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Business Law & Order:
Tax Planning
January 20, 2014
Business Law & Order – Tax
Planning
January 20, 2014
Presenters: Cory J. Thompson, CFA
Managing Director

Investment Banking

Valuation & Financial Opinions

Dispute Advisory & Forensic Services
Disclaimer
This presentation is intended for general information purposes only and
is not intended to provide, and should not be used in lieu
of, financial, accounting, legal, or other professional advice. Stout
Risius Ross, Inc. assumes no liability for the use of the information
herein and the audience is encouraged to seek professional assistance
with regard to specific matters.
The opinions expressed during this presentation are solely those of the
presenter and do not necessarily reflect the views of Stout Risius
Ross, Inc.

3
Equity Incentive Strategies
What are Share-Based Payment Awards
 Equity shares
 Share options
 Share appreciation rights
 Restricted stock
 Other equity instruments (e.g., performance units)

 Granted in exchange for services

4
Equity Incentive Strategies
What are Share-Based Payment Awards
 Who receives them and why?
– Executives and other company employees are granted share-based
awards as a component of a total compensation package
 Received as one-time grants or annual grants
 Can be structured to vest upon certain timing, performance, or market

conditions
 This form of variable compensation may fit most strategically with the

interests of a company’s shareholders (i.e., pay can be tied to
performance)

5
Equity Incentive Strategies
Valuation Implications
 Tax reporting: IRC 409A (Fair Market Value)
 Financial reporting: FASB ASC 718 (Fair Value)
 Other Considerations:
– Dilutive impact to remaining stakeholders
– Change of control issues pertaining to NOLs (more of an issue for new
capital raises)

6
Valuation Methodologies
Enterprise Value Model Selection Considerations
 Income Approach
 Market Approach

 Asset Approach

7
Valuation Methodologies
Equity Value Allocation Model Selection Considerations
 Current Value Method
– Company sold on valuation date
– Proceeds distributed according to investors’ liquidation rights and
preferences
 Probability Weighted Expected Return Method (“PWERM”)
– Probability weighted of future likely outcomes
– IPO, sale, status quo, liquidation

 Option Pricing Method (“OPM”)
– Treats securities as call options on the company’s equity value
 Hybrid Method – Combination of the above approaches

8
Early Stage Company Valuation Challenges
 Must consider the impact of negative cash flows that may occur in the

early years
– Value dependent on accuracy of prospective financial information
 High chance of failure of early stage, high growth companies
– Discount rate selection is key
 Analysis of prior capital raises is critical
– “Backsolve Method” – employ prior capital raises to solve for indication
total equity value
 Difficult to find comparable companies
 Valuing a company for what it wants to be – not what it is today

9
Net Investment Income Tax
Additional Medicare Tax
Annette Tenerelli-Lemke, CPA, MST
Partner
Plante Moran, PLLC

10
Pat i ent Pr ot ect i on &
A f or dabl e C e A
f
ar
ct
• Items to cover:
I. Additional Medicare Tax
II. Net Investment Income Tax (NII)
III. How much NII gets surtaxed?
IV. Examples
V. Planning ideas - Individuals

11
C par e 2012 t o 2013
om
2012 Tax Brackets by “Taxable” Income

2013 Tax Brackets by “Taxable” Income

Rate

MFJ

Single

Rate

MFJ

Single

10%

0-17,400

0-8,700

10%

0-17,850

0-8,925

15%

17,400-70,700

8,700-35,350

15%

17,850-72,500

8,925-36,250

25%

70,700-142,700

35,350-85,650

25%

72,500-146,400

36,250-87,850

28%

142,700-217,450

85,650-178,650

28%

146,400-223,050

87,850-183,250

33%

217,450-388,350

178,650-388,350

33%

223,050-398,350

183,250-398,350

35%

Over 388,350

Over 388,350

35%

398,350-450,000

398,350-400,000

39.6%

Over 450,000

Over 400,000

12
A t i onal M car e Tax
ddi
edi
• 0.9% HI (Hospital Insurance)Tax on earned income
• total wages and other self employment income of
taxpayer and spouse in excess of:
– $250,000 MFJ/ $125,000 MFS
• – $200,000 Single and HOH
• Employee contribution 2.35%
• Employer matching 1.45%

13
A t i onal M car e Tax
ddi
edi
• Employer responsible to withhold/pay on wages
in excess of $200,000/250,000
• Additional tax is not deductible

