Purchase Of Scorp Stock

[BOB W]

I have a personal tax return client that has paid taxes on a stock repurchase agreement. In other words, stock was given to him and the value of the stock was included in his W2. The W2 was grossed up to include most of the federal & state taxes based in the value of the stock included.

My question is, as an "outside" basis I plan on treating his outside basis for the full amount included on his W2 that included the Value of stock and federal and state taxes grossed up . Anybody have a problem with this?

This is an existing business and my client will be a 10% owner.

Example: Stock Value= $100,000
Federal taxes= 30,000
State taxes= 6,000

W2 Total= $136,000 This is the amount I want to include in his "Outside Basis"

[ChEAr$]

I have a personal tax return client that has paid taxes on a stock repurchase agreement. In other words, stock was given to him and the value of the stock was included in his W2. The W2 was grossed up to include most of the federal & state taxes based in the value of the stock included.

My question is, as an "outside" basis I plan on treating his outside basis for the full amount included on his W2 that included the Value of stock and federal and state taxes grossed up . Anybody have a problem with this?

This is an existing business and my client will be a 10% owner.

Example: Stock Value= $100,000
Federal taxes= 30,000
State taxes= 6,000

W2 Total= $136,000 This is the amount I want to include in his "Outside Basis"

The box 1 on the W2 equals 136,000$? Right. that is the basis.

[BOB W]

The box 1 on the W2 equals 136,000$? Right. that is the basis.

Thanks Harlan..............just checking............

[Davc]

Disagree. The basis of the stock is based on it's value. The additional bonus paid is irrelevant to basis.

[BOB W]

Disagree. The basis of the stock is based on it's value. The additional bonus paid is irrelevant to basis.

Thanks Dave for your opinion.... That's what I'm looking for... Just need more opinions.

Please keep them coming..

[BOB W]

Bump up for more opinions........

[Maribeth]

I have a personal tax return client that has paid taxes on a stock repurchase agreement. In other words, stock was given to him and the value of the stock was included in his W2. The W2 was grossed up to include most of the federal & state taxes based in the value of the stock included.

My question is, as an "outside" basis I plan on treating his outside basis for the full amount included on his W2 that included the Value of stock and federal and state taxes grossed up . Anybody have a problem with this?

This is an existing business and my client will be a 10% owner.

Example: Stock Value= $100,000
Federal taxes= 30,000
State taxes= 6,000

W2 Total= $136,000 This is the amount I want to include in his "Outside Basis"

If the $136,000 was included in Box 1 of his W-2, then yes, that is his basis.

Maribeth

[BOB W]

If the $136,000 was included in Box 1 of his W-2, then yes, that is his basis.

Maribeth

I value your opinion and will consider it, although it matches mine as well.

[BOB W]

Tax law has a history of "additional expenses added to cost" in a purchase of an asset, why would this be different?

On the other hand, If stock in a corporation where paid from a personal savings account, one would not include any taxes paid on that income with anything that was purchased going forward.

Does the timing of stock purchase and taxes paid on that same transaction make a difference?

[Gary2]

Tax law has a history of "additional expenses added to cost" in a purchase of an asset, why would this be different?

The "gross up" received wasn't an expense, it was income.

When an employer gives an employee stock, that's wages being paid in property instead of cash. It's taxed at FMV, added to the W-2, and the basis is treated as FMV minus any expenses (i.e. brokerage fees) involved in transferring ownership. The taxpayer never gets any cash as part of the addition to the W-2; all they have to show for it is a stock certificate. It's the virtual equivalent to having the employer pay the employee the cash, then having the employee pay it right back to the employer to buy the stock at a fair price.

When an employer decides to gross up to cover taxes, that's additional cash being paid to the employee. It's a separate transaction, it's real cash that's either included in a paycheck or sent to the various tax collectors as a credit in the employee's "withholding" box. There may or may not be any actual tax due as a result of the stock grant (e.g. unused non-refundable credits). In theory, the employee could wind up spending some of the gross up on a fancy dinner to celebrate the stock grant. In practice, they'll use much of it to pay the extra tax due on the stock grant, an amount they would have had to pay with or without the gross-up. They get a benefit from the gross-up separate from the stock.

I don't see any way to include the gross up as part of the basis.

[BOB W]

The "gross up" received wasn't an expense, it was income.

When an employer gives an employee stock, that's wages being paid in property instead of cash. It's taxed at FMV, added to the W-2, and the basis is treated as FMV minus any expenses (i.e. brokerage fees) involved in transferring ownership. The taxpayer never gets any cash as part of the addition to the W-2; all they have to show for it is a stock certificate. It's the virtual equivalent to having the employer pay the employee the cash, then having the employee pay it right back to the employer to buy the stock at a fair price.

When an employer decides to gross up to cover taxes, that's additional cash being paid to the employee. It's a separate transaction, it's real cash that's either included in a paycheck or sent to the various tax collectors as a credit in the employee's "withholding" box. There may or may not be any actual tax due as a result of the stock grant (e.g. unused non-refundable credits). In theory, the employee could wind up spending some of the gross up on a fancy dinner to celebrate the stock grant. In practice, they'll use much of it to pay the extra tax due on the stock grant, an amount they would have had to pay with or without the gross-up. They get a benefit from the gross-up separate from the stock.

I don't see any way to include the gross up as part of the basis.

Thanks for your input. I am slowly coming around to your way of thinking.

I guess I'll go with it, gross up does not count......... Thanks to everyone who posted on this thread,,,,,,,,,,,,,,,,,,,,,,,,,

[BHoffman]

"Computing Stock Basis
In computing stock basis, the shareholder starts with the initial capital contribution to the S corporation or the initial cost of the stock purchased (the same as a C corporation)."

From here:

http://www.irs.gov/businesses/small/article/0,,id=203101,00.html

[BOB W]

"Computing Stock Basis
In computing stock basis, the shareholder starts with the initial capital contribution to the S corporation or the initial cost of the stock purchased (the same as a C corporation)."

From here:

http://www.irs.gov/businesses/small/...203101,00.html

OK...then here is an additional question.......

When a SCorp shareholder is issued additional shares of stock (that is taxed as income) he automatically owns AAA for his % of ownership. Presumably the price of the stock issued to him is for the total value of the company, which includes AAA.

If that is the case, is the value included in his W2 "outside basis" or not, since he now owns the % of AAA?

[BHoffman]

OK...then here is an additional question.......

When a SCorp shareholder is issued additional shares of stock (that is taxed as income) he automatically owns AAA for his % of ownership. Presumably the price of the stock issued to him is for the total value of the company, which includes AAA.

If that is the case, is the value included in his W2 "outside basis" or not, since he now owns the % of AAA?

I'm thinking that would depend on whether he purchased the stock from the Corporation, or did he purchase the stock from the existing shareholders?

AAA is an account of the corporation, and not of the shareholders.

[BOB W]

I'm thinking that would depend on whether he purchased the stock from the Corporation, or did he purchase the stock from the existing shareholders?

AAA is an account of the corporation, and not of the shareholders.

It was classified as a "Repurchase of stock", whatever that means.

Upon dissolution each shareholder will get his % of the AAA, so while it belongs to the corp it can be distributed to each shareholder without any taxation or used as an "inside basis" upon sale. AAA is money that taxes have been paid and it is a tax free distribution. So I'm not so sure in saying it belongs to the Corporation.