Did a voting trust holding shares for 19 people count as one shareholder for the former officer-compensation add-back exception?

Plain-English summary

The voting trust counted as one shareholder if it held the registered shares and was not created to avoid the add-back.

The bank had 38 shareholders, but 19 had contributed their shares to a voting trust controlled by two trustees. The shares could not be transferred or sold, and the trustees voted them.

Rule 3.558(b)(7) counted a trust, association, or other legal entity in whose name corporate shares were registered as one shareholder. The exception was a trust organized to avoid the officer-and-director compensation add-back.

What this means for you

Closely held corporations and banks

The registered holder, rather than every beneficial owner, could control the historical shareholder count for this exception.

Tax professionals

Verify the share-registration record and the trust's purpose before counting it as one shareholder.

Common questions

Q: Did the 19 trust contributors count separately?
A: No, if the shares were registered in the trust's name.

Q: When would the trust not count as one?
A: If it was organized to avoid the compensation add-back.

Q: Which rule supplied the definition?
A: Rule 3.558(b)(7).

Citations and references

• 34 Tex. Admin. Code Sec. 3.558(b)(7)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9701778L

Original ruling text

January 9, 1997

Dear **:

In your letter of December 27, you requested information regarding the add-back
of officer and director compensation for BANK.

You state that BANK is a state chartered bank doing business wholly within
Texas. The bank was purchased by the current stockholders in 1989. Although
there are 38 shareholders, 19 shareholders contributed their stock to a voting
trust. The trust was created in 1989 to hold and control the majority of the
voting stock of the BANK. The shares may not be transferred or sold. The two
trustees of the trust vote the shares.

In computing shareholders, a trust, association, or other legal entity in whose
name shares issued by a corporation are registered is counted as one
shareholder unless the trust was organized to avoid the add-back of officer and
director compensation (see enclosed Rule 3.558(b)(7)). Therefore, the trust
counts as one shareholder if the shares are held in the name of the trust
(unless the trust was organized to avoid the add-back).

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you have any questions, contact Tax Policy Division. You may call toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.
You may write me at Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division