Key Employee

Technical topics regarding tax preparation.
#41
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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
Nilodop  
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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)?
 

#43
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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
Nilodop  
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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
Pitch78  
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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
Nilodop  
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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
Pitch78  
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The regulation is simply stating what Congress intended as set forth in the Senate Report.
 

#49
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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
Nilodop  
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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.
 

#51
DAJCPA  
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Curious as to the tax basis journal entries on both the original shareholder's and the corporation's books for the 30% given to Key Employee?
 

#52
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Original s/h keeps his tax basis in the remaining shares, so the only "entry" is a memo to reduce his number of shares. Corporation shows treasury stock at zero cost, then shows issuing it at a gain equal to the value of the compensation, said gain being not taxable because of section 1032.
 

#53
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Section 83(h) only "denies the deduction to the shareholder" if the s/h is NOT


Right. But it’s a given that the key employee isn’t performing services for the shareholder.
The regulation is simply stating what Congress intended as set forth in the Senate Report.


The plan in question isn’t a restricted stock plan. But even if we bypass that point, which isn’t so insignificant, the Regulation is still problematic because it’s in direct conflict with Sec 1001. It’s hard to see how a Regulation, which is supposed to deal with the limited issue of income and deduction with respect to a transfer of stock, ends up superseding an existing Code Section pertaining to gain and loss. Just because the Treasury wrote the regulation based on what Congress intended, doesn’t mean the Regulation passes muster. What if the Senate Report also said that the Senate believes all gifts and muni bond income should be taxable, and directs the Treasury to write a Regulation to that effect, which the Treasury does. That Regulation would be good to go?
 

#54
Pitch78  
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Nilodop wrote: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.


That is verbatim from the legislative report. I would like to hear Jeff's take.... :twisted: :twisted: :twisted:
 

#55
Pitch78  
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I didnt see Jeff's reply. The specific controls over the general. 83h addresses a specific transaction, and is pretty much an exception to 1001. It gives the deduction to the corporation, so you have to figure out how the corp got the stock when it was never in title. For a 100% owner, seems that 351 could also apply and not 1001. Regardless, it is the specific controls over the general, and the legislative history fills in the gap of the intention of the legislature on how that fiction works with the language in the statute.

Re muni bonds and gifts, your example is too broad. It is comparing apples to oranges.
 

#56
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Re muni bonds and gifts, your example is too broad. It is comparing apples to oranges.


Not really, because if we have Code Section that says a sale or exchange gives rise to recognized gain or loss (i.e. Sec 1001), it’s hard to see how a regulation in a different Code Section could trump that…especially when that other code section [Sec 83(h)] doesn’t preclude shareholder gain/loss recognition. All Sec 83(h) covers is the EE’s income recognition and the corporation’s deduction. As such, the regulation sure seems to go beyond those points. It’s still over-reach even if Congress intended over-reach. You can’t undo a statute with a regulation. If you could, why doesn’t the IRS just issue a Regulation telling us that QIP is 15-year property?

Regardless, it is the specific controls over the general


There is no “general” in Sec 83(h) as to shareholder gain/loss recognition. All we have are “specifics” in the Regulation…which over-ride a completely different Code Section.

Or, we might say that the “general” in Sec 83(h) is that it doesn’t upset Sec 1001…if so, then the “specifics” completely over-ride that idea…
 

#57
Nilodop  
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Let's say you're right, which I don't yet concede. Why hasn't it come up in cases, rulings, scholarly articles, etc? And, in your facts. What will be your advice to them? I think you said your firm does the 1120S. Will the result be a gain to the s/h, whose return I gather your firm is not concerned with, but still the same deduction by the corp.? Is there an inconsistency between reporting it as a sale to the corp., but based on its being a satisfaction of a compensation liability? Im not expressing it well, but you get the idea, i think. A taxed gain and no benefit from the added basis.
 

#58
Pitch78  
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It has come up in cases though 1001 is not mentioned.

https://www.ravellaw.com/opinions/8d5d1 ... 8c42430d9e

Jeff is arguing the position the Tax Court took, which was reversed on appeal.
 

#59
Nilodop  
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Really nice find, Pitch. Thanks. Nichols' dissent is entertaining if not persuasive. I just reviewed Jeff-Ohio's
TPT profile, hoping to ascertain whether he had possibly been one of Judge Nichols' law clerks back then, as Jeff's reasoning was similar to Nichols', but I'm unable to conclude.
 

#60
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Nichols' dissent is entertaining if not persuasive.


I found the whole issue to be pretty fascinating. Here, in the Senate Report, we have a indication of Congressional intent, but the existing statutes are at odds with that intent. The existing statute [Sec 83(h)] says nothing about the shareholder’s gain or loss. And another existing statute, Sec 1001, tells us that gain/loss is recognized by the shareholder. Yet, some words show up in a Senate Report that say, “Our intent is to expand Sec 83 so that it says stuff it doesn’t say (about a completely different area of the law) and to also to create an exception to that completely different area of the law (Sec 1001).”

I’d say the dissent is pretty persuasive. And I wonder how this would pan out in another circuit.

With that said, here we sit with Congress screwing up the new law as to Qualified Improvement Property. It is clear Congress intended for such property to have a 15-year life, such that it would qualify for bonus depreciation. Doesn’t Tilford tell us that the Treasury has all the authority in the world to just issue a Regulation that says, “QIP has a 15-year life?” I mean, if all we need is a manifestation of Congressional intent, why isn’t that good enough?

Is the Treasury worried that certain Congresspeople would get mad at them?

P.S. You ought to read the Tax Court case too:

https://casetext.com/case/tilford-v-com ... al-revenue
 

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