As a former tax-lawyer, one thing that never fails to surprise me is how often intelligent and sophisticated clients fail to consider the tax implications of multimillion-dollar deals and transactions.
I remember working on a file with a client who had recently sold his stake in a business and wanted to know what the tax consequences would be. The complicating factor was that even though the client wasn’t a shareholder of the business being sold, the three partners had agreed to split the proceeds evenly between them. With the payout date scheduled for three years after closing, the client decided to wait until a week before the payout to consult a tax lawyer about what kind of taxes he would be paying on those proceeds.
Here’s what he got. When the shares were sold, capital gains tax was triggered on the gross proceeds of the share sale. Now, without any supporting documents for the oral agreement, this payout to the sole non-shareholder partner looked a lot like employment income and would probably be taxed like it was well. Suddenly, his $1,000,000 share of the sale proceeds was starting to look a lot closer to about $300,000 after taxes. Funnily enough, the business that had been sold was a financial investment firm.
The point I’m trying to make is that this is a common phenomenon in both corporate and personal transactions. While practicing real estate law, I’ve seen parents transfer properties to their children without considering the capital gains tax or land transfer tax that would be incurred immediately or in the future as a result of those transactions.
Tax planning can be one of the most consequential considerations in any given transaction, and yet those involved often treated like an afterthought, if even that. So the next time you’re about to transfer or sell millions of dollars of property, try talking to a tax lawyer.
Max H. Shin, Associate Lawyer