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Old 02-25-2011, 01:00 PM
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Question Taking over father's business

Hello,

My father has a small business, setup as an S-corp, and he is looking to retire. He would like to give the business to me at no charge and I will continue to run it as he did. My father is the sole stockholder in the corporation and holds 10 shares of stock. The plan is to transfer 5 shares over to me initially and then at a later date transfer the last 5 shares.

How should we structure such a sale. Initially when the corporation was setup the stocks had no par value. My father's cost basis is probably around $100,000. As I said he would like to just hand over the stock to me but is worried about getting burned in taxes. I am clueless when it comes to such matters. Does he gift the stocks to me or should he sell them to me at a low value? Should we draw up paper work to sell half the business and assets or just transfer the stocks for now?

We just want to get the stocks into my name so I can become an officer of the corporation and continue to run the corporation the same way. It sounds simple enough but we are just leary about getting hit with heavy taxes.

Thank you!
Kevin



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Old 02-26-2011, 08:55 PM
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“How should we structure such a sale. Initially when the corporation was setup the stocks had no par value. My father's cost basis is probably around $100,000. As I said he would like to just hand over the stock to me but is worried about getting burned in taxes.---->I guess the transfer is considered a gift ( the transfer would potentially be a taxable gift) ; any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return. Your father MUST file Form 709 as the amount of the gift exceeds $13,000, annual gift exclusion amount; the annual exclusion applies to gifts to each donee. In other words, if your gives you $13,000 on or after January 1, 2010, the annual exclusion applies to each gift. However, UNLESS your father made a huge gift exceeding $1.13,000 million ( as I assume that you are the only the donee) before or in the year alone, he is NOT subject to any gift tax. You, as a recipient of the gift, are not liable for gift tax; under special arrangements the done, you, may agree to pay the tax instead.
“I am clueless when it comes to such matters. Does he gift the stocks to me or should he sell them to me at a low value? Should we draw up paper work to sell half the business and assets or just transfer the stocks for now?”---> If he sells the stocks in gain, then he should pay long term capital gain tax 0% if his marginal tax rate is either 10%or 15% and 15% if his tax bracket is higher than 15% in 2010.If he just gifs the stocks to you directly, it is a gift for you and he is not subject to LTCG tax or gift tax as said above. Giving accumulated stock instead of cash( or instead of selling the stocks and paying LTCG taxes) can have tax advantages for both your father and the recipient, you, and when your father gives the stock to you also give the opportunity for further appreciation of the asset. However, capital gain from appreciation of the stocks will be subject to LTCG tax to you.
it is important to follow the proper procedures to avoid problems with the Internal Revenue Service.

Please visit the IRS website;Frequently Asked Questions on Gift Taxes



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