No deduction, upon corporate merger for stock | KPMG | GLOBAL

No deduction, stock not subject to substantial risk of forfeiture

No deduction, upon corporate merger for stock

The U.S. Court of Appeals for the Fourth Circuit affirmed a decision of the U.S. Tax Court, holding that a corporate taxpayer was not entitled to a deduction in 2008 under Code section 83 for stock issued to an executive employee because the stock was not subject to a “substantial risk of forfeiture” upon grant in 2002.

1000

Related content

The Fourth Circuit found that there could be no deduction upon a corporate merger for stock previously issued to the executive when it was not subject to a substantial risk of forfeiture at grant.

The case is: QinetiQ US Holdings, Inc. v. Commissioner, No. 15-2192 (4th Cir. January 6, 2017). Read the Fourth Circuit’s decision [PDF 44 KB]

Summary

At issue was whether the corporate taxpayer was entitled to a deduction (for salary and wage compensation) with respect to corporate stock that an executive acquired in 2002. The taxpayer asserted that the stock qualified as a trade or business expense in 2008 because the stock was transferred in connection with the executive’s employment and was subject to a substantial risk of forfeiture until the executive sold the shares in 2008 as part of a corporate merger.

The stock transferred to the executive, who was one of two shareholders, was pursuant to a shareholders agreement that recited certain conditions that would require the executive to return the stock—death, disability, or termination without cause. The agreement provided that the stock would be repurchased at a value corresponding to 100% of what was essentially the stock’s fair market value. 

The agreement further provided that the only circumstances in which the executive would be required to forfeit his stock at a below-market price would be if he voluntarily resigned before 20 years of employment; if he voluntarily resigned and entered into competition with the taxpayer; or if he were terminated for cause. 

The Fourth Circuit agreed with the Tax Court’s findings, and concluded that the applicable regulations (Reg. section 1.83-3(c)(2)) provide that forfeiture provisions triggered by termination for cause or by engaging in competition do not constitute a substantial risk of forfeiture based on the facts and circumstances of this case—the employee had a significant ownership interest and close relationship with the other shareholder. The appellate court agreed with the Tax Court that the likelihood of forfeiture due to the executive’s voluntary resignation did not amount to a substantial risk.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Request for proposal

 

Submit