- 7 -
ten-year employment contract with Mrs. Hurst, giving her a small
salary and fringe benefits that included employee health
insurance.
If done right, the deal would have beneficial tax and nontax
effects for the Hursts. From a tax perspective, a stock sale
would give rise to long-term capital gain, taxed at lower rates
than dividends.3 And by taking a 15-year note, rather than a
lump sum, they could qualify for installment treatment under
section 453, probably letting them enjoy a lower effective tax
rate.
There were also nontax reasons for structuring the deal this
way. HMI’s regular bank had no interest in financing the deal,
and the parties thought that a commercial lender would have
wanted a security interest in the corporations’ assets. By
taking a security interest only in the stock, the Hursts were
allowing the buyers more flexibility should they need to encumber
corporate assets to finance the business.
But this meant that they themselves were financing the sale.
And spreading the payments over time meant that they were faced
with a lack of diversification in their assets and a larger risk
3 This was an important consideration to the Hursts--
although HMI was an S corporation at the time of these transac-
tions, and thus subject only to a single tier of tax, secs. 1363,
1366, it had been a C corporation until 1989 and still had
$383,000 in accumulated earnings from those years that had not
been distributed to Mr. Hurst. Without careful planning, these
earnings might end up taxed as dividends under section 1368(c).
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011