside). This will produce entity level gain, that will pass thru exclusively to the new 70% shareholder and the 30% Key Employee, as per the (a)(2) election.

My client, who no longer owns the S-corp, is spear-heading all of this, including the handling of the 1120S. He is worried that since his name and address are attached to this corporation, something might come back to bite him if things aren’t done right….although he could say: “I’m not the owner anymore. You new owners figure it out and just send me my K1.” But he doesn’t want to leave the 30% guy, who is also a friend of his, and a young kid, in the lurch. I should add that the 30% guy is in charge of everything at this point. The 70% cash buyer fell ill and is on her deathbed. When she fell ill, she transferred her 70% equity to the Key Employee, which the Key Employee apparently accepted.

I did advise my client to think hard about his role in all of this. It might be in his best interests to just tell the Key Employee, “Just give me my K1” and leave it at that. Even though the Key Employee has authority to sign the 1120S and make decisions surrounding it, I wonder how the heirs of the 70% owner will feel when they get a K1 with a big gain on it from the liquidation. They won’t be happy and they might be looking to place the blame on someone. In addition, my client doesn’t want to leave this mess to the young Key Employee to figure out on his own.

I also told my client that the 2018 Form 1120S doesn’t have to marked “final.” Even though a Newco was formed, one might argue that Oldco wasn’t liquidated, and Newco is just using the Oldco assets on a rent-free (or royalty-free basis). I doubt the IRS would see it that way, however. One issue with keeping Newco alive is that my client can’t get comfort around this entity still hanging out there, with his name still attached to it, when the thing could be shut down and a final return filed.

I think my client’s IRS concerns are unwarranted. Overall, I think he’s worried because this sale happened in 2018 and he was the 100% owner on the last tax return filed (and an owner for part of 2018). IRS has his name, address, etc. Things have not been transitioned over to the new owners such that client is off the radar. So he somehow thinks the IRS will connect things back to him. From a legal standpont, it’s not making much sense to me. I don’t think he has any responsibility here, in terms of the 2018 Form 1120S filing, even though he was a shareholder for part of the year. But it’s been a while since I’ve researched the issue. I don’t think the IRS can deem a former shareholder as responsible for filing the return, but I could be wrong. But at the same time, I understand where he’s coming from in terms of not wanting to leave the the Key Employee in the lurch. Even if client can deflect the IRS, they’ll be coming for the Key Employee next. And client doesn’t want that either.

But no, there's a deemed capital contribution and transfer of the shares by the corp.

A deemed capital contribution of what – cash? If so, that means the selling shareholder would have a stock basis increase for the amount of compensation recognized by Key Employee (and deducted by the corp), right?
 

#14
Nilodop  
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A deemed capital contribution of what – cash?. No, of 30% of the stock.
 

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No, of 30% of the stock.

Hmmm…How would that work? Let’s say he has $10k basis in his stock. He contributes 30% of his stock. His basis initially goes down by $3k to $7k. But then, he should get basis credit for the $3k capital contribution. So his basis remains at $10k. Is that right?

But that stock was worth $21,429, but call it $16,072 after the minority interest discount. There will be a compensation deduction hitting the books for the $16,072, all of which gets allocated to my client. Assume that’s the only transaction inside the corporation for the year. Are you saying my client won’t be able to deduct all of the $16,072 pass thru loss because he lacks stock basis? He’s short on basis by $6,072.

Or, are you saying he will able to deduct the loss, but only because he has personal gain of $6,072. In effect, he satisfied an “obligation” worth $16,072 with appreciated property; property that had a basis of $10k. While the net effect to the shareholder is neutral, that wouldn’t make sense on a couple of grounds. First, I don’t know why we’d add the personal gain to his stock basis. And second, it is the corporation that is deemed to satisfy the obligation. But from the corporation’s standpoint, it can’t have gain because of Sec 1032, right?

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?
 

