Denver Business Attorney Discusses Gain on Debt Relief

Issues regarding gain or loss upon the sale of stock are common issues faced by a Denver tax attorney or business attorney at The McGuire Law Firm.  ADenver Small Business Attorney recent United States Tax Court case dealt with gain recognition when a taxpayer was relieved of debt through court proceedings.  The Tax Court agreed with the IRS that the taxpayer’s basis needed to be reduced to reflect a court ordered debt reduction.

The applicable taxpayer had entered into an option to purchase stock within an S corporation and then agreed to purchase the shares of stock from another shareholder for approximately $5.8 million.  The taxpayer purchasing the shares eventually filed suit to seeking to rescind the contract due to a mistake in the value of the stock to be purchased.  The court held that the fair market value of the shares of stock to be purchased through the agreement was actually $1 million.

Upon sale of the stock for $3 million, the taxpayer claimed a capital loss on his Schedule D when reporting the gain or loss from the sale of the stock.  The Internal Revenue Service audited the taxpayer’s Individual Income Tax Return and argued that the basis in the stock should be the judgment amount of $1 million from the prior court proceedings.   The gain or loss on the sale or other disposition of property is the difference between the amount realized and the properties adjusted basis.  Basis is generally the cost of the property, and in the case of S corporation stock, basis can be adjusted as required under IRC Section 1367.  Thus, the IRS issued a notice of deficiency to the taxpayer claiming the that taxpayer actually had a capital gain of $2 million as opposed to a capital loss.

The court agreed with the Internal Revenue Service given the fact the taxpayer was only obligated to pay the $1 million, and found that the $1 million purchase price for the shares was the true economic reality of the transaction.  Thus, the correct reporting of the transaction would be that of capital gain and not a capital loss.

If you are considering purchasing an interest in a business it is important to understand the impact your basis will have regarding the gain or loss on any sale or disposition, and how your basis can be adjusted per the Internal Revenue Code.  A Denver tax attorney or business attorney at The McGuire Law Firm can assist you with the tax implication of business transactions in addition to other business matters.

Schedule a free consultation with a Denver business attorney by contacting The McGuire Law Firm.

 

Step Transaction Doctrine Described by Denver Tax Attorney

“So, we’ll take step one, and then step two and then step three and then pay no tax!?  Wow, that’s great, we should have been doing this Denver Tax Attorneyfor years!”  Maybe you have heard these words, or even said these words.  With all the current tax law, tax attorneys, CPAs, accountants and others have found loopholes of which transactions can be arranged, organized and carried out in a manner that provide the taxpayer with a benefit that was never intended by Congress upon the passing of the tax law or tax laws.  Although, our tax attorneys may find these transactions creative, they may be illegal and certainly could be questioned and not upheld by the Internal Revenue or a court.  Therefore, we recommend you discuss any proposed transaction with a tax attorney if it sounds too good to be true.  The article below discusses one doctrine, the Step Transaction Doctrine that can be used by the Internal Revenue Service or a court when reviewing certain transactions and what the correct tax implications should be to the transaction(s).

One Judicial Doctrine that tax lawyers are familiar with is the Step Transaction Doctrine.  The Step Transaction Doctrine allows for the combination of separate “steps” or transactions and taxes them as a single occurrence or transaction.  As the court stated in Comm’r v. Clark, 489 U.S. 726, 738 (1989), “interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction.  By thus linking together all interdependent steps with legal or business significance, rather than taking them in isolation, federal tax liability may be based on a realistic view of the entire transaction.”

The Internal Revenue Service or a court may look for a binding commitment to complete any one step within a series of transactions, which appears separate from the others.  Another factor the Internal Revenue Service or a court may consider is how likely one party would be to enter into the transaction(s) or agreement(s) if the other steps never took place or occurred.  Further, the parties subjective intent can be considered and whether the separate steps or transactions have an independent purpose.  If each step or transaction is related to a former or later step or transaction, it is likely the Internal Revenue Service or a court would apply the Step Transaction Doctrine and view them as a single event for tax purposes.

As a Denver tax attorney and business attorney, John McGuire is familiar with the Step Transaction Doctrine and other doctrines that can be applied to alter the tax outcome of certain transactions.  We would gladly assist you in examining any proposed transactions that you are considering entering into.

Contact The McGuire Law Firm to schedule your free consultation with a Denver tax attorney or business attorney.

Denver Business Attorney Discusses a Profits Only Interest in a Business

Many clients consult their tax attorney or business attorney about establishing an agreement with third parties or Denver Small Business Attorney employees whereby the individual would receive a profits only interest in the business.  In a typical profits only interest, the employee or a third party service provider receives a grant of a certain percentage of the business profits.  The agency history of profits interests are outlined below by a Denver tax attorney at The McGuire Law Firm.

The Internal Revenue Service provided Revenue Procedure 93-27 which defines a profits only interest as an interest that would not provide the “holding party” with a right to the share of the LLC’s proceeds if the LLC liquidated and sold all of the partnership assets for fair market value.  Thus, the “holding party” does not have an equity interest in the business because the “holding party” would not necessarily reap the benefits of appreciated property or assets held by the business.

