See attached sample language from a stock restriction agreement for a Subchapter C corporation.

Read the attached contractual language. Work within your teams to identify any problems you see with this agreement in terms of its federal income tax consequences. Then prepare a short oral report to the class, as if you were addressing the non-tax lawyer who drafted the agreement, making any recommendations you have for changing the agreement’s terms. List any additional facts that you need in order to render more precise advice on this proposed agreement.

Teams:

A: Sean Espy, Cindy Steele, Brooke Carson, Tonia Smith, Kelly Yee

B: Richard Barnhart, Joe Sylvester, Ted Chapman, Barry McConnell, Kristin Denny-Rasmussen, Melissa Music

C: Steve Hall, Chuck Dargo, Cathy Tyson, Andy Balderson, Jason Gunsorek, Kevin Burnett

D: Dara Greene, Eric Cromwell, Jim Tackett, Chris Krisiewicz, Russ Dempsey

E: Geoff Baker, Keith Michaelis, Robbin Russell, Raimee Gordon, Cathy Reece

F: Luis Alcalde, Chris Goodwin, Steve Feldbauer, Suzanne Kuhns, Scott Griffith

G: Mike Beldy, Sarah Williams, Simon Reeve, Laura Allen, Christy Zimmerman

H: Matt Schaeffer, Jessica Holleran, Jaya Chakravarti, Mei Zhang, Shawn Hiller

Week 11: March 31 – Project #1 Due. Read text pages 405-440 and all applicable Supplement pages. No problems are assigned.

Week 12: April 7 – Read text pages 440-497 and all applicable Supplement pages but omit 475-486. No problems are assigned.

Week 13: April 14 – Read text pages 511-513, 533, 542-548, 549-557, 558-563, 611-614, 626, 629, 632-633, 739-744 and all applicable Supplement pages and Code Sections assigned by the text but no Regs. No problems are assigned.

Week 14: April 21 – Do the Review Questions. Project #2 Due.

Exam: Saturday, May 6, 2000, 9:00 a.m. – noon.

1. Restrictions on Transfer of Stock. No Stockholder shall at any time during the existence of this Agreement directly or indirectly sell, assign, transfer, mortgage, encumber, pledge or otherwise deal with or dispose of all or any portion of the Stock in the Corporation now owned and hereafter acquired by him without first obtaining the written consent of the Corporation and the other Stockholder or, in the absence of such written consent, without first complying with the terms and conditions of this Agreement. For purposes of this Agreement, the term "Stock" shall include all stock of the Corporation currently owned by the Stockholders, as set forth above, and any and all other stock of the Corporation, of whatever class or denomination, which may hereafter be acquired by the Stockholders, whether by purchase, stock dividend, or otherwise. Any purported transfer in violation of any provision of this Agreement shall be void and ineffectual, and shall not operate to transfer any right, title, or interest to the purported transferee.

2. Right of First Refusal to Purchase Stock. If a Stockholder desires to sell or in any way to encumber or dispose of all or any portion of his Stock in the Corporation, such Stockholder shall first serve notice (hereinafter referred to as "Offer to Sell") to that effect upon the other parties hereto, stating the number of shares desired to be sold, encumbered or otherwise disposed of, and offering to sell such shares to the other Stockholder and the Corporation in accordance with the terms hereinafter set forth. For purposes of this Agreement, a Stockholder shall be deemed to have made an Offer to Sell (i) on the date of any threatened or actual transfer of the Stock by sale under levy of execution, attachment, pledge or seizure by a trustee in bankruptcy, or any other transfer by operation of law; and (ii) on the date upon which the other Stockholders receive notice of (a) the institution by any Stockholder of voluntary proceedings under any bankruptcy law, (b) the institution of involuntary proceedings against any Stockholder and the entry of an adjudication of bankruptcy or order for relief, (c) an assignment by any Stockholder for the benefit of creditors, or (d) the levy upon the Stock of any Stockholder under a writ of execution or other legal procedure; and (iii) on the date that the Stockholder's employment with the Corporation is terminated for any reason other than for the reasons set forth in paragraph 3 hereof.

