Mr. & Mrs. Trucker formed an S Corp in 1994, with 1000 shares of capital stock, established value $1/share, and transferred assets (and related debt) into the corporation worth some $40,000 net. $1000 was credited to capital stock, and $40,000 into excess paid-in capital, as I believe to be totally proper. Immediately, Mr. Trucker was issued 510 shares (51%), Momma Trucker 190 shares, Son Trucker 200 shares, and Daughter Trucker 100 shares.
Over the years the S Corp has grown incredibly. Corporation is now valued at $4 million on 01/01/05, and thus FMV of all these shares has grown exponentially. However, because assets are valued at historical value and have grown, and zero value recorded for goodwill, the "Equity" on the balance sheet is only $300,000.
Also over the years, Daughter Trucker has worked just as hard in the company as anyone else, and the initial issue of only 10% has become a sore spot in various family feuds, because Son Trucker was initially issued 20%. The Son worked fulltime for the corporation, and it was the Daughter's intent to work only part-time, thus that is reason she received only 10%. However, almost immediately Daughter began working full time and has done so ever since.
Daddy and Momma Trucker know virtually nothing about estate planning, and just to create peace and harmony in the family, Momma decides to relinquish 10% of her part, and give it to Daughter Trucker, so Daughter and Son would have same share, 20% each.
At time of giving away these 100 shares to her daughter, FMV of the company is some $4 million, but "book value" is only $300,000. Tax basis of all shares is some $250,000 due to various differences, and Mommas tax basis prior to the gift was $38,000. For purposes of gift tax, is the value of the gift:
a)$30,000? (10% of Book Value)
b)$400,000? (10% of FMV)
c)$25,000 (10% of Tax Basis)
d)$20,000 (10/19 of Momma's tax basis)
Most of the gift taxation I've seen has been at FMV, but I'm wondering if there are exceptions. The situation above is an actual case with one of my customers, except the numbers are conveniently rounded for simplicity. And yes, of course, the family did not consult me before doing this.
Thanks in advance for your help,
Ron Jordan
Over the years the S Corp has grown incredibly. Corporation is now valued at $4 million on 01/01/05, and thus FMV of all these shares has grown exponentially. However, because assets are valued at historical value and have grown, and zero value recorded for goodwill, the "Equity" on the balance sheet is only $300,000.
Also over the years, Daughter Trucker has worked just as hard in the company as anyone else, and the initial issue of only 10% has become a sore spot in various family feuds, because Son Trucker was initially issued 20%. The Son worked fulltime for the corporation, and it was the Daughter's intent to work only part-time, thus that is reason she received only 10%. However, almost immediately Daughter began working full time and has done so ever since.
Daddy and Momma Trucker know virtually nothing about estate planning, and just to create peace and harmony in the family, Momma decides to relinquish 10% of her part, and give it to Daughter Trucker, so Daughter and Son would have same share, 20% each.
At time of giving away these 100 shares to her daughter, FMV of the company is some $4 million, but "book value" is only $300,000. Tax basis of all shares is some $250,000 due to various differences, and Mommas tax basis prior to the gift was $38,000. For purposes of gift tax, is the value of the gift:
a)$30,000? (10% of Book Value)
b)$400,000? (10% of FMV)
c)$25,000 (10% of Tax Basis)
d)$20,000 (10/19 of Momma's tax basis)
Most of the gift taxation I've seen has been at FMV, but I'm wondering if there are exceptions. The situation above is an actual case with one of my customers, except the numbers are conveniently rounded for simplicity. And yes, of course, the family did not consult me before doing this.
Thanks in advance for your help,
Ron Jordan
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