Discussion:Partner or ?
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Discussion Forum Index --> Advanced Tax Questions --> Partner or ?
Discussion Forum Index --> Tax Questions --> Partner or ?
| 8 July 2008 | |
| My client (two individuals) advised me that they are buying an s-corporation. They will be giving 1/3 of the net profits from sales to a third person in order to prevent him from legal action against the s-corp. They say this person will not be a shareholder. Has anyone ever heard of something like this? If so, what would this person's payouts be accounted for as on the books? | |
| July 8, 2008 | |
| Salary? 'Management fees'? I'd do some research into it to ensure that you're not violating the second class of stock issue. Is there a Shareholder's Agreement? I'll defer to the legal boys on this..... | |
Death&Taxes (talk|edits) said: | 8 July 2008 |
| Sounds like E-X-T-O-R-T-I-O-N if it were not a business situation.
And is this one third of profits before salaries for the other two? Or what? | |
| 8 July 2008 | |
| I don't know the whole story, but essentially three brothers were handed down a large amount of land. The two brothers somehow scammed the third brother by giving him next to nothing for the property and buying him out of the s-corp. Now, the two brothers are selling the s-corp to my clients and my clients have brought the third brother into the will-be profits once the land is developed and subdivided. They told me they were doing this so as to prevent legal action. I am not sure if the 1/3 of profits are before or after salaries, obviously that makes a big difference on the profits. I think I will defer this question to their tax attorney and go from there. Question though, is it legitimate to give out a salary or management fees to someone who really isn't working? I will also research to make sure I am not violating anything with regards to a second class of stock...thank you! | |
| 9 July 2008 | |
| Hmmmmm. Third brother is still an IDIOT, after all of this, he's in a perfect position to force a quick, nailed down, settlement from brothers. For one, third brother is trading CG for what? OI, if he get's that? Also, where's his benefit from the step up in basis? Let's say damages were substituted instead: from a damages standpoint, aren't damages from intentional torts, fraud, tax free? That's worth his tax attorney looking up for him.
Anyway, your guys could still be buying a lawsuit, or at least an endless expensive hassle dealing with this brother. I predict your clients are buying a lawsuit. Your clients need good legal advice from a contruction/RE development lawyer first, before even inking this deal, and the lawyer will likely not be enthused about the loose thread/cannon. Surely, with people trying to unload even raw land now, are there not some other cleaner deals to be had? | |
| July 9, 2008 | |
| Why not just call it the continuing sale of the land? Since they gave him next to nothing for it, perhaps the correct thing is that it IS for the sale of the land. Preserves cap gain for him, too. | |
| 15 July 2008 | |
| Looks like the tax attorneys involved are suggesting paying him as part of the land sale (it is on an installment basis so he would get part of the installments). The money would be going from the two brothers (who are owners of the s-corp) to the one brother as a "finders fee". They said that this would be deductible by the brothers - I am not sure where (maybe add to stock basis) and then the third wayward brother would count this as taxable income. | |
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