2.1 Purchase by Stockholders. The other Stockholder shall have the first right to purchase all of the Stock offered for sale by giving notice of acceptance to the other parties hereto within thirty (30) days after the purchasing Stockholder's receipt of the Offer to Sell, and the purchase price for such shares shall be determined as set forth in paragraph 4 hereof.

2.2 Purchase by Corporation. If the other Stockholder shall fail to exercise his right to purchase all of such offered Stock, then the Corporation shall have the right to purchase all of the Stock offered for sale by giving notice of acceptance to the selling Stockholder within twenty (20) days following the close of the aforesaid thirty (30) day period, and by paying the purchase price for such shares as set forth in paragraph 4 hereof.  The decision of whether or not the Corporation accepts such offer shall be made in the form of a resolution adopted by the Stockholders at a valid meeting, except that the Stockholder who made the Offer to Sell agrees that he will refrain from voting his shares at such meeting and his shares shall not be counted in determining either the existence of a quorum or a majority vote.  However, notwithstanding the foregoing, if neither the Corporation nor the other Stockholder has elected to purchase all of the Stock offered for sale by the selling Stockholder, then the selling Stockholder may sell all of the Stock so offered for sale in accordance with the provisions of subparagraph 2.3 of this Agreement.

2.3 Sale of Stock to Third Parties. In the event that the other Stockholder and the Corporation fail or refuse to purchase all of the Stock offered for sale, the selling Stockholder shall be free to sell, encumber or otherwise dispose of the shares of Stock to, but only to, any person licensed to practice medicine in the State of _______ in any manner and upon any terms and conditions; provided, however, that such selling Stockholder shall not in fact sell any Stock either for a price or on terms different than the purchase price or the terms fixed by this Agreement without first offering the other Stockholder and the Corporation the right to purchase the Stock, in the manner set forth in subparagraphs 2.1 and 2.2, at the same price and upon the same terms as offered to such other person. The Offer to Sell shall specify the name and address of the person to whom the selling Stockholder proposes to sell his Stock and the price and terms offered by the person for the Stock. In the event that the other Stockholder and the Corporation shall then fail or refuse to purchase all of the Stock offered for sale pursuant to this Agreement, the selling Stockholder shall then be free to sell the Stock to such other person for the price and upon the terms set forth in such notice; provided, however, that any such sale shall take place within ninety (90) days following the last day that the Corporation may give notice of acceptance as provided above, and upon the expiration of such ninety (90) day period, the provisions of this Agreement shall reattach to all of the Stock not sold during said ninety (90) day period.

2.4 Encumbered Stock. In the event that any Stock is not sold but is merely encumbered during the ninety (90) day period specified in subparagraph 2.3 above, then the transferee of such encumbered Stock shall accept such Stock subject to the terms and conditions of this Agreement, and upon the release of any Stock from an encumbrance, the provisions of this Agreement shall reattach to all of the Stock so released. 

3. Mandatory Purchase of Stock. Upon the occurrence of any one of the following events with respect to a Stockholder (a "Mandatory Purchase Event"), a Stockholder shall be deemed to have made an Offer to Sell, and the other Stockholder shall purchase, and the Offeror or the personal representative of the deceased Offeror, as the case may be, shall sell, all of the Stock in the Corporation owned by the Offeror at the time of such occurrence, for the price and on the terms set forth in this Agreement:

a. the death of a Stockholder;

b. the retirement of a Stockholder from his principal profession (determined as of the date of this Agreement);

c. the suspension or revocation of the professional license of a Stockholder in the State of __________; or

d. the inability of a Stockholder to remain actively engaged in the practice of his profession in ____________ County, __________, by reason of a "permanent disability" (as hereinafter defined).

For purposes of this Agreement, the term "permanent disability" shall mean the inability of the Stockholder, for a period of more than ninety (90) consecutive days, or for a period of more than ninety (90) days in any one hundred (100) consecutive day period, to perform substantially all of the duties and obligations normally associated with the active practice of his profession by reason of illness or mental or physical incapacity.