14
N I nvest m
et
ent I ncom Tax
e
( 1411)
• Enacted as part of the Health Care and Education
Reconciliation Act of 2010
• Intended to help fund health care reform
• Effective 1/1/13
• 3.8% tax on certain “net investment income”
• This new tax will apply to individuals, estates and
trusts

15
N I nvest m
et
ent Tax
3.8% tax imposed on lesser of:
1) Net Investment Income (NII); or
2) Excess of AGI over $250,000/$200,000

Net Investment Income:
Category 1: Interest, Dividends, Annuities, Royalties and
Rents
Category 2: Passive income from Trades or Businesses
Category 3: Net gain (but not loss) from Dispositions of other
than Active Trade or Business Property
16
N I nvest m
et
ent Tax cont .:
Certain types of income are excluded from NII
1. Earned income including wages and SE income
2. Active trade or business income
3. Distributions from qualified retirement plans and IRAs
4. Interest on municipal bonds
5. Excludable portion of gain on primary residence sale
6. Gain on sale of partnership or S corporation interests
• Note that while earned income, active trade or business
income, retirement and IRA distributions and active gains are
excluded from NII, they are INCLUDED in AGI and thus increase
the likelihood that the tax will apply.

17
Examples
• Example 1:
X and Y, married filing jointly, together have income of
$500,000, all of which is salary. The surtax will not apply
because they have no net investment income.

• Example 2:
X and Y, married filing jointly, have $500,000 of salary and
$50,000 of net investment income. The surtax applies to
the $50,000 of net investment income because it is less
than the excess of MAGI over the threshold (i.e., $550,000
– $250,000 = $300,000).
18
Examples
• Example 3:
X, a single filer, has $275,000 of net investment income and no other income.
The surtax applies only to the $75,000 that exceeds the $200,000 threshold for
single filers.

• Example 4:
X and Y, married filing jointly, have $225,000 of salary income and $125,000 of
net investment income. The surtax applies to $100,000, the difference
between their threshold ($250,000) and MAGI ($350,000), which is less than
their net investment income of $125,000.

• Example 5:
X, a single filer, has $500,000 of interest and a $500,000 net capital loss. The
surtax applies to $297,000, $500,000 less $200,000 threshold and the $3,000
maximum capital loss that may offset ordinary income

19
N I – C egor y 2 I ncom
I
at
e
Category 2 –
Gross income from passive activities and from trade or
business of trading financial instruments

• Example:

a pass-thru entity in which you do not materially

participate

20
Passive Activity
Importance of Passive Activity Rules - Material
Participation Generally
The taxpayer works 500 hours or more during the year in the
activity;
• The taxpayer does substantially all the work in the activity;
• The taxpayer works more than 100 hours during the year in
the activity and no one else works more than the taxpayer;

21
• The activity is a significant participation activity (a “Significant
Participation Activity”) because the taxpayer works more than 100
hours in the activity, and the sum of the taxpayer’s time spent on
Significant Participation Activities exceeds 500 hours that year;
• The taxpayer materially participated in the activity in any 5 of the
prior 10 years;
• The activity is a personal service activity and the taxpayer materially
participated in that activity in any 3 prior years; or
• Based on all of the facts and circumstances, the taxpayer
participates in the activity on a regular, continuous, and substantial
basis during such year. However, this test only applies if the
taxpayer works at least 100 hours in the activity, no one else works
more hours than the taxpayer in the activity, and no one else
receives compensation for managing the activity.
22
Exam e:
pl
Joint w/AGI Over Threshold and Passive K-1 Passthrough
$

$
$
$
$

240,000
25,000
2,500,000
2,765,000
-250,000
2,515,000
2,525,000
2,515,000
x 3.8%
95,570

IRA distribution
Interest and dividends (NII)
K-1 passive activity
Modified AGI
Joint Threshold
MAGI less threshold
NII
Lesser of NII or MAGI – threshold
Medicare Investment Tax
HI tax increase

23
Joint w/AGI Over Threshold and Active K-1 Passthrough
$

$
$
$
$

240,000
25,000
2,500,000
2,765,000
-250,000
2,515,000
25,000
25,000
x 3.8%
950

IRA distribution
Interest and dividends (NII)
K-1 Active trade or business
Modified AGI
Joint Threshold
MAGI less threshold
NII
Lesser of NII or MAGI – threshold
Medicare Investment Tax
HI tax increase

24
D
educt i ons agai nst N I
I
• Deductions are allowed against Net Investment
Income to the extent they are allowed for income tax
purposes.
• – 2% misc itemized deductions
• Investment interest expense
• Investment advisory & brokerage fees
• Tax prep fees, fiduciary expenses
• State and local income taxes
25
Pl anni ng – m ni m zi ng “N
i
i
et
I nvest m
ent I ncom
e”
Tax Exempt Bonds
That will depend on a comparison of the after-tax yields of
both. The after-tax yields of taxable bonds will now be
affected by this additional 3.8% tax.