#16
Nilodop  
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Hmmm…How would that work? Let’s say he has $10k basis in his stock. He contributes 30% of his stock. His basis initially goes down by $3k to $7k. But then, he should get basis credit for the $3k capital contribution. So his basis remains at $10k. Is that right?
. His basis would stay at $10k on the reasoning that his (deemed) capital contribution of 30% of his shares was, by itself, meaningless, because he owned 100% of the shares before and after said contribution. And according to RR 80-76, that would even be true if he were only a majority (as opposed to 100%) shareholder.
 

#17
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His basis would stay at $10k on the reasoning that his (deemed) capital contribution of 30% of his shares was, by itself, meaningless, because he owned 100% of the shares before and after said contribution.

What?!? So you’re saying my guy doesn’t even get a loss deduction for the basis of the shares he transferred?? And I’m also hearing that he has no gain either, which is good, but odd, since he transferred appreciated property.

And how is it that the corporation gets a deduction here? The corporation didn’t *really* transfer anything of value to the Key Employee, the sole shareholder did. It is such that the sole shareholder’s actions have decidedly determined that the “compensation” is ordinary and necessary as to the corporation? Or, is that a loaded question…because we don’t need the compensation to be ordinary and necessary, strictly speaking - we get to Sec 162 by going to Sec 83(h) first?
 

#18
Nilodop  
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What is this, a CPE course or what?

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.

What?!? So you’re saying my guy doesn’t even get a loss deduction for the basis of the shares he transferred??. Yup, I sure am. Instead, he gets to keep the basis, as discussed a coupla posts back.

And I’m also hearing that he has no gain either, which is good, but odd, since he transferred appreciated property.. Not so odd. He made a capital contribution, not a sale or exchange.

And how is it that the corporation gets a deduction here? The corporation didn’t *really* transfer anything of value to the Key Employee, the sole shareholder did.. But as I suspect you know, the regs. (based of course on the law) deem that the corporation "paid" the compensation by the fiction of deeming that it, not the shareholder, transferred the shares.

It is such that the sole shareholder’s actions have decidedly determined that the “compensation” is ordinary and necessary as to the corporation? Or, is that a loaded question…because we don’t need the compensation to be ordinary and necessary, strictly speaking - we get to Sec 162 by going to Sec 83(h) first?. We do get to 162 via 83(h) but we also do need to determine that the compensation was ordinary and necessary, and not, for instance, a capital expenditure or even (since we don't know for sure whether the key guy is a relative) a gift, in which latter case I think section 83 would not even be invoked.

Especially where, as here, the shareholder is 100% owner pre-deal, I look at it as really a different way of saying that what "really" happened is simply an issuance of shares to key guy by the corporation as compensation.

Why do I have the feeling you are headed somewhere novel with this?
 

#19
Nilodop  
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Just to cover all the bases, even the remotely, unlikely, hardly a chance ones as to applicability, are you thinking an issue with section 351?
 

#20
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What is this, a CPE course or what?

Yes, be sure to report your response time the the PA Accountancy Board.

It's compensation in the form of property.

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.

And what he gave 100% of his stock to the Key Employee?

Just to cover all the bases, even the remotely, unlikely, hardly a chance ones as to applicability, are you thinking an issue with section 351?


No.
 

#21
Nilodop  
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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
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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  
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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  
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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  
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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
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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
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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
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Jeff, that makes sense.
 

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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  
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Not to mention the absurdity that a corporation (even if momentarily) owns 100% of its own stock. Is that a liquidation?
 

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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
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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).
 

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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
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[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
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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
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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
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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
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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
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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  
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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.
 

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I noticed that Sec 83(h) doesn’t say anything about this capital contribution we’ve been talking about. Only the regulation spells out that theory:

(1)Transfers. If a shareholder of a corporation transfers property to an employee of such corporation or to an independent contractor (or to a beneficiary thereof), in consideration of services performed for the corporation, the transaction shall be considered to be a contribution of such property to the capital of such corporation by the shareholder, and immediately thereafter a transfer of such property by the corporation to the employee or independent contractor under paragraphs (a) and(b) of this section.

