USA ? For Tax Preparers: S Corp Shares Given for Services

[ChereCK]

An S Corp hires "UBest Co" to provide services as outlined in an agreement and statement of work. The agreement states that UBest will receive $10,000 cash compensation and 10 shares in the S Corp. The agreement does not specify the value of the shares, but the owner says they are worth $10,000.

1. Assuming the owner's opinion of $10k value is correct, how is the $10k of income reported to UBest? Box 10 on the K-1?
2. Do you take the owner's word for it regarding the value of shares or does it have to be in writing?

Thanks.

 

[BIG E]

Why would an S corp owner give ownership shares in a corporation away?
That makes UBest Co an owner of the S Corp that shares in the corporation profits and share
in management decisions. Although the value of the stock (according to the S owner) is under the gift tax threshold
and no gift tax return is due, it just doesn't make any sense. And no - you don't accept the owner's value - as it may
cause future problems should disagreements exist in the future and split ups are present.

 

[espresso_941]

An S Corp hires "UBest Co" to provide services as outlined in an agreement and statement of work. The agreement states that UBest will receive $10,000 cash compensation and 10 shares in the S Corp. The agreement does not specify the value of the shares, but the owner says they are worth $10,000.

1. Assuming the owner's opinion of $10k value is correct, how is the $10k of income reported to UBest? Box 10 on the K-1?

What kind of entity is UBest? How did UBest fill out their FW-9 ?
The Scorp just expenses the amount paid for the services.

2. Do you take the owner's word for it regarding the value of shares or does it have to be in writing?

The value of the shares of a non publicly traded US corporation is the balance sheet divided by total shares.

Why would an S corp owner give ownership shares in a corporation away?

Lack of cash to pay for services, very common in tech startups and commercial real estate.
Also you get 'buy in' from from UBest, they will do better quality work.

That makes UBest Co an owner of the S Corp that shares in the corporation profits and share
in management decisions.

Yes and no, it depends on the fine print on the shares, they often don't come with a vote or ability to participate in management decisions. At minimum the shareholder UBest has a right to inspect the books and receive a copy of the by-laws of the S corp.
Boils down to the books of S corp is used to determine the value of the shares in an audit.

 

[BIG E]

Really?
If you know anything at all about S Corporation tax law, you would know that ONLY 1 CLASS OF STOCK is permitted.
So having shares that "don't vote" violates the existence of an S corp- that automatically terminates S status and
reverts to C status.

 

[espresso_941]

having shares that "don't vote" violates the existence of an S corp- that automatically terminates S status and
reverts to C status.

Pardon me perhaps I am out of date.
Do you have a source for this in the tax code?

At Cornell I go by this:
See https://www.law.cornell.edu/uscode/text/26/1361
26 U.S. Code § 1362(c)(4):
"Differences in common stock voting rights disregarded
For purposes of subsection (b)(1)(D), a corporation shall not be treated as having more than 1 class of stock solely because there are differences in voting rights among the shares of common stock."


Cheers

 

[BIG E]

Ok - I stand corrected on that voting issue - thanks for pointing it out.

But I still fail to see why the current owner would be willing to have other owners involved in his business simply because
he lacks sufficient cash to pay them in full for their services.