Posted on 12/18/2006 6:30:36 PM PST by Alberta's Child
Sorry for the vanity, but I figure there are a few folks here on FreeRepublic who might be able to help me with this. I'm looking for some information about capital gains taxes (Federal) and how they are applied to a specific situation. I'll check with my tax accountant myself if/when the need arises, but for now I'm just checking to see how this would apply to a hypothetical situation that may or may not become a reality.
Here's the scenario . . .
Suppose I am an employee in a closed corporation and I am given the opportunity to buy shares in the company. Let's say I'm buying X shares for a total of $100,000.
The shareholders agreement for this company includes specific stipulations for buy/sell arrangement in the future. If I sell my shares to another employee in the company, we could make our own arrangements. If, however, I am looking to sell out down the road and there are no buyers, then the company would buy back my shares based on a very specific formula for calculating their value. The agreement stipulates that the company would pay me 10% up front, then pay off the remaining 90% over a period of five years -- including interest.
Let's suppose my shares are worth $300,000 when I sell them back in five years. Here are two basic questions:
1. In the scenario I described above, I would report a capital gain of $200,000 on my subsequent tax return. If I am in the 20% bracket for the capital gains tax, does this mean that I would have to pay $40,000 in taxes even though I had only received $30,000 in cash up front for my shares (I think the answer to this is YES, but I want to verify this)?
2. If this scenario were to play out, would there be any way under the current tax code to defer my payment of at least part of this capital gains tax until the second year when I receive the second installment from the company?
Send me $ 300.00 as a retainer, and I'll be glad to answer....
(And I have no clue).
LOL. I assume that would be a tax-deductible expense?
Probably doesn't depend on whatever corporate arrangements you set up. IRS would look at the sale as concluded, regardless of your private extended payment schedule, and
seek to tax at the whole amount on day 1.
Tax accounting ping.
>IRS would look at the sale as concluded.
Probably not, and there are cash vs. accrual questions here.
There are all sorts of issues about "tax liability creating events" here. He needs PROFESSIONAL advice.
I believe IRS rules basically require the company to pay interest in this case -- since I would effectively become a "lender" if such a scenario were to unfold.
Sorry. Sick of tax code.
"LOL. I assume that would be a tax-deductible expense?"
If she Itemizes deductions...
"LOL. I assume that would be a tax-deductible expense?"
If he Itemizes deductions...
However, assuming the transaction qualifies as capital gain and not salary, and assuming you are unrelated and assuming the interest in the company is not a partnership your example would be capital gain to the extent of the cash received (unless you elect out of installment reporting rules).
You need to research Sec 83b.
Yr One will show a 30,000 payout with 10% of 200,000 as capital or 20,000 capital gain to be taxed. Year 2-5 the payout is 67,500 with the gain of 45,000 recognized. The dirrerence between the capital gain amount and the payout is the return on you capital investment and is not taxable.
www.irs.gov is the place to look for more detail.
Installment Sales If you sold property (other than publicly traded stocks or securities) at a gain and you will receive a payment in a tax year after the year of sale, you generally must report the sale on the installment method unless you elect not to. Use Form 6252 to report the sale on the installment method. Also use Form 6252 to report any payment received in 2006 from a sale made in an earlier year that you reported on the installment method.
To elect out of the installment method, report the full amount of the gain on Schedule D on a timely filed return (including extensions) for the year of the sale. If your original return was filed on time, you may make the election on an amended return filed no later than 6 months after the due date of your return (excluding extensions). Write “Filed pursuant to section 301.9100-2” at the top of the amended return
Good Luck but remember this advice was FREE so you know what its worth!
Bingham McCutchen LLP Circular 230 Notice: To ensure compliance with IRS requirements, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding any federal tax penalties. Any legal advice expressed in this message is being delivered to you solely for your use in connection with the matters addressed herein and may not be relied upon by any other person or entity or used for any other purpose without our prior written consent.
Not my disclaimer. I copied it from an email I got today. ;>)
That is true, but he could just change his name to "Jose."
Changing it to "IRS" is more profitable in the long run.
I don't think Section 83b would apply here, since I would be buying the shares up front, not receiving them from the company as part of my compensation.
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