Improper Use of a Subsidiary to Satisfy Parent’s
Stock-Based Compensation Obligations
IRS Notice 2000-60

 

According to the IRS, the efforts of the promoters to use a “deemed capital contribution” theory to justify the taking of a compensation deduction by P corp., under Regs. 1.83-6(d), should fail. The IRS believes that in this setting, S corporation is doing P corp.’s bidding, and not acting in its capacity as a shareholder. In applying substance-over-form, the IRS believes that the transaction could be viewed as (1) redemption by P of its stock from S, followed by (2) the making of compensatory transfers to P’s employees. According to the IRS, the efforts of the promoters to use a “deemed capital contribution” theory to justify the taking of a compensation deduction by P corp., under Regs. 1.83-6(d), should fail. The IRS believes that in this setting, S corporation is doing P corp.’s bidding, and not acting in its capacity as a shareholder. In applying substance-over-form, the IRS believes that the transaction could be viewed as (1) redemption by P of its stock from S, followed by (2) the making of compensatory transfers to P’s employees.

If you believe that you may have engaged in a transaction that is the same or substantially similar to the transaction described above, Federal law may require you to disclose your and other parties’ participation in any such “listed transaction” on IRS Form 8886. For more information about Federal law requirements, please contact us.