I'm sole shareholder of an S-Corporation in California. Can I transfer portion of my stock to my husband or does it need to be a sale based on FMV?

Yes, you can make a gift of stock. The person who recieves the gift will have the same tax basis in those shares that you had when you transferred them. If the value is $14,000 or less, then there is no gift tax. If it is more than $14,000, then it counts against your uniform lifetime exemption from estate and gift taxes, but no gift tax will be due now. If the person receiving the stock is making any contribution of cash or property to the corporation, then it is better to treat the stock as payment for such cash or property. Then the buyer of the stock will receive a tax basis equal to the amount of cash or the fair market value of the property. He might elect to take a tax basis equal to his tax basis in the property, in order to avoid tax on any capital gain for selling property in exchange for stock, since he won't receive any cash from the sale with which to pay the tax. If you would like me to help document such a gift on the records of the corporaton, I am Dana Sack at ds@sackrosendin.com,510-286-2200.