Attorney-at-Law

UNVESTED STOCK, VESTED

In Uncategorized on 04/24/2017 at 16:14

Here’s the end of a story I began three-and-a-half years ago. Stock that IRS claimed was vested (not subject to substantial risk of forfeiture) turns out to be unvested, but the moment the risk dropped away by its own terms, the vested stock was taxable, and the shuck-and-jive surrender and repurchase deal the stockholders pulled goes down in no-business-purpose flames.

Here’s the end of the trail for Larry E. Austin and Belinda Austin, 2017 T. C. Memo. 69, filed 4/24/17, as told by Judge Lauber.

Judge Lauber denied partial summary J to IRS back on 12/16/13. See my blogpost “Cause Celèbre,” 12/16/13, for the backstory.

Now, after the trial, it turns out that even though Larry and his late fellow-shareholder Art Kechijian ran the show, their economic interests were so aligned that they couldn’t agree to kill the restrictions on their shares (the five-year earn-out) without doing themselves serious economic hurt. Larry was Mr Outside, finding deals; Art was Mr Inside, making what Larry brought in work. Each couldn’t go solo; each lacked the skillset the other possessed. Thus, the restriction was real, so the stock didn’t vest until the five years were up.

Using a now-obsolete provision allowing ESOPs to hold S Corp stock, Larry and Art let their ESOP buy a 5% stake. When the provision sunset, the ESOP was terminated, there was a fair-value opinion and an independent vote by the beneficiaries on the buyout.

So far, so good. No tax due from Larry and Art until the five years was up, the ESOP got IRS clearance until termination, and Larry and the late Art’s estate are leading IRS as they near the wire.

Ah, but how many tickets have I torn up on horses that were leading in the stretch, but never made it ahead to the wire.

Well, the coupled entry of Larry and Art can join the unhappy list. As the five year earn-out ends, they claim they surrendered their stock and bought it back, for a note yet, to avoid SE.

That’s tax avoidance with no economic substance or business purpose. So in Year Five the guys get nailed for $45 million in tax, plus 20% chop.

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