Irv Blackman and Brian Whitlock

It's true: Real life is stranger than fiction. Here are two true-client tax stories ¬- with almost identical facts - involving transferring a family business to the kids. One caused a financial-tax train wreck; the second a tax-free victory.

If you own (all or a portion of) a closely held business and are about to (or will someday) sell/transfer your interest in the business to one or more family members or employees, read this article carefully. You'll learn the wrong way and then the right way to make the transfer and literally save more taxes - income, capital gains and estate combined - than the actual fair market value of your business interest being transferred.

Both stories started with a phone call from a column reader. The first call came from Joe in Chicago.

Here's Joe's story: About a year ago, Joe sold 100 percent of his business, Success Co., to his son Sam for $5 million, payable by Sam over an eight-year period, plus interest. Joe's tax basis of Success Co., which was started by Joe 28 years ago for $9,000, was near zero (so for our purposes we'll assume his tax basis is zero).

Let's take a look at the tax damage when Joe sells his Success Co. stock to Sam. To make it easy to follow the numbers, let's assume the price is $1 million, and both Joe and Sam are in the highest tax bracket. Also, assume the combined state and federal income tax rate is 40 percent - 5 percent state and 35 percent federal.