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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22692
Experience:  Taxes, Immigration, Labor Relations
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My company is selling our division to a PE firm and the management

Resolved Question:

My company is selling our division to a PE firm and the management group is investing a sum of money in the deal. We are getting our equity from our parent company as a non cash bonus to be invested as equity in the new PE firm. I have been told that this non cash bonus is not taxable until we cash out from the PE firm. Does this sound correct?
Submitted: 3 years ago.
Category: Tax
Expert:  Lev replied 3 years ago.

LEV :

Hi and welcome to Just Answer!
"non cash bonus" - I am not clear is the bonus is in form of property? If it is non cash - what is it?
Is that a bonus - or it is a loan that you are required to pay back?

Customer:

It is a bonus that would have been cash but is now being given to the new PE firm for B stock within the new company with the PE firm.

LEV :

So - that is a cash bonus which is not paid to you directly, but paid to the third party per your direction and on your behalf - correct?

Customer:

yes

LEV :

Who will own shares that will be issed - you or your employer?

Customer:

They will be owned by the employeer (Ibelieve) until we resell the company, The PE firm will hold A stock and the management group will hold B Stock.

LEV :

And you are not obligated to pay back that "bonus" - correct?

Customer:

correct

LEV :

In this case - I do not see any reason why the bonus would be not taxable.
Based on your information - it should be treated as wages or we are missing some important information...

Customer:

We must be missing something important.....

Customer:

Agreement to Amend Amended and Restated Retention Bonus and Severance Agreement


 


In consideration of the agreement by B Corporation with A Partners, Inc. to negotiate exclusively with A partners with respect to the sale of the XYZ business, each of the undersigned employees agrees to amend the terms of the Amended and Restated Bonus and Severance Agreement (Original Agreement) between the undersigned employee and and BCorp each agree to cause the Equity Transaction Bonus to be deleted, and to provide that the Non-Equity Bonus Base Bonus Percentage and the Non-Equity Transaction Enhanced Bonus will be payable at the same rates as the Equity Bonus Base Rate and the Equity Bonus Enhanced Rate in the original agreement; provided that in addition to such amendment, the total of the bonuses payable under all of the Original Agreements will be reduced by $10,000,000. The amendments would be effective only upon the consummation of the transaction with A Partners. The reduction will be as set forth in Schedule A to this Agreement, provided, however, that if any other employee does not sign an amendment agreeing to reduction in such employee’s Original Agreement, the undersigned employee will agree to a further reduction in addition to the reduction set forth on Schedule A, in proportion individual reductions of all employees, so that the total reduction will be $10,000,000.


 


In addition, the definition of Deal Value will include, in addition to the amount of cash consideration, the $10,000,000 aggregate reduction in bonuses.


 


The undersigned employee understands the tax consequences regarding this amendment and agrees that the undersigned employee will be responsible for any taxes payable as a result of the amendments required by this Agreement or otherwise related to the transactions contemplated with A partners.


 


The undersigned employee agrees that they will be bound by this Agreement upon the undersigned employee’s execution of this Agreement and that this Agreement may be signed by and BCorp at any time on or before June 8, 2011, provided that BCorp enters into an exclusivity arrangement with A Partners.


 


IN WITNESS WHEREOF, the undersigned have executed this Agreement as of June 2, 2011.

LEV :

are you a shareholder of your current company?

Customer:

no

LEV :

plz give me some time...

Customer:

no problem!

LEV :

Following are in essence...
1. the Equity Transaction Bonus to be deleted
2. the Non-Equity Bonus Base Bonus Percentage and the Non-Equity Transaction Enhanced Bonus will be payable at the same rates
3. the total of the bonuses payable will be reduced by $10,000,000
4. if you sign an amendment - you will agree to a further reduction regardless if someone would not sign.
5. you understand all tax consequences as a result of the amendments.


I see nothing that convinces me for new bonuses to be treated as not taxable wages.


Also the same rates seems as contradicts with reduction of bonuses…


Also the company clear indicates your tax liability of that scheme.


If the company insists that new Non-Equity bonuses are not taxable – I would expect either the company to take all tax liability (including penalties and representation overhead) if the IRS disagrees with that position or at least having an expert’s confirmation of such position as a part of the agreement.

LEV :

Sorry if you expected a different answer.

Customer:

Is it payable at the time of issue (sale of the company to PE firm) or upon the liquidation of the B shares in the future?

Customer:

Sorry... clarification...


Is it payable at the time of issue (sale of the company to PE firm) or upon the liquidation of the B shares in the future?

Customer:

"it" refers to the tax liability...

LEV :

The bonus is taxable based on the time it is paid.

LEV :

See for reference the Treasury Regulation 1.451-2(a) - http://edocket.access.gpo.gov/cfr_2010/aprqtr/pdf/26cfr1.451-2.pdf


(a) General rule. Income although not actually reduced to a taxpayer’s possession is constructively received by him/her in the taxable year during which it is credited to his/her account, set apart for him/her, or otherwise made available so that he or she may draw upon it at any time, or so that he/she could have drawn upon it during that taxable year if notice intention to withdraw had been given. However, income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.

Customer:

last question, is there a scenerio that the taxes would be "deferred".

Customer:

Ahhhh, so if we have limitations or no access to the money, there would be no taxes until we had control/access?

LEV :

If the money were paid to the third party per your direction and on your behalf - that was your choice - and you do access to the money and use them at your discretion.
If instead of money - you were given stock options that you may not sell - that means "limitations or no access"
Because the agreement you provided does not specify what exactly you are going to receive - there are some room for interpretations. However the agreement is very clear that all tax liabilities will be your (not the company’s) responsibility.

Customer:

Okay. I think need to clarify with my company how the "bonus" will be treated. In any case, I would not have access to the "bonus" until the company is re-sold again by the PE firm. Is this considered constructive receipt of income?

LEV :

That depends on interpretation... As I said - if the money were paid to the third party per your direction and on your behalf - that was your choice - and will be considered as constructive receipt of income.

Customer:

okay. I think I've exhausted this question as it sounds like I need more clarification on my side. You have been very helpful. Thnaks!

LEV :

You are very welcome.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22692
Experience: Taxes, Immigration, Labor Relations
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