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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10172
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I am retired and receiving Social Security. An old company

Customer Question

I am retired and receiving Social Security. An old company that I worked for was in trouble and was re-purchased by the original founder who invited me back to participate as an owner. Rather than buy a lump of shares, it was agreed that I would work for the company for a year but would not receive any salary. Instead I would receive at the end of this year my salary ($100,000.00) as a percentage of shares in the company. I do not intend to cash-out these shares for a number of years. Will I be liable for any taxes on these shares this year, or will taxes only be applied once I cash-out the shares. The founder and primary shareholder has said that he could "gift" the shares to me and that way I would not be liable for tax, but he would give me a lesser percentage of shares than my full salary is worth, on the basis that I would not have a tax liability. Currently there is no dividend payable to share-holders.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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Yes, once the shares are owned by you, the value of those shares at the time they are re-titled to you become compensation.

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And, so sorry, that is considered taxable income. (Here's the IRS guidance on this: http://www.irs.gov/publications/p525/ar02.html)

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Once you cash out (sell the shares) that would then be a capital gain or loss (depending on the price/value when they were first given and the sale price)

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Now, he COULD get the shares to you under a stock option plan or restricted stock plan, and in THIS way, the shares would not vest until sometime in the future and are only income at THAT point in time.

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Finally, again, sorry to be the messenger here, but he is wrong that he has the ability to gift the shares to you. If any work is done by you this cannot be considered a gift.

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The IRS, and the common law, definition of a gift is something given with out the expectation of anything in exchange. (You might want to read the Duberstein case, the seminal tax law case where this was settled in the law). Even property of any kind (money is property) given after RETIREMENT to an ex-employee is considered income, rather than a gift.

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Let me know if you have questions

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Lane

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Expert:  Lane replied 1 year ago.

Again, let me know if you have questions.

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I hope you'll rate me positively, using the stars on your screen … (that's the only way we get credit for the work here) … based on thoroughness and accuracy, rather than any good news/bad news content ... Hopefully, having all the facts will help you "see around some corners."

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Lane

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