Although many can understand why the individual or “holding party” would not have an equity interest in the business with a profits interest only, our business attorneys are often asked, how the profits only interest is taxed.  In Revenue Procedure 93-27, the Internal Revenue Service provided that a parties receipt of a profits only interest would not be treated as an interest received for past or future services as a taxable event if the parties and circumstances meet certain conditions.  One such condition is that the party must receive their interest in the capacity of a member, or in anticipation of becoming a member of the LLC, in exchange for their services to or for the granting LLC’s benefit.  Further, the party can only receive a profits interest and not a capital interest.  The receipt of a capital interest without the contribution of money or property is likely to be a taxable event.  Additionally, the LLC cannot correlate the profits only interest to a certain and predictable income stream, or dispose of the interest within two years from the date the interest is received.

Eventually Revenue Procedure 2001-43 followed up and answered questions created by Revenue Procedure 93-27.  The issues in Rev. Proc. 2001-43 involve profits interest that are subject to vesting restrictions, such as requirements for employment or service duration and how a non-vested holder would be treated for federal income tax purposes under the tax laws.  The IRS does not consider either event (the granting of a profits only interest nor the vesting of a profits only interest) to be a taxable event.  With certain exceptions, the IRS would tax the grant of the profits interest, but the issue remains value.  The value of the interest may be hard to ascertain and have a value of zero.  Further the “holding party” would be/will be taxed on the profits as they are received.  Thus, without value, there is no income to the recipient or holder and there can be no deduction to the LLC.

A Denver tax attorney or business attorney at The McGuire Law Firm can discuss profits only interests with you and their potential application to your business.  Additionally, we counsel and advise businesses on other tax law and business law questions and issues.

Contact The McGuire Law Firm to schedule your free consultation with a Denver tax attorney or business attorney.

 

Discussion of 2014 Tax Changes by Denver Tax Attorney

As a tax law firm, The McGuire Law Firm attempts to remain abreast of current tax law and changes that impact our clients.  As taxDenver Tax Lawyer Denver Tax Attorney attorneys, we attempt to educate our clients on the tax laws so they understand the tax laws and therefore the impact these tax law changes will have.

Recently, the Internal Revenue Service announced many tax law changes and provisions to current tax law that tax attorneys and taxpayers should be aware of.  Below are the tax law changes that most taxpayers and tax attorneys should be aware of.

In 2014, the standard deduction will increase to $6,200 for single taxpayers and $12,400 for taxpayers filing as married filing joint.  This is an increase from $6,100 and $12,200 respectively from 2013.  For those taxpayers filing as head of household, the 2014 standard deduction is $9,100 an increase from $8,950.

In 2014, itemized deductions are phased out or limited beginning at $254,200 for single taxpayers and $305,050 for married filing joint taxpayers.

The 2014 personal exemption increased $50 to $3,950 for 2014, but this exemption is subject to phase out when a single taxpayer has an adjusted gross income of $254,200 or more, and when taxpayers filing married filing joint have an adjusted gross income of $305,050 or more.

In 2014, the highest tax rate of 39.6% will impact single taxpayers whose income is in excess of $406,750 and for taxpayers filing married filing joint, $457,600.

The annual gift tax exclusion for 2014 will remain at $14,000.  Thus an individual can gift up to $14,000 in 2014 without lowering their lifetime gift exclusion.  The gifting of assets within the annual gift tax exclusion can be a wonderful way to lower a taxable estate.  Any individual considering gifting property to loved ones should consult with their tax attorney.

The lifetime exclusion amount for estates of decedents who die in 2014 is $5,340,000 which was an increase from the $5,250,000 amount in 2013.

There was an increase in the foreign earned income exclusion to $99,200, meaning an individual can exclude up to $99,200 of foreign earned income on their 1040 United State Individual Income Tax return.  Prior to taking the exclusion, a taxpayer should consult with their tax attorney or tax professional to ensure that they qualify for the foreign earned income exclusion.

A Denver tax attorney at The McGuire Law Firm can assist you with your tax questions and matters.  Further, a tax attorney can assist you with tax planning and other matters.

Schedule a free consultation with a Denver tax attorney by contacting The McGuire Law Firm.

Tax Attorney on Non Collectible Status

One option to “resolve” an IRS tax debt is to have the debt placed in a “Currently Non-Collectible” status.  As a Denver tax attorney, John McGuire Denver Tax Lawyer Denver Tax Attorney IRS Debt has placed many IRS tax debts in a currently non-collectible status.  The reason “resolve” is placed in parenthesis above will be better explained by the article below drafted by a Denver tax attorney at The McGuire Law Firm.

When the IRS places a federal tax debt in a Currently Non-Collectible status, the IRS is more or less agreeing that they will not actively collect on the tax debt.  Although, the IRS does not actively collect on the debt (which is a benefit) there are ups and downs to having your tax debt placed in a currently non collectible status, which are outlined below.  A tax debt is placed in a currently non collectible status by completing the appropriate financial statement(s) and providing the necessary attachments to verify the financial statement(s).  Generally, when the IRS places a tax liability in this non collectible status they are agreeing that the taxpayer is unable to make payments towards the tax debt.

The Good:

–          IRS will not actively collect while your tax liability is in non-collectible status, thus you do not have to fear IRS bank levies, wage garnishments or the seizure of assets.

–          The collection statute continues to run, meaning the amount of time the IRS has to legally collect on the debt gets shorter for the amount of time your liabilities are placed in non-collectible status.

–          It is possible that the collection statute could expire while you are in this status and thus the IRS could no longer legally collect