Stock transfer - GIFT or COMPENSATION?

I can understand that your auditors will start with the rebuttable presumption that these transactions are compensation to the recipient. But as an auditor, I would want to understand the facts and circumstances around the transactions. For example, if the CEO filed gift tax returns on the transfers (assuming they were valued greater than the annual gift amount), that would seem to be helpful evidence about gifting intent. I would also want to review other option grants (from the Company) around that time. If I found that other execs or employees in similar circumstances got option grants, while those individuals instead were gifted options, that would support a conclusion that the transfers were really compensation. I have to say that the gift conclusion seems easier to support for family, where estate planning plays a bigger role, than for friends, but I wouldn't dismiss the gift argument out of hand. I think the auditors are putting the burden on the company to provide evidence that would overcome their rebuttable presumption of comp. You might want to start by asking if their presumption really is rebuttable and then build your case.

I don't suppose the law firm opinion was in writing? Owner gifts to employees are often "sort of compensation", and may also represent a company "plan" not offered to other employees, a nast thicket of accounting, tax and legal issues. The "gift" classification is easier for the family menbers than others. There is no clear answer here.

gifts and business don't go together in a business. not in this country. unfortunately.
and this problem proves it.