Minimize dividends
Dividends will now be taxed more heavily. This could
encourage a preference for investments that generate
capital appreciation. This could include non-dividend, or
low dividend, paying stocks and non-principal protected
structured notes.
26
Pl anni ng – M ni m zi ng N I
i
i
I
Increase participation to make passive income
non-passive.
Gross income from a passive activity will be subject to the
3.8% tax. If your level of activity could be increased so that
the business income becomes not passive, that would
avoid the tax.

Review how your passive activities are aggregated.
In determining whether you are active or passive in an
“activity,” there are rules governing what constitutes an
“activity” and how different activities might be combined
and considered one single “activity.”
27
Pl anni ng – M ni m zi ng N I
i
i
I
• Consider a charitable remainder trust (CRT)
• Maximize deductible contributions to qualified
retirement plans (e.g. traditional IRA’s and
401(k)s)
• Convert LLC to S corp (careful planning required)

28
Thank-you!
Annette Tenerelli-Lemke
Partner
1000 Oakbrook Dr. Suite 400
Ann Arbor, MI 48104
Direct Dial: 734-302-6407 Mobile: 248-420-3310 Fax: 248-233-8687
Plante & Moran | Twitter | Facebook | LinkedIn
Celebrating 16 years as one of FORTUNE magazine's “100 Best Companies to Work For”

29
Tax Efficient Exits:
Two Opportunities
for C Corporation Sellers
Ann Arbor SPARK
January 20, 2014

Marko J. Belej
mbelej@jaffelaw.com
30
Generally, C corporations are
undesirable in an exit
Tax consequences with a C corporation seller/target
• Stock sale:
- Shareholders only subject to tax on gain from sale of stock
- But purchaser does not get stepped up tax basis
• Asset sale:
- Purchaser does get stepped up tax basis.
- But double tax- C corporation taxed on sales gain and
shareholders taxed on distribution of proceeds
Contrast with an LLC or S corporation:
• Members/shareholders only subject to tax on gain
• And purchaser gets stepped up tax basis
31
Opportunity #1: Code Section 1202
Under Code Section 1202, a seller of C corporation stock may
exclude a portion of the gain
What portion? > Depends on when the stock was acquired
•100%, if acquired after Sept 27, 2010 and before Jan 1, 2014
•75%, if acquired after Feb 17, 2009 and before Sept 28, 2010
•50%, if acquired before Feb 18, 2009, or after Dec 31, 2013
Limitation: Generally, shareholder can’t exclude more than $10
million from the sale of stock of any issuer

Also, the exclusion is an AMT preference amount

32
Opportunity #1: Code Section 1202 (cont.)
Requirements for Code Section 1202 exclusion
•Shareholder has held stock for more than 5 years

•Stock is “qualified small business stock”
-

-

Stock of a C corporation
Shareholder acquires stock at original issue in exchange for money or
property or as compensation for services
Corporation meets active business requirement- generally that 80% (by
value) of assets used in a “qualified trade or business” (certain service and
financial businesses, among others, are excluded) during holding period
Corporation is qualified small business – amount of cash and tax basis of
assets held by corporation not more than $50 million at stock’s issuance;
certain reporting required

•Additional rules for stock held through pass-through entities and
for certain tax-free and other transfers of stock
33
Opportunity #2: Personal Goodwill
Theory: One or more shareholders personally own goodwill or
similar asset used in business

Structure 1 (Seller favorable): Purchaser acquires personal
goodwill and corporation stock from shareholder
• Only shareholder recognizes gain from sale
• Purchaser obtains stepped up basis in personal goodwill
Structure 2 (Purchaser favorable): Purchaser acquires personal
goodwill from shareholder and assets from corporation
• Shareholder recognizes gain from goodwill sale
• Corporation recognizes (minimized) gain from sale of assets
• Purchaser obtains stepped up basis in all assets

34
Opportunity #2: Personal Goodwill (cont.)
Limitations:
• Will not work if shareholder/employee has previously executed
an employment/noncompete agreement with corporation
• May be difficult to get purchase consideration to shareholders
who are not active in business
• Identifying and transferring personal goodwill must be done
carefully
• Valuation

