ch26 - H Chapter Twenty-six H FAMILY TAX PLANNING SOLUTIONS...

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H Chapter Twenty-six H FAMILY TAX PLANNING SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 26-1 Under the assignment of income doctrine, income must be taxed to the individual or entity that performs the service to earn the income. Investment income must be taxed to the owner of the capital asset that generated the income. (See p. 26-4.) 26-2 Income shifting only results in tax savings if the taxpayer to whom the income is shifted is subject to a lower marginal tax rate than the taxpayer from whom the income was shifted. This condition is present only in a tax system with a progressive rate structure. (See Example 1, p. 26-3, and § 1.) 26-3 The IRS would consider all relevant facts and circumstances including educational qualifications of the employee, prior employment experience, time spent on the job, and the nature of the work actually performed. (See Example 3 and p. 26-7.) 26-4 If the employee is a shareholder, the excessive compensation would be deemed a dividend to him. If the employee himself is not a shareholder but is related to other shareholders, the excessive compensation could be recharacterized as a constructive dividend to the other shareholders, the amount of which was then gifted to the employee. (See footnote 13 and p. 26-8.) 26-5 The unrestricted transfer of an equity interest in a business gives the transferee the right to dispose of his newly acquired asset, regardless of the transferor’s wishes. Such transfer of ownership also can result in a dilution of control of the business. (See p. 26-12.) 26-6 To prevent the transferee-recipient of an equity interest in a family business from disposing of the interest against the wishes of the family, the transfer can be subject to the condition that the transferee can dispose of the interest only after he or she has offered to sell it back to the family at fair market value. (See p. 26-12.) 26-7 Income earned by a regular corporation that is distributed as dividends to shareholders is subject to double taxation. (See Example 8, p. 26-10 and §§ 11 and 61.) 26-8 An S corporation may not issue preferred stock. As a result, any family member who owns shares of stock in the S corporation will be taxed on an amount of corporate income proportionate to his or her stock ownership, regardless of his or her marginal tax bracket. Preferred stock cannot be used to give a preferential claim on income to low-bracket family members. [See Example 9, p. 26-11, and § 1366(a).] 26-9 A grantor trust may be used when an individual desires to make a legal transfer of the ownership of property without totally surrendering all aspects of control over the property. The grantor trust form also is useful if the transferor wants to relinquish ownership of property for a limited period of time. (See p. 26-17.) 26-1
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26-10 A Crummey Trust provides that the beneficiaries have a current, noncumulative right to withdraw amounts transferred into trust during the year. Usually, the withdrawal right is limited to the amount of the annual gift tax exclusion. While both a Crummey trust and a § 2503 trust secure the annual exclusion for
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ch26 - H Chapter Twenty-six H FAMILY TAX PLANNING SOLUTIONS...

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