C12-Chp-04-8-Cases Confirm Bad Tax Plan-PPC-Feb-2004

C12-Chp-04-8-Cases - Recent Cases Confirm That Bad Tax Planning = Bad Tax Results Practitioners Publishing Company-February 2004

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Recent Cases Confirm That Bad Tax Planning = Bad Tax Results Practitioners Publishing Company-February 2004- PPCnet [[email protected]] Shareholders of closely held C corporations commonly lease real estate, equipment, and other property to the corporate entity either directly or through a separate partnership, LLC, or S corporation. (A separate entity is often used to limit liability or to spread participation in the leasing activity among multiple investors.) Some of the tax advantages that can motivate these arrangements include the following: 1. Avoiding Payroll Taxes. Rental income from real estate is exempt from the self-employment (SE) tax. Rental income from personal property may be exempt from SE tax. Royalties are not subject to SE tax unless earned in an activity that is a trade or business. 2. Providing Retirement Cash Flow. Retaining valuable assets outside a controlled corporation allows a shareholder-lessor to continue to receive cash flow from the corporation in the form of rents or royalties, even though the shareholder sells or is no longer actively employed by the corporation. 3. Avoiding Corporate-level Gain. Retaining ownership of real estate and other tangible or intangible assets with a high probability of appreciating in value avoids the potential for triggering corporate-level gain when those assets are sold or distributed [IRC Secs. 311(b) (1) and 336(a)]. Recent Farm Corporation Cases In late 2003, the Tax Court issued four opinions, in sequence, all addressing the same employee fringe benefit issues with respect to four family-owned farm corporations. These four farm corporations all had essentially the same fact pattern because they were all designed by an attorney who also served as their tax preparer, as well as the taxpayers' counsel in the Tax Court litigation. As noted in a recent Farm Tax Network article written by PPC authors Andy Biebl and Bob Ranweiler, the four corporations received a mixed result from the Tax Court [ Weeldreyer v. Comm. , TC Memo 2003-324; Schmidt v. Comm. , TC Memo 2003-325; Tschetter v. Comm. , TC Memo 2003- 326; and Waterfall Farms, Inc. v. Comm. , TC Memo 2003-327]. The corporate-provided medical
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This note was uploaded on 03/09/2012 for the course ACCT 6120 taught by Professor Godfrey,h during the Spring '08 term at UNC Charlotte.

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C12-Chp-04-8-Cases - Recent Cases Confirm That Bad Tax Planning = Bad Tax Results Practitioners Publishing Company-February 2004

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