Inheritance

[Kilar1]

I have a very complicated question.   Summary Owner of restaurant died. The 3 managers in will were left with lease for restaurant and profit shares. It is a very large restaurant that makes well over single digit millions.  If family of owner left the estate choose to buy out option they were required to pay an amount. The managers did not have a business license as family opted out of lease and while in probate were asked to sign a employee contract for normal wage. The buy out $ was required in 60 days if buy out. The estate paid each manager the sum for buy out/opt out by family. 4 months later want to put threw the payroll making taxes huge for managers well beyond wages More than triple in employee contract.  Are managers responsible for taxes in a will no idea of lease or amount of opt out for a check sent 4 months ago?? Or required at this time?? It is complicated. 

[Critter-3]

This is a legal issue ... seek local professional guidance for your issues.  

[Anonymous_]

I agree with @Critter-3; you need local legal counsel.

See https://www.avvo.com/estate-planning-lawyer.html

[Opus 17]

I agree the three managers need an attorney and probably a tax accountant as well. They can split the cost between them since they have the same legal and tax issues.

For reference, let’s consider a slightly simpler case. Suppose each manager was left 10% of the company in the will.  They pay no income tax on the inheritance received. Then, the owner's family wants to buy back the 10% ownership stake. When the manager sells their ownership stake back to the family, they only have a taxable profit (capital gain) if they sell their share for more than it’s fair market value on the date the previous owner died.  Assuming the restaurant business was about equally as valuable on a day the previous owner died and the day the manager sells their shares back, then there is no capital gain, so none of the sales proceeds are taxable income. The payment should never be reported as wages.  This is the sale of an asset from one person to another, and would be treated for tax purposes as if the manager had sold their used car (or any other asset) to the owner’s family.

This actual situation is indeed more complicated, and either you have not explained all the relevant facts, or I do not understand them. For example, I don’t know what the managers actually received in the will — did they receive profit participation without an ownership stake? Is that even possible? Maybe the profit participation does give them an ownership stake of some kind.  The lease is a separate asset. It has a fair market value, although that may be difficult to calculate, because while the lease entitles the lease holder to operate a restaurant on a certain piece of property, it also obligates the leaseholder to pay certain rent.

I would say that if the owner’s family buys out the lease from the managers, that is a capital transaction. The managers would realize a capital gain or capital loss depending on the fair market value of the lease and the amount they received. These funds should never be reported as wages.

I am less sure about buying out the profit participation. That’s something that I’m just not familiar with.

In any case, I hope those general thoughts are helpful to you, but the managers really do need professional legal and tax advice. If the buyouts were reported as wages and the family refuses to fix the issue, there is a way to make a correction on the person’s tax return, but this really requires professional intervention.

[Anonymous_]

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@Opus 17 wrote:

I would say that if the owner’s family buys out the lease from the managers, that is a capital transaction. The managers would realize a capital gain or capital loss.....

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That involves a fact that we have no way of knowing based solely upon the original post.

If the lease was created by a provision in the will, then a buyout at a gain would be a short-term capital gain (since it came into existence on the date of the decedent's death). If the buyout resulted in a loss, then that loss would be an ordinary loss (if the lease is Section 1231 property).

Regardless, this is an extremely complex situation, so again, the parties involved need professional tax guidance and legal counsel.

[Kilar1]

I agree it is very complicated. I also agree it should never be a payroll wage or a 1099. They are consulting an attorney. In mean time was throwing it out there if anyone has heard anything like this situation. Thank you.