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Tax Law (Questions About Taxes)/Stcok transfer tax consequences


QUESTION: Dear Mr. Stancil,
Please bear with me, as this question might be rather involved. Six years ago, I started a business from scratch. It became successful, and I contracted to give my second-in-command, half of the private shares of the company, payable next month.
The value of the shares which my partner will be receiving is $1 million. My partner told me that his accountant and attorney, both said that he will have to pay income taxes on those shares of stock for 2013, even though they will remain as shares while in his possession (until the company is sold, of course, but there are no plans to sell the company).
So, just to clarify what my partner was told, even though he will receive $1 million in shares, he will have to pay $400,000 in cash for tax year 2013.
I'm no genius, but I can't understand how this is true. How can the government expect someone to have $400,000 lying around in cash, to pay taxes on acquired shares, that have yet to be sold. I would guess that, once you sold the shares, then you could and would pay the subsequent taxes, but to pay taxes on unsold shares?
My thoughts are, that this transfer of shares, is not a taxable event.
Please shed some light on this.
Thank you.


Thanks for your question.

Unfortunately, the accountant and the attorney are correct.  The stock is considered compensation, just as if you had paid him in cash.  Since it is compensation, it is taxable income at the time received.  This is a well-established tax principle and there is not really any way around it.

Once he sells the shares, he would pay tax only on the proceeds in excess of the "issue" price.

Hope this helps.

John Stancil, CPA

---------- FOLLOW-UP ----------

QUESTION: Dear Mr. Stancil,

Thank you for your timely reply.

I believe you, but what happens if you don't have the cash to pay the taxes and you can't sell the shares?
Do you come up with a payment plan with the IRS and end up paying interest on the taxes?
I still can't get my mind around this. My partner has $5000 in the bank, and he barely makes ends meet. It would take him 100 years to pay the taxes on those shares.
Is he supposed to take a loan out, using the shares as collateral, like the equivalent of a home equity loan?
Thank you.

ANSWER: Probably won't work in your situation, but commonly the recipient will sell enough stock to cover the taxes.  A loan or an instalment agreement with the IRS are both possibilities.

Hope this helps.

John STancil, CPA

---------- FOLLOW-UP ----------

QUESTION: Dear Mr. Stancil,

Last question, I promise.

Can I gift these shares?

Thank you.

No.  That would be illegal as the transfer is being made in consideration services rendered.  Due to the amount involved, if the IRS picked up on it, you (and he) could be liable for a substantial understatement of tax liability. This penalty can be up to 20% of the understatement.

In addition, they could charge you with criminal fraud.

John Stancil, CPA

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John Stancil, CPA


I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at I also offer seminars and consultations to churches and clergy on their tax issues at Also visit my blog, I am listed on Tax Connections at Prepare and file your own taxes at


I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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