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Form is Critical: IRS Cuts Down Broker’s FICA S Corp Planning

Takeaway: While S corporations can be an effective means to reduce FICA taxes, the form of the arrangement must be consistent with the taxpayer’s intended reporting position(s). The S corporation, not the S corporation’s employee-shareholder, must be in control of the receipt of income in order shift income from the shareholder’s personal income tax return to an S corporation. After the fact tax planning to shift income to an S corporation by utilizing Schedule C with “reported on” or nominally including income reported to the shareholder on Form 1099 but zeroing out the income out with a deduction or expense could easily fail if challenged by IRS. Background The taxpayer in Fleischer v. Commissioner[1] is a financial consultant, who develops investment portfolios for clients. The taxpayer [...]

January 24th, 2017|

Respecting Corporate Formation: Rochlani v Commissioner

Overview How can a corporation have a loss for tax purposes if it does not have any bank accounts, credits cards, or other lines of credit and it does not keep any books or records? The taxpayers in Rochlani v Commissioner found out the hard way.[1] Business Formation and Operations In 2006, Mr. Rochlani (the “Taxpayer”) started Ultimate Presale, which was a business that bought and resold sporting, concert, and other tickets.  Without the Taxpayer’s knowledge, his son--a minor at the time--used an online legal service to incorporate Ultimate Presales under Michigan law. As a result of the incorporation, the state sent the Taxpayer documentation on his new corporation. Although the taxpayer had not initiated the process, he did not seek to stop or unwind [...]

November 23rd, 2015|

Easy, Partner: Becoming a Tax Partnership by Adding a New Member to a Single Member LLC

This post is a primer on the federal income tax effects of adding a new member to a limited liability company (“LLC”) that goes from a single member limited liability company (“SMLLC”) to a two member LLC.  These effects include the conversion of the LLC being treated as a disregarded entity (“DRE”) to a partnership for federal income tax purposes. I will also highlight some related issues that will be discussed in subsequent posts. Sample Fact Pattern: Assume that in 2013 Clint contributes $35,000 in cash to a newly formed LLC to operate a small service business.[1] As a result of the contribution, the LLC only has one member (i.e., a single member LLC; SMLLC). With the contributed cash, the LLC then purchases office equipment [...]

July 27th, 2015|
  • Step-up drawing

Basic Considerations: Electing to Treat a Stock Purchase as an Asset Purchase

  Can you help your client obtain a “step-up” in a stock purchase? As a tax adviser, you may have been confronted with the following scenario: your client (P) is buying 100% of the stock of a corporation (T) from seller (S), but the purchase price far exceeds T’s basis in its assets. Since P is buying the stock of T, T will generally only be able to continue to depreciate or amortize T’s historical costs basis in assets by utilizing the same method, convention, and asset life as it had prior to the closing of the transaction. Depending on P’s level of sophistication and previous exposure to the federal tax consequences of a stock purchase, P may be shocked and disappointed to learn from [...]

June 27th, 2014|