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socrateaser
socrateaser, Lawyer
Category: Tax
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Experience:  Retired (mostly)
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I have a client that is an S Corporation, two shareholders,

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I have a client that is an S Corporation, two shareholders, 40% and 60%. One is more active in the business, manages the business, receives a salary, the other is more of an investor to help him get started. They would like to annually adjust the percentage ownership in the business, either by transfer of shares, or some other way. They are wondering if there is a way to do this without creating income or compensation for the shareholder who will receive the shares or the increased percentage ownership? Also, they want to do this retroactively but is there any way to do that for 2011? No 83b election was filed last year.
Submitted: 4 years ago.
Category: Tax
Expert:  socrateaser replied 4 years ago.
The only way that I can conceive of this working would be for the shareholder relinquishing shares to simply gift them to the other shareholder.

For this type of gift to be nontaxable, the transfer must be based upon love, admiration, respect, or other like-minded charitable motives. In short, the gift can't have any relationship to the business.

The IRS can challenge this type of nontaxable gift, but, if the shareholders have something other than a business relationship, or are willing to testify to such a relationship, if it becomes necessary, then the case law will confirm the gift as a valid nontaxable event.

See Commissioner v. Duberstein, 363 US 278 (U.S. Sup. Ct. 1960).

Hope this helps.

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Customer: replied 4 years ago.

If the other owner does not want to deem it a gift, are the only options then to treat as a stock dividend or a distribution of stock in lieu of compensation? If a stock dividend can it be issued to one shareholder only? Or do they both have to receive the stock dividend? Also, for the shares that were issued in 2011 is it too late to file an 83b election?

Expert:  socrateaser replied 4 years ago.
If the other owner does not want to deem it a gift, are the only options then to treat as a stock dividend or a distribution of stock in lieu of compensation?

A: A dividend would have to issue to every shareholder, and since an S Corp cannot issue more than one class of stock, there is no way to distribute a dividend to only one shareholder.

So, the stock would have to be in lieu of compensation.

If a stock dividend can it be issued to one shareholder only?

A: No. See above.

Or do they both have to receive the stock dividend?

A: Yes. See above.

Also, for the shares that were issued in 2011 is it too late to file an 83b election?

A: 83(b) election must be no later than 30 days after purchase date (no exceptions). So, this is a non-starter.

Hope this helps.

NOTICE: My goal here is to educate the public about the law. Please help me in this effort by clicking Accept (or, click on one of the happy smiley faces/stars/etc., if applicable) for my Answer to your Question. If you have a subscription account, clicking Accept does not create any additional charge. It merely gets me credit for my Answer.

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