|
Posted by tax akademik on July 4, 2007, 10:57 pm
Please log in for more thread options
I was hired four years ago in 2003 by the NE Corp. to serve
as the CEO for their company. I relocated from Chicago to
Boston to accept the position. As part of my employment
contract, if they fired me, then they agreed to purchase my
residence at FMV. Last year, in 2006 NE Corp, unsatisfied
with my performance, fired me, and purchased my residence
for $625,000.00. I purchased the house for $500,000.00 back
in 2003. NE Corp immediately listed the house with a real
estate agency. But soon after the purchase, the real estate
market in the area experienced a serious decline, especially
in higher priced homes. NE Corp sold the house in 2006 for
500,000.00 and paid selling expenses of $22,000.00.
My questions are:
a. What are my tax consequences? (i.e., how much is the
gain/loss that is realized and /or recognized on the sale of
my residence; and does any portion of the transaction
qualify as compensation?)
b. What are the tax consequences to the company, NE Corp?
(i.e., how much is the gain or loss realized and or
recognized on the sale of the residence; and does this
qualify as an ordinary and necessary business expense or is
it a capital loss?
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
|
|
Posted by Paul Thomas, CPA on July 5, 2007, 11:51 pm
Please log in for more thread options
> I was hired four years ago in 2003 by the NE Corp. to serve
> as the CEO for their company. I relocated from Chicago to
> Boston to accept the position. As part of my employment
> contract, if they fired me, then they agreed to purchase my
> residence at FMV. Last year, in 2006 NE Corp, unsatisfied
> with my performance, fired me, and purchased my residence
> for $625,000.00. I purchased the house for $500,000.00 back
> in 2003. NE Corp immediately listed the house with a real
> estate agency. But soon after the purchase, the real estate
> market in the area experienced a serious decline, especially
> in higher priced homes. NE Corp sold the house in 2006 for
> 500,000.00 and paid selling expenses of $22,000.00.
>
> My questions are:
> a. What are my tax consequences? (i.e., how much is the
> gain/loss that is realized and /or recognized on the sale of
> my residence; and does any portion of the transaction
> qualify as compensation?)
I wouldn't look at it as compensation, because you didn't
have to do anything for them to be obligated to buy your
house, and income or profit wasn't guaranteed.
The sale of the house seems to qualify for the gain
exclusion under Section121.
> b. What are the tax consequences to the company, NE Corp?
> (i.e., how much is the gain or loss realized and or
> recognized on the sale of the residence; and does this
> qualify as an ordinary and necessary business expense or is
> it a capital loss?
I'm sure they'll find a way to deduct it all.
It seems it would be a cost of doing business, and not a
capital transaction.
--
Paul A. Thomas, CPA
Athens, Georgia
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
|
|
Posted by Mark Bole on July 9, 2007, 12:30 am
Please log in for more thread options Paul Thomas, CPA wrote:
>> I was hired four years ago in 2003 by the NE Corp. to serve
>> as the CEO for their company. I relocated from Chicago to
>> Boston to accept the position. As part of my employment
>> contract, if they fired me, then they agreed to purchase my
>> residence at FMV. Last year, in 2006 NE Corp, unsatisfied
>> with my performance, fired me, and purchased my residence
>> for $625,000.00.[...]
> I wouldn't look at it as compensation, because you didn't
> have to do anything for them to be obligated to buy your
> house, and income or profit wasn't guaranteed.
>
> The sale of the house seems to qualify for the gain
> exclusion under Section121.
My first thought is that it would be compensation, but for
the taxpayer's sake I hope I'm wrong. There is no guarantee
of income or profit from nonstatutory stock options either
-- what's the difference?
At the very least, I would expect some difficulty in showing
that the purchase was truly at FMV. Normally that requires
parties with adverse interests in an arm's-length
transaction. The $22,000 of selling expenses that the
company paid seems to me like a form of taxable
reimbursement.
Somehow this sounds too good to be true -- a tax-free
transfer of money from employer to employee under terms of
an employment contract.
-Mark Bole
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
|
|
Posted by Seth on July 12, 2007, 8:51 pm
Please log in for more thread options > Paul Thomas, CPA wrote:
>>> As part of my employment
>>> contract, if they fired me, then they agreed to purchase my
>>> residence at FMV. Last year, in 2006 NE Corp, unsatisfied
>>> with my performance, fired me, and purchased my residence
>>> for $625,000.00.[...]
>> The sale of the house seems to qualify for the gain
>> exclusion under Section121.
