Should I sell private company stock to a relative?
September 26, 2011
Date: Thu, 7 Jan 2010
Dear Mr. Gray
If I exercise an ISO for private company stock with a stated fair market value of $565 and an option price of $65 and sell the stock during the year of exercise to a relative for $70, will I pay income taxes based on the fair market value or the sales price for the disqualified disposition?
I look forward to your advice!
Date: 8 Jan 2010
According to Section 422(c)(2), reporting income for a disqualified disposition based on the selling price of the stock is only permitted if a loss (if sustained) would be allowed for the transaction. Under Section 267, losses for sales to certain related parties are disallowed, including siblings, ancestors and descendants.
Even if you make a sale to a “qualifying” relative or friend, the IRS might find the transaction to be part sale, part gift because of the sale being made substantially below the fair market value reported by the company.
Therefore, I don’t recommend such a sale to avoid the alternative minimum tax. A sale to a person with whom you have no personal relationship with no strings attached and some stated rationale for the discounted selling price, such as lack of marketability and financial hardship, is a possibility. Most private companies won’t permit sales of the shares under these circumstances.