You are a tax analyst for Company X (target) that has recently completed a merger with Company Y (acquirer), a pharmaceutical company. As part of the merger, a key shareholder-employee with ownership of 6% of shares named Dr. Frederick from Company X has signed an agreement where he has received income of a lump sum that was for his future employment with the acquiring Company Y and in exchange for his shares. The agreement provided that he would likely be required to work a period of years, and assign his interests in certain scientific property and his shares of stock.
After the merger was successfully completed, your Company’s tax manager advised Dr. Frederick that his $1 million payment would be allocated as $350,000 capital gain and ordinary income of $650,000 on a W-2 based on the terms of the agreement that classified it as deferred compensation. Based on this input, a W-2 is planned to be prepared and Dr. Frederick’s tax advisors have insisted that the proceeds of the $1 million dollars was all capital gain to Dr. Frederick as he only gave up only one asset of any value, his 6% share of stock in Company X.
You must analyze the problem and provide the technical research and support to your Company’s tax department.