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Stock transfer - GIFT or COMPENSATION?

Our CEO personally gifted shares to four employees - 2 family members and 2 very close friends. He was advised by a premier law firm there might be risk with classification but that based on his relationship and family status with the 4 he would be fine and could defend his rationale. Our auditors are now pushing back (they were not consulted up front) with the argument that it was compensation from the CEO. It clearly was not and was intended as a personal gift to them and they all understood all the tax impacts with the gift. I want to argue our position hard with the audit firm, what do you think?

Answers

Brian Kreischer
Title: Assurance and Advisory Partner
Company: Frank, Rimerman + Co. LLP
(Assurance and Advisory Partner, Frank, Rimerman + Co. LLP) |

I can understand that your auditors will start with the rebuttable presumption that these transactions are compensation to the recipient. But as an auditor, I would want to understand the facts and circumstances around the transactions. For example, if the CEO filed gift tax returns on the transfers (assuming they were valued greater than the annual gift amount), that would seem to be helpful evidence about gifting intent. I would also want to review other option grants (from the Company) around that time. If I found that other execs or employees in similar circumstances got option grants, while those individuals instead were gifted options, that would support a conclusion that the transfers were really compensation. I have to say that the gift conclusion seems easier to support for family, where estate planning plays a bigger role, than for friends, but I wouldn't dismiss the gift argument out of hand. I think the auditors are putting the burden on the company to provide evidence that would overcome their rebuttable presumption of comp. You might want to start by asking if their presumption really is rebuttable and then build your case.

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

I don't suppose the law firm opinion was in writing? Owner gifts to employees are often "sort of compensation", and may also represent a company "plan" not offered to other employees, a nast thicket of accounting, tax and legal issues. The "gift" classification is easier for the family menbers than others. There is no clear answer here.

Brianna Larsen
Title: manager
Company: USA
(manager, USA) |

gifts and business don't go together in a business. not in this country. unfortunately.
and this problem proves it.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

So, what was the upshot?

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