4. Purchase Price of Stock.

4.1 Purchase Price for Stock Purchased Pursuant to Paragraph 2 and 3.

a. The purchase price for Stock purchased pursuant to paragraph 2 and 3 of this Agreement shall be equal to the product of: (i) the value of a single share of stock of the Corporation, determined in accordance with subparagraph 4.1.b. as of the last day of the month immediately preceding the date of the Offer to Sell or deemed Offer to Sell, as applicable, multiplied by (ii) the number of shares of Stock being purchased.

b. For purposes of this subparagraph 4.1, the value of a single share of the Corporation's stock shall be determined and redetermined, if necessary, not less frequently than annually by agreement of the Stockholders within thirty (30) days after the termination of each fiscal year of the Corporation. The determined amount shall be recorded on a Certificate of Agreed Value in the form of Schedule A, which is attached hereto and incorporated herein by this reference. When recorded, each such Certificate of Agreed Value shall be filed with the Corporation and attached to this Agreement. The Certificate of Agreed Value shall be effective for the ensuing fiscal year of the Corporation and shall be determinative of the value of a single share of the Corporation's stock for purposes of this subparagraph 4.1. If the Stockholders fail to make the annual redetermination of value for a particular year, the last previously recorded value shall control; provided, however, that if no revaluation has been agreed to by the parties for a period of two consecutive fiscal years, then the last previously recorded value shall have no force or effect and the value of a single share of the Corporation's stock shall be determined in accordance with subparagraph 4.1.c. of this Agreement.

c. There shall first be determined the "adjusted book value" of the Corporation (as defined in subparagraph 4.2) as of the last day of the calendar month immediately preceding the Offer to Sell or the Mandatory Purchase Event, as the case may be (the "Determination Date"), by an accountant or firm of accountants mutually agreed upon by the parties to this Agreement, in accordance with generally accepted accounting principles, consistently applied, pursuant to the cash basis method of accounting. If the parties are unable to agree on an accountant or firm of accountants that is satisfactory to both parties, then a nationally recognized firm of certified public accountants (commonly referred to as the "Big Six") will be selected by the Corporation by placing the names of not less than six such firms on six separate pieces of paper which will be placed in a closed container in random order and one such piece of paper shall be withdrawn randomly by a disinterested person who is not a stockholder of the Corporation. The accounting firm so selected shall make the determination of adjusted book value as aforesaid.

d. The resulting "adjusted book value" shall be divided by the number of shares of Stock issued and outstanding as of the Determination Date, and the quotient shall equal the purchase price of each share then being purchased and sold.

4.2 Definition of "Adjusted Book Value". For purposes of this Agreement, the term "adjusted book value" shall mean the book value of the assets of the Corporation, less the sum of its liabilities, all as of the close of business on the Determination Date, subject to the following:

a. There shall be no reappraisal or adjustment to the values of the corporate assets (except that real property shall be valued at fair market value as of the Determination Date), so that all assets are to be taken into account at their depreciated values as shown on the books and records of the Corporation;

b. No amount shall be included in book value for good will, firm name, leases, or for other similar intangible assets;

c. Unmatured life insurance contracts shall be valued at their cash value, but no amount shall be included for matured life insurance contracts;

d. Outstanding trade accounts receivable shall not be deemed assets of the Corporation;

e. All taxes and assessments, including federal and state income taxes, shall be prorated or accrued, as the case may be, and shall be included as liabilities; and

f. All contingent liabilities, except those resulting from a professional malpractice suit brought against the Corporation or any of its employees, shall be disregarded.

The accountant, firm of accountants, or firm of certified public accountants that makes the determination of the "adjusted book value" of the Corporation is hereby authorized to engage qualified appraisers to determine the fair market value of any real property. The expenses of said accountants making such determination shall be borne equally by the purchaser and the selling Stockholder or the estate of a deceased Stockholder, as the case may be.