35
Next Business Law & Order Program:
Monday, March 17th
Basics of Formation
Office hours included

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Business Law & Order - January 20, 2014 - Tax Planning

  • 1. Business Law & Order: Tax Planning January 20, 2014
  • 2. Business Law & Order – Tax Planning January 20, 2014 Presenters: Cory J. Thompson, CFA Managing Director Investment Banking Valuation & Financial Opinions Dispute Advisory & Forensic Services
  • 3. Disclaimer This presentation is intended for general information purposes only and is not intended to provide, and should not be used in lieu of, financial, accounting, legal, or other professional advice. Stout Risius Ross, Inc. assumes no liability for the use of the information herein and the audience is encouraged to seek professional assistance with regard to specific matters. The opinions expressed during this presentation are solely those of the presenter and do not necessarily reflect the views of Stout Risius Ross, Inc. 3
  • 4. Equity Incentive Strategies What are Share-Based Payment Awards  Equity shares  Share options  Share appreciation rights  Restricted stock  Other equity instruments (e.g., performance units)  Granted in exchange for services 4
  • 5. Equity Incentive Strategies What are Share-Based Payment Awards  Who receives them and why? – Executives and other company employees are granted share-based awards as a component of a total compensation package  Received as one-time grants or annual grants  Can be structured to vest upon certain timing, performance, or market conditions  This form of variable compensation may fit most strategically with the interests of a company’s shareholders (i.e., pay can be tied to performance) 5
  • 6. Equity Incentive Strategies Valuation Implications  Tax reporting: IRC 409A (Fair Market Value)  Financial reporting: FASB ASC 718 (Fair Value)  Other Considerations: – Dilutive impact to remaining stakeholders – Change of control issues pertaining to NOLs (more of an issue for new capital raises) 6
  • 7. Valuation Methodologies Enterprise Value Model Selection Considerations  Income Approach  Market Approach  Asset Approach 7
  • 8. Valuation Methodologies Equity Value Allocation Model Selection Considerations  Current Value Method – Company sold on valuation date – Proceeds distributed according to investors’ liquidation rights and preferences  Probability Weighted Expected Return Method (“PWERM”) – Probability weighted of future likely outcomes – IPO, sale, status quo, liquidation  Option Pricing Method (“OPM”) – Treats securities as call options on the company’s equity value  Hybrid Method – Combination of the above approaches 8
  • 9. Early Stage Company Valuation Challenges  Must consider the impact of negative cash flows that may occur in the early years – Value dependent on accuracy of prospective financial information  High chance of failure of early stage, high growth companies – Discount rate selection is key  Analysis of prior capital raises is critical – “Backsolve Method” – employ prior capital raises to solve for indication total equity value  Difficult to find comparable companies  Valuing a company for what it wants to be – not what it is today 9
  • 10. Net Investment Income Tax Additional Medicare Tax Annette Tenerelli-Lemke, CPA, MST Partner Plante Moran, PLLC 10
  • 11. Pat i ent Pr ot ect i on & A f or dabl e C e A f ar ct • Items to cover: I. Additional Medicare Tax II. Net Investment Income Tax (NII) III. How much NII gets surtaxed? IV. Examples V. Planning ideas - Individuals 11
  • 12. C par e 2012 t o 2013 om 2012 Tax Brackets by “Taxable” Income 2013 Tax Brackets by “Taxable” Income Rate MFJ Single Rate MFJ Single 10% 0-17,400 0-8,700 10% 0-17,850 0-8,925 15% 17,400-70,700 8,700-35,350 15% 17,850-72,500 8,925-36,250 25% 70,700-142,700 35,350-85,650 25% 72,500-146,400 36,250-87,850 28% 142,700-217,450 85,650-178,650 28% 146,400-223,050 87,850-183,250 33% 217,450-388,350 178,650-388,350 33% 223,050-398,350 183,250-398,350 35% Over 388,350 Over 388,350 35% 398,350-450,000 398,350-400,000 39.6% Over 450,000 Over 400,000 12
  • 13. A t i onal M car e Tax ddi edi • 0.9% HI (Hospital Insurance)Tax on earned income • total wages and other self employment income of taxpayer and spouse in excess of: – $250,000 MFJ/ $125,000 MFS • – $200,000 Single and HOH • Employee contribution 2.35% • Employer matching 1.45% 13
  • 14. A t i onal M car e Tax ddi edi • Employer responsible to withhold/pay on wages in excess of $200,000/250,000 • Additional tax is not deductible 14
  • 15. N I nvest m et ent I ncom Tax e ( 1411) • Enacted as part of the Health Care and Education Reconciliation Act of 2010 • Intended to help fund health care reform • Effective 1/1/13 • 3.8% tax on certain “net investment income” • This new tax will apply to individuals, estates and trusts 15
