What are the tax consequences of a company giving stock?
June 20, 2005
Date: Tue, 31 May 2005
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?
Date: Fri, 10 Jun 2005
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.