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Date:   Tue, 31 May 2005
From:   Mike

I have a client who has an S corporation. He owns 100% of the shares. He has an agreement with the shop manager that, after one year of service, the manager would own 80% of the corporation.

For example, the owner owns 1000 shares and he agrees to give 800 shares to the manager. Is this a taxable transaction? Also, what are the tax consequences if the manager gives back 700 shares in five years?

Answer

Date:   Fri, 10 Jun 2005

Hello Mike,

The transfer to the manager by your client is treated as a contribution of stock to the corporation and a stock grant by the corporation to the manager. The manager will have taxable W-2 income based on the fair market value of the stock, subject to income tax withholding and employment taxes like a cash bonus.

I'm not sure what the consequence will be for the transfer by the manager to your client in five years. It depends on the motivation for the transaction. This is a very unusual arrangement for which I recommend your client and the manager should get legal and tax counsel.

Good luck!

Mike Gray

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.