How is it that a Regulation can usurp a Code Section, like Sec 1001(c):

(c)RECOGNITION OF GAIN OR LOSS
Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized
 

#42
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The regulation s not usurping anything; it's merely implementing section 83(h) on a common-sense basis. How else would the corporation be able to get a deduction, as mandated by 83(h)?
 

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How else would the corporation be able to get a deduction, as mandated by 83(h)?


By Section 83(h) itself. You’re implying that the deduction mandated by Sec 83(h) fails, absent the Regulation. Absent the Regulation, you’re saying that Sec 83(h) would be inoperative on its face.
 

#44
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No, I don't say that, and I offer my most sincere apology if that is what is implied. They could have left out the part of the reg. that "creates" the capital contribution, and simply "created" a deduction for
... the person for whom were performed the services in connection with which such property was transferred, ...
. But that would have left even more uncertain than you have already pointed out the various other issues here being discussed.
Last edited by Nilodop on 15-Jan-2019 4:58pm, edited 1 time in total.
 

#45
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From S. Rep. No. 552, 91st Cong., 1st Sess. (1969).

In general, where a parent company's or a shareholder's stock is used to compensate employees under a restricted stock plan, the transfer of the stock by the parent company or shareholder is to be treated as a capital contribution to the company which is to be entitled to a deduction in accordance with the restricted property rules. The parent company or the shareholder merely is to reflect the contribution as an increase of the equity in the company which is entitled to the compensation deduction.
 

#46
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They could have left out the part of the reg. that "creates" the capital contribution, and simply "created" a deduction for


Exactly. But by invoking capital contribution treatment, that precludes gain/loss on the existing shareholder’s disposition of stock to the Key Employee. That regulatory scheme sure seems to over-ride Section 1001(c)…

I realize that there is some alliteration there, and for that, I apologize…

And thank you for your heartfelt apology. I will follow-up as to acceptance…
 

#47
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Also, by writing the reg. as they did, they provided an easy and useful workaround to the inevitable issue that otherwise would have arisen. That would be, in addition to the 1001 gain, the argument over whether the debit side of the transaction (for the shareholder) would be a 162 deduction (probably not), a basis addition or a cost of the sale (very possibly one of those), or a gift (already beaten to death above). Not to mention the withholding, payroll tax, even maybe deferred income and deferred deduction aspects (if there were restrictions on the sale of the stock).

If the alliteration to which you refer is "scheme sure seems", I'll have to check whether that counts, because the s in sure is pronounced sh. Contrast, e.g., "Peter Piper picked a peck of pickled peppers." with "She sells seashells by the sea-shore." I note that at least one source says "The best way to spot alliteration in a sentence is to sound out the sentence, looking for the words with the identical beginning consonant sounds." Somehow seems sensible.
 

#48
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The regulation is simply stating what Congress intended as set forth in the Senate Report.
 

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Also, by writing the reg. as they did, they provided an easy and useful workaround to the inevitable issue that otherwise would have arisen. That would be, in addition to the 1001 gain, the argument over whether the debit side of the transaction (for the shareholder) would be a 162 deduction (probably not),


But even without the Reg, Sec 83(h) denies the deduction to the shareholder.

And thank you for the little lesson on ‘literation…
 

#50
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Jeez, Jeff, just judge it on what it says. Section 83(h) only "denies the deduction to the shareholder" if the s/h is NOT
the person for whom were performed the services in connection with which such property was transferred
.

Yes, Pitch 78, what you say is true. But please, Pitch, don't get Jeff started on what this means:
The parent company or the shareholder merely is to reflect the contribution as an increase of the equity in the company which is entitled to the compensation deduction.
 

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