Gift (Tax) or Taxable Income?

What is the name of your state? Alabama

Here is my problem. The company I work for was just sold. I did not have any shares of stock in the company. However, the CEO who did own about 80-85% of the stock came forward with an e-mail before the sale was complete saying that he was going to give a personal gift to each employee who did not own stock after the sale was completed. Well last week, the sale went through and yesterday we got our checks (drawn from a personal bank account with the CEO's name on it). However, we also were given a W9 form to fill out when we got the checks. Today, the company's CFO comes forward and says that it's only logical that we should plan on paying the tax on the money from the CEO. The amount was less than the $11,000 gift tax limit. So a few questions: Because we filled out W9 forms, does that automatically mean that we are responsible for the tax on that money? Does the CEO not have to pay capital gains tax on the portion of the money he received from the sale of his stock which he later re-distributed to use via these gifts? How would the checks he wrote us be deductible to him for tax purposes since we provided no service or good in exchange for that money (we already were paid our salaries, annual bonuses, etc)? Please help! I need to KNOW if I have to plan on paying taxes on this gift money or not. I don't want to have to play it safe and save out 35% if I don't have to. Thanks alot!

Its obvious that the CEO intends to report that money as income to you, hence the request for the W9. However, I honestly don't know how the CEO intends to report it. You better plan to hold back part of the money for taxes. You will get a tax document stating how the money has been reported.

Basis

You need to know donor's basis. That basis would carry over to you and your subsequent sale would be treated as long or short term capital gains based on the holding period in the donor's hands. There is no tax liability for gift taxes for those receiving a gift. I not convinced that this is really a gift. Perhaps the shares were sold and some of the income is being distributed in that case you have ordinary taxable income (compensation). There is a big difference between captital gains max 15% LT and ordinary income max 35.9% so lets hope you recieved the shares before they were sold.

By law, money transferred from a business to an employee cannot be characterized as a gift. It is compensation. The IRS won't care that it came out of the CEO's personal bank account. They also won't care that you already got a bonus. This is just a second bonus.

The cap gains issue is his problem, not yours. There's no doubt you will have to report the money as ordinary income. Plan accordingly.

Thanks for the replies, but I need to clarify somethings here.

First off we employees DID NOT receive any stock before the company was sold. The stock was owned by the CEO amongst a few others and he directly took some of his personal proceeds from the sale of HIS shares of stock and then gave us some of that money which he originally termed "a personal gift from my wife and I".

As time has went on though, the story has morphed into one where they are not claiming it is a gift anymore... somehow.

Secondly, the money was not transferred from a business to me. It was transferred from an individual (the CEO and his wife as a private individual(s)) to me. In fact the CFO sent out an e-mail today saying that this money was NOT a bonus. In no way was the money derived from company funds in any way. The stock was owned by a individual, private person, not a business. As such when he sold his stock, the money he received becomes private income and in no way is part of the corporation any more. It's like me taking a piece of my regular paycheck and giving it to my nextdoor neighbor. That money wouldn't be tied back to my employer and neither should this. As for capital gains - if he pays the capital gains tax, then I should not have to pay income tax on it because it would have already been taxed and it could surely then be classified as a gift. What I am afraid he is doing though is trying to transfer money to one of his other dealings (a business, maybe a LLC, which actually owns the building we work in), and somehow transfer the money to us and claim it was in return for some service or good to this second company... which it wasn't as we have not performed or provided anything in exchange for this money. I think he then wants to claim the disbursed money as a business expense for his 2nd business, get a tax writeoff, and recoup some of the tax cost that he had thru the capital gains tax and at the same time push a tax burden onto us that could have been avoided simply by using the gift tax approach.

We have talked to a couple of CPAs and they say this would normally be clearly a gift tax issue, but how he is trying to do it is getting into the very grey area of legality. As such they have advised us to seek advice from a tax attorney to determine if we could contest this or at least defend our position that it is a gift if the IRS comes to us asking questions.

Anyways, any more advice would be appreciated. It appears though that I will save off some of the money in case I get hit with taxes and in the meantime find out from a lawyer if this is being handled properly and what I should do to protect myself.

Save the email where he said it was a gift. That should help.

Snipes

aerograd, the IRS looks at the substance of the transaction, not the formalities. Gifts are defined in tax law as transfers arising from "detached and disinterested generosity".

There is no way the IRS is going to consider a transfer from your CEO to you to be a gift, regardless of where the money comes from or what he says. The transfer is clearly intended as a bonus incident to the sale of the company. It is not like you giving money to your neighbor -- which would be a true gift.

If you can get a tax atty to write an opinion letter stating otherwise, great -- you can attach that to your return and if you get audited, you will avoid any penalties for being wrong (under sec 6662)

Thanks

Thanks for the help. I learned a bit more info today which goes along the lines of some of what was posted here.

The CEO is paying the capital gains tax on all the money he got from the sale of his stock as I expected. But he did not transfer any money to one of his other business interests before passing it on to us. However, since we are associated with him at work his tax lawyers said it would appear as if the gifts were in return for something business related, so there would most likely be income tax to pay on it.

So I guess I am resigned to the possibility of paying the income tax on it, although I am still going to check on the gift tax thing to see if I can get it excluded based on his original e-mail which I have posted below (with names and stuff changed to protect identities) from the CEO to us.

--------------

"I want to thank all of you for supporting me in the all hands yesterday. I hope that all of your questions and concerns have been answered to your satisfaction. I want to assure all of you that I will continue to represent you and your needs to the [new parent company] management, the same as I have always run this business. I know that most of you had no stock in [company], but you do have ownership. And for that, [wife] and I want to share with all of you, not only our thanks, but more importantly, we intend to share with each of you, who had no stock, a portion of the sale of [company]. In order to be as fair as I possibly can, I intend to use our latest bonus ratings to base the contribution amount to each individual, since our bonus ratings are intended to reward each of you based on your annual performance. In addition, since the bonus ratings do not factor in years of service, I will also consider your employment date as one of the factors.

This will be a personal gift from [wife] and I, and will not be connected to the sale of [company] in any way. However, no matter what some of you may think, I don’t have a bank account large enough to write out this many checks of this magnitude. Therefore, I have to wait until we close on the sale, tentatively the first week in January, 2006. I wish it could have been in time for a great Christmas gift, but I guess you could still use it to pay off your credit cards full of Christmas gift charges? No matter how you spend it, I want to reiterate that each of you ARE important to [wife] and me, and to this company.

I also want to make it very clear, we are not doing this to try to motivate you to remain with us, but rather to say “thank you for all of your hard work and dedication to [company] over the years of your employment”. Of course, we hope that you stay with us until your retirement. If any of you have any doubt about my commitment and dedication to this company after the sale, I WILL BE HERE until I feel that [company] is stable and growing, and will remain in tact, whether or not I am the guy still sitting in this big “Santa Clause” chair in my office, or maybe until you guys run me off, which ever comes first. By the way, my chair is the first chair that we bought as we formed [company] back in 1997, and it has turned out to be the “cheapest” chair that we have ever purchased. I can still remember how nervous I was back then to spend $150 just for a chair to sit in. I guess we’ve come a long way together.

So I will close this email with a big thanks and have a great Holiday Season.

[CEO and Wife]"

I dunno if that e-mail swings any of you one way or the other. If so, please post. Again, thanks for your advice. I, and my co-workers, appreciate it.

If the CEO won't pony up the fee for an IRS opinion letter, you employees should pass the hat & get one. Or at least get an opinion letter from a lawyer. I could see this going either way.

abezon said:

I could see this going either way.

Click to expand...

Yeah, either the OP pays income tax on the money now -- or pays it later