Purchase Of Scorp Stock

[BOB W]

Harlan, thanks for the bump up.

[ChEAr$]

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

Just now reading this thread again. Bob is talking about outside basis of a non publicly held corporation, thus market value doesn't matter. Probably is no such thing for closely held stock.

[Maribeth]

Okay, I get it. I went back and looked at one of my engineers stock option. Indeed, the amount on his W-2 was only the gain and did not include taxes. I think I understand.

Thank you so much for your explanation.

Maribeth

[Gary2]

I hear what you all are saying but I would still take the $136,000 as basis. That is the amount that he took into income in order to acquire the stock, that is the amount that he was taxed on and being taxed on something creates basis.

If you look on a W-2 that has been prepared for an employee with a stock option. The paperwork that the employee receives has the gross amount on it, less the taxes, less the payment.

Then on the W-2, the amount listed under -- oh darm, is it code V -- will have the gross amount.

Code V is for non-statutory stock options only, usually creating a taxable event on exercise. It's not a gross up by itself; it's the fair market value of the options (or often stock, if the option value can't be determined), minus out of pocket exercise costs. I've never seen a case of these where there was a gross up; usually they forcibly sell some of the stock to pay the taxes.

What that means is that you can't apply the full amount of the code V increment to the stock retained by the recipient. You have to compute the per share basis, use up some of it on the Schedule D for the stock that was sold, and only apply the remainder to the stock that was actually kept.

If the company handled the transaction themselves, without going through a broker, there may not be a 1099-B for the sale, in which case the IRS will never know about it, and you'll never get dinged for the missing Schedule D. And since the IRS can't track basis, they won't be able to correct you when, in some years, the stock that was kept is sold and you use the wrong basis. But it's still wrong.

[Maribeth]

One other thing - I'd probably be inclined to use his NET paycheck as the basis rather than his GROSS because the stock would then have been purchased with before-tax dollars and that doesn't seem right.

I hear what you all are saying but I would still take the $136,000 as basis. That is the amount that he took into income in order to acquire the stock, that is the amount that he was taxed on and being taxed on something creates basis.

If you look on a W-2 that has been prepared for an employee with a stock option. The paperwork that the employee receives has the gross amount on it, less the taxes, less the payment.

Then on the W-2, the amount listed under -- oh darm, is it code V -- will have the gross amount.

Maribeth

[BHoffman]

One other thing - I'd probably be inclined to use his NET paycheck as the basis rather than his GROSS because the stock would then have been purchased with before-tax dollars and that doesn't seem right.

[BHoffman]

There is a difference between AAA and shareholder basis. Here is a pretty good example of why AAA does not always equal the shareholder basis:

http://www.reallifeaccounting.com/pubs/Article_Theme_S_Corporations.pdf

Ed Zollars is very reliable. Here he discusses AAA and offers the cites:

http://www.edzollars.com/2008-07-07_AAA.pdf

If an SCorp has no prior CCorp accumulated earnings and profits (it's been an S since day one), the the AAA account is basically irrelevant. It's the shareholder stock basis that determines the amount of available tax free distribution, not the AAA. You cannot reliably reconcile the total shareholder basis to the AAA account.

[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.

[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]

"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]

"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]

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,,,,,,,,,,,,,,,,,,,,,,,,,

[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]

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?

[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.