  • 16. N I nvest m et ent Tax 3.8% tax imposed on lesser of: 1) Net Investment Income (NII); or 2) Excess of AGI over $250,000/$200,000 Net Investment Income: Category 1: Interest, Dividends, Annuities, Royalties and Rents Category 2: Passive income from Trades or Businesses Category 3: Net gain (but not loss) from Dispositions of other than Active Trade or Business Property 16
  • 17. N I nvest m et ent Tax cont .: Certain types of income are excluded from NII 1. Earned income including wages and SE income 2. Active trade or business income 3. Distributions from qualified retirement plans and IRAs 4. Interest on municipal bonds 5. Excludable portion of gain on primary residence sale 6. Gain on sale of partnership or S corporation interests • Note that while earned income, active trade or business income, retirement and IRA distributions and active gains are excluded from NII, they are INCLUDED in AGI and thus increase the likelihood that the tax will apply. 17
  • 18. Examples • Example 1: X and Y, married filing jointly, together have income of $500,000, all of which is salary. The surtax will not apply because they have no net investment income. • Example 2: X and Y, married filing jointly, have $500,000 of salary and $50,000 of net investment income. The surtax applies to the $50,000 of net investment income because it is less than the excess of MAGI over the threshold (i.e., $550,000 – $250,000 = $300,000). 18
  • 19. Examples • Example 3: X, a single filer, has $275,000 of net investment income and no other income. The surtax applies only to the $75,000 that exceeds the $200,000 threshold for single filers. • Example 4: X and Y, married filing jointly, have $225,000 of salary income and $125,000 of net investment income. The surtax applies to $100,000, the difference between their threshold ($250,000) and MAGI ($350,000), which is less than their net investment income of $125,000. • Example 5: X, a single filer, has $500,000 of interest and a $500,000 net capital loss. The surtax applies to $297,000, $500,000 less $200,000 threshold and the $3,000 maximum capital loss that may offset ordinary income 19
  • 20. N I – C egor y 2 I ncom I at e Category 2 – Gross income from passive activities and from trade or business of trading financial instruments • Example: a pass-thru entity in which you do not materially participate 20
  • 21. Passive Activity Importance of Passive Activity Rules - Material Participation Generally The taxpayer works 500 hours or more during the year in the activity; • The taxpayer does substantially all the work in the activity; • The taxpayer works more than 100 hours during the year in the activity and no one else works more than the taxpayer; 21
  • 22. • The activity is a significant participation activity (a “Significant Participation Activity”) because the taxpayer works more than 100 hours in the activity, and the sum of the taxpayer’s time spent on Significant Participation Activities exceeds 500 hours that year; • The taxpayer materially participated in the activity in any 5 of the prior 10 years; • The activity is a personal service activity and the taxpayer materially participated in that activity in any 3 prior years; or • Based on all of the facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial basis during such year. However, this test only applies if the taxpayer works at least 100 hours in the activity, no one else works more hours than the taxpayer in the activity, and no one else receives compensation for managing the activity. 22
  • 23. Exam e: pl Joint w/AGI Over Threshold and Passive K-1 Passthrough $ $ $ $ $ 240,000 25,000 2,500,000 2,765,000 -250,000 2,515,000 2,525,000 2,515,000 x 3.8% 95,570 IRA distribution Interest and dividends (NII) K-1 passive activity Modified AGI Joint Threshold MAGI less threshold NII Lesser of NII or MAGI – threshold Medicare Investment Tax HI tax increase 23
  • 24. Joint w/AGI Over Threshold and Active K-1 Passthrough $ $ $ $ $ 240,000 25,000 2,500,000 2,765,000 -250,000 2,515,000 25,000 25,000 x 3.8% 950 IRA distribution Interest and dividends (NII) K-1 Active trade or business Modified AGI Joint Threshold MAGI less threshold NII Lesser of NII or MAGI – threshold Medicare Investment Tax HI tax increase 24
  • 25. D educt i ons agai nst N I I • Deductions are allowed against Net Investment Income to the extent they are allowed for income tax purposes. • – 2% misc itemized deductions • Investment interest expense • Investment advisory & brokerage fees • Tax prep fees, fiduciary expenses • State and local income taxes 25
