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Hello and thank you for your question.
The starting point is to determine the fair value of the stock. If you were to sell this to a third party for cash up front, what would the price be? That is the sale price of the stock and a note payable from your son to you should be drawn up in the year of the sale. Gain or loss should be calculated accordingly, noting if you take back a note and have a gain you can use the installment method. If using the installment method, interest should also be calculated each year.
That said, I realize you want to do 5% of sales. That is fine, but the difference between what you receive (or do not receive) and the payments you should receive based on the note payable is going to be a gift.
1) The fair value of the stock is $100,000 so you sell the stock to your son for that amount as you do not intend to gift it initially.
2) Your basis in the stock is $50,000, meaning that for each $1 you receive $0.50 is gain.
3) You take a note from your son to pay for the stock at 5% interest.
4) Per your agreement, you have your son pay you 5% of sales with a maximum loan period of twenty years (ie... state in your loan that after 20 years any unpaid principal balance is immediately due and payable).
5) In year one you receive $5,000.
6) In year two you receive $10,000.
7) In years three through twenty you receive $85,000 in principal payments plus interest.
8) Your son does not pay anything other than the 5% of sales for twenty years.
1) In year one the entire $5,000 payment is interest revenue given the 5% interest rate and after year one the principal balance of the note remains $100,000.
2) In year two you receive $10,000, half of which is principal bringing the note balance down to $95,000 and half of which is again interest revenue to you. At this point, you would recognize gain of $2,500 having received $5,000 principal payments using the installment method.
3) After twenty years the balance of the note is $10,000 (this is the $95,000 balance after year two less the $85,000 in principal payments received during years three through twenty). If your son is not going to pay you the final $10,000 that is due and payable, it is a gift from you to him.
I hope this is helpful. Thanks again for your question.