> My first thought is that it would be compensation, but for
> the taxpayer's sake I hope I'm wrong. There is no guarantee
> of income or profit from nonstatutory stock options either
> -- what's the difference?
There's no guarantee of profit from sale of the house at
FMV, either.
> At the very least, I would expect some difficulty in showing
> that the purchase was truly at FMV.
Why? Presumably the company got an appraisal in order to
determine FMV prior to purchasing the house. Why do you
think it might invent an arbitrarily high "FMV" in order to
give more money to a _fired_ employee?
> Normally that requires parties with adverse interests in an
> arm's-length transaction.
The company and the ex-employee have adverse interests: the
purchase price is a 0-sum game.
> The $22,000 of selling expenses that the
> company paid seems to me like a form of taxable
> reimbursement.
Again, since the market weakened a lot between the company's
purchase and sale, perhaps the selling expenses the
ex-employee would have seen would have been a lot lower.
> Somehow this sounds too good to be true -- a tax-free
> transfer of money from employer to employee under terms of
> an employment contract.
If the market had risen between the company's purchase and
sale, the company would have made money, with the "transfer"
being in the opposite direction.
Seth
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
|
|
Posted by Mark Bole on July 15, 2007, 3:09 pm
Please log in for more thread options Seth wrote:
>> Paul Thomas, CPA wrote:
>>>> As part of my employment
>>>> contract, if they fired me, then they agreed to purchase my
>>>> residence at FMV. Last year, in 2006 NE Corp, unsatisfied
>>>> with my performance, fired me, and purchased my residence
>>>> for $625,000.00.[...]
[...]
> Why? Presumably the company got an appraisal in order to
> determine FMV prior to purchasing the house. Why do you
> think it might invent an arbitrarily high "FMV" in order to
> give more money to a _fired_ employee?
For the same reason companies give fired executives golden
parachutes -- to induce them to go quietly, for the sake of
future business relationships, and so on. My point was this
seems like some kind of tax-free golden parachute payment.
We're using the term "fired" here loosely -- if he was truly
fired for cause (theft, gross violation of company policy,
etc) then in I think all employment agreements are off. If
he was "let go", that's a different matter. Even
rank-and-file employees who are laid off are often
unilaterally offered severance payments if they sign off to
not sue the company. Those payments are taxable
compensation.
>> Normally that requires parties with adverse interests in an
>> arm's-length transaction.
> The company and the ex-employee have adverse interests: the
> purchase price is a 0-sum game.
But it certainly wasn't an arm's-length transaction, due to
the employment contract, and in fact even their interests
were not necessarily adverse, since the relationship between
company and CEO encompassed much more than just this real
estate transaction.
>> Somehow this sounds too good to be true -- a tax-free
>> transfer of money from employer to employee under terms of
>> an employment contract.
> If the market had risen between the company's purchase and
> sale, the company would have made money, with the "transfer"
> being in the opposite direction.
Certainly it was common knowledge in 2006 that residential
real estate had peaked in late 2005 and that local "bubbles"
were in the process of deflating, if not bursting. A true
FMV transaction would have taken this knowledge into
account.
That begs the question -- why would the company bother
committing to such a thing in the first place? A commitment
to buy an asset at FMV has an economic value of zero, since
by definition you can always sell an asset at FMV without
any prior commitment from anyone. Of course the company
helped the employee avoid the transaction costs, which again
seems to me like a taxable reimbursement.
I'm just wondering, in an audit situation, would the
tax-free nature of this transaction between an employer and
employee be questioned? As previously noted in another
reply, this seems more like a contrived class exercise than
a real-life situation.
-Mark Bole
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
|
| Similar Threads | Posted | | Annual CA-VPDI discussion | March 26, 2007, 10:57 am |
| ISP problem | November 30, 2006, 10:34 pm |
| TaxCut problem? | January 30, 2007, 12:09 pm |
| Last name too long , is that a problem? | April 4, 2008, 12:15 am |
| State Withholding Problem | August 23, 2007, 9:48 pm |
| Re: State Withholding Problem | August 29, 2007, 1:31 am |
| Re: Tax Problem from Sale of Residence | April 12, 2006, 11:28 pm |
| Re: Tax Problem from Sale of Residence | April 12, 2006, 11:28 pm |
| Re: Tax Problem from Sale of Residence | April 14, 2006, 3:45 am |
| Re: Tax Problem from Sale of Residence | April 15, 2006, 3:18 am |
|
|
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap