Taxpayer is shareholder of a ESOP C-corporation and he is wanting out of corporation. The corporation came up with a buy-out plan of $500,000 under an installment obligation of $12,000 per month until the $500,000 has been met. Taxpayer and his attorney met with corporation to go over the agreement. Taxpayer advised me that the $12,000 per month is non-taxable. Isn't the only way the $500,000 would be non-taxable is if he had a basis in his share of stock of $500,000? The corporation was formerly a S-Corp and changed over to the ESOP corporation in 2004. I know he did not have a basis of $500,000 so trying to determine another reason why attorney advised him that it would be non-taxable. I am not too knowledgeable with ESOP's so didn't know if that played into it. Any ideas??
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Sec 1042
I have not been involved with one for a number of years but there is potential tax deferred treatment of reinvested proceeds from shares sold to an ESOP. I believe it is Code Sec 1042. The one thing I do recall is there are some strict eligability requirements to qualify under Sec 1042. I am sure if you google Sec 1042 you will find more information than you ever wished to know.Last edited by jimmcg; 05-03-2007, 01:30 PM. -
Not quite as I recall. In S1042 you are allowed to have constructive use of the cash proceeds for a limited period of time before reinvesting in C Corp stock. This would diferentiate it from S1031 constructive receipt rules. However this is purely from memory and it has been a few years, best to research it first and get the real facts.Comment
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Buy-Out
I did a google search earlier and found where there were some tax advantages when a corporation changed to an ESOP. But the company already change to the ESOP in 2004 and now the shareholder is wanting out. In the research I found, the tax advantages were at the point of conversion from a closely-held corporation to an ESOP. I couldn't find anything in the research that showed tax advantages years after the conversiion. So, am I correct in my thinking that anything over the shareholder's basis in his shares of stock would be taxable?? Not sure why an attorney would be telling him not taxable.Comment
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I am probably thinking of the original transfer of shares from the individual to the ESOP. As I said it has been a while since I worked with it. In your present situation I would simply ask the attorney for a Code cite for his conclusion that it would not be taxable.Comment
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Why not
have the client ask the attorney to put his recommendation that the income is not taxable in writing? I'm betting the attorney would refuse to do that, which might help the client understand the difference between your advice and the attorney's."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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Buy-Out
I did a google search earlier and found where there were some tax advantages when a corporation changed to an ESOP. But the company already change to the ESOP in 2004 and now the shareholder is wanting out. In the research I found, the tax advantages were at the point of conversion from a closely-held corporation to an ESOP. I couldn't find anything in the research that showed tax advantages years after the conversiion. So, am I correct in my thinking that anything over the shareholder's basis in his shares of stock would be taxable?? I was told setting up some kind of trust. But then I would think even if a trust is set up, when money is taken out of trust, a portion of the distribution would be taxable.... I know I am not giving enough information for you to truly answer my question, but, just trying to get some general information on the sell of stock by a shareholder and in what instances would the proceeds not be taxable.Comment
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