Contact UsAn employee purchases shares of common stock of her employer, with a full recourse promissory note, but her employment agreement provides that any outstanding indebtedness at the time of her death, permanent disability, termination without cause or a change in control, will be forgiven.
Given the mandatory note forgiveness provided in the employment agreement for those certain events, will the payment of the shares by way of the note constitute a “transfer” for tax purposes, such that she would have long term capital gain treatment on the sale of the underlying shares, rather than ordinary income, if a change in control occurred prior to repayment of the note?
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Tax Professional Answers
Chris Snedeker
If the note is forgiven then the employee may have a taxable event. It will create debt forgiveness income to the employee if there is a difference between purchase price and the market value at that time.
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624 weeks ago