Phantom stock plans allow S corps. to reward key personnel and restrict control

Article Abstract:

S corporations are prevented by regulation from having more than one class of stock, and any difference in dividend rights or liquidation preferences is evidence of the existence of more than one class of stock. However, the IRS has held that convertible debentures, stock options, or warrants do not constitute another class of stock. S corporations can create performance incentive programs for key employees through phantom stock plans in which the rewarded employees are granted incentive units rather than stock. The units qualify the employees for cash disbursements predicated on the company's performance. Phantom stock plans must be carefully structured so as not to give employees the immediate benefits of stock ownership if a corporation is to retain its "S" status. The IRS has held that units not entitling participants to dividends or liquidation rights are not equivalent to stock.

Securities, Securities taxes

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S corporations with C year E&P can often avoid termination even with rental income

Article Abstract:

Real estate S corporations often face termination of S status due to accumulated earnings and profits (E&P) and excessive passive income. S corporations with prior C corporation status that have accumulated E&P at the end of the taxable year will lose S status in cases where passive income exceeds 25% of gross receipts for three consecutive years. Rental income is often considered passive by the IRS. Owners performing additional services of a substantial nature not incidental to the realization of return on real estate investments greater than those necessary to maintain occupancy will be determined to have self-employment income and avoid having the rental income classified as passive. There is a fine line in the determination of how much additional service turns rental income from passive income into self-employment, so real estate S corporations should obtain a ruling from the IRS.

Rents (Property)

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Cross-purchase agreements now are often more beneficial than redemption agreements

Article Abstract:

Buy-sell agreements for subchapter S corporations must limit the number and identity of shareholders to preserve the S status and prevent the disposal of stock in a transaction that would terminate S status. Recent changes in tax laws have favored the use of cross-purchase agreements over redemption or equity purchase agreements in buy-sell agreements. An entity buy-sell agreement has negative effects on shareholder basis and the accumulated adjustments account (AAA) of S corporations with previous C corporation earnings and profits. A cross-purchase agreement structures the transaction as an exchange, has no effect on AAA, and preserves the benefits of AAA for shareholders. Cross-purchase agreements also avoid the imposition of the alternative minimum tax on life insurance funded entity redemption buy-sell agreements by transferring ownership of the insurance to the shareholders.

Buy-sell agreements

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