Using a gift program to shift control to family members.

• Author: Ellentuck, Albert B.

Facts: Webster owns 80% of the outstanding stock of Webster, Inc., the corporation he founded 17 years ago. The remaining 20% of the stock has been sold over the last few years to top-level employees as part of an incentive program. Webster, Inc. has only one class of outstanding stock (voting common stock). Webster's basis in his stock is $32,000 (8,000 shares at $4 per share); the fair market value (FMV) of the stock is $600,000. The corporation has been successful but, because of recent capital investments, it does not have a large cash reserve. Webster, Inc. has reached its credit limit in borrowing from the bank. * Webster has not been in good health during the past year. He has been steadily decreasing his involvement in the corporation's daily management and plans to retire soon. Although he has confidence in the corporation's current top-level employees, he does not wish to completely terminate his involvement. Therefore, he would like to act as a consultant to the corporation and be paid for any Consulting work he does. * Webster is married and has a married son, Don, who is interested in becoming active in the corporation after he graduates from college next year. The corporation represents a large portion of Webster's estate, and he wants to transfer his shares to Don at the lowest possible tax cost. However, Webster is reluctant to transfer all of his stock to his son at once because Don has relatively little business experience. Webster also wants the top-level employees to retain their proportionate interest. Became Don is finishing school, he does not have funds at this point with which he could buy the stock outright. * Webster has investment income of $95,000 a year from fixed obligation securities worth approximately $1 million. He feels this is adequate to maintain his standard of living in retirement.

Issues: How can Webster transfer his stock to his son while avoiding payment of any tax on the transfer?

Analysis

Shifting control of a closely held corporation can be accomplished in several ways, including redemptions, stock sales or gifts.

In this situation, a redemption of Webster's stock is not appropriate, because (1) the corporation does not have a cash reserve to fund the redemption, (2) control would not pass to Webster's son because he does not own any stock and (3) Webster would be taxed on his gain on the stock. Because a redemption is not the answer for Webster, other alternatives should be considered.

A stock...