  • 26. Pl anni ng – m ni m zi ng “N i i et I nvest m ent I ncom e” Tax Exempt Bonds That will depend on a comparison of the after-tax yields of both. The after-tax yields of taxable bonds will now be affected by this additional 3.8% tax. Minimize dividends Dividends will now be taxed more heavily. This could encourage a preference for investments that generate capital appreciation. This could include non-dividend, or low dividend, paying stocks and non-principal protected structured notes. 26
  • 27. Pl anni ng – M ni m zi ng N I i i I Increase participation to make passive income non-passive. Gross income from a passive activity will be subject to the 3.8% tax. If your level of activity could be increased so that the business income becomes not passive, that would avoid the tax. Review how your passive activities are aggregated. In determining whether you are active or passive in an “activity,” there are rules governing what constitutes an “activity” and how different activities might be combined and considered one single “activity.” 27
  • 28. Pl anni ng – M ni m zi ng N I i i I • Consider a charitable remainder trust (CRT) • Maximize deductible contributions to qualified retirement plans (e.g. traditional IRA’s and 401(k)s) • Convert LLC to S corp (careful planning required) 28
  • 29. Thank-you! Annette Tenerelli-Lemke Partner 1000 Oakbrook Dr. Suite 400 Ann Arbor, MI 48104 Direct Dial: 734-302-6407 Mobile: 248-420-3310 Fax: 248-233-8687 Plante & Moran | Twitter | Facebook | LinkedIn Celebrating 16 years as one of FORTUNE magazine's “100 Best Companies to Work For” 29
  • 30. Tax Efficient Exits: Two Opportunities for C Corporation Sellers Ann Arbor SPARK January 20, 2014 Marko J. Belej mbelej@jaffelaw.com 30
  • 31. Generally, C corporations are undesirable in an exit Tax consequences with a C corporation seller/target • Stock sale: - Shareholders only subject to tax on gain from sale of stock - But purchaser does not get stepped up tax basis • Asset sale: - Purchaser does get stepped up tax basis. - But double tax- C corporation taxed on sales gain and shareholders taxed on distribution of proceeds Contrast with an LLC or S corporation: • Members/shareholders only subject to tax on gain • And purchaser gets stepped up tax basis 31
  • 32. Opportunity #1: Code Section 1202 Under Code Section 1202, a seller of C corporation stock may exclude a portion of the gain What portion? > Depends on when the stock was acquired •100%, if acquired after Sept 27, 2010 and before Jan 1, 2014 •75%, if acquired after Feb 17, 2009 and before Sept 28, 2010 •50%, if acquired before Feb 18, 2009, or after Dec 31, 2013 Limitation: Generally, shareholder can’t exclude more than $10 million from the sale of stock of any issuer Also, the exclusion is an AMT preference amount 32
  • 33. Opportunity #1: Code Section 1202 (cont.) Requirements for Code Section 1202 exclusion •Shareholder has held stock for more than 5 years •Stock is “qualified small business stock” - - Stock of a C corporation Shareholder acquires stock at original issue in exchange for money or property or as compensation for services Corporation meets active business requirement- generally that 80% (by value) of assets used in a “qualified trade or business” (certain service and financial businesses, among others, are excluded) during holding period Corporation is qualified small business – amount of cash and tax basis of assets held by corporation not more than $50 million at stock’s issuance; certain reporting required •Additional rules for stock held through pass-through entities and for certain tax-free and other transfers of stock 33
  • 34. Opportunity #2: Personal Goodwill Theory: One or more shareholders personally own goodwill or similar asset used in business Structure 1 (Seller favorable): Purchaser acquires personal goodwill and corporation stock from shareholder • Only shareholder recognizes gain from sale • Purchaser obtains stepped up basis in personal goodwill Structure 2 (Purchaser favorable): Purchaser acquires personal goodwill from shareholder and assets from corporation • Shareholder recognizes gain from goodwill sale • Corporation recognizes (minimized) gain from sale of assets • Purchaser obtains stepped up basis in all assets 34
  • 35. Opportunity #2: Personal Goodwill (cont.) Limitations: • Will not work if shareholder/employee has previously executed an employment/noncompete agreement with corporation • May be difficult to get purchase consideration to shareholders who are not active in business • Identifying and transferring personal goodwill must be done carefully • Valuation 35
  • 36. Next Business Law & Order Program: Monday, March 17th Basics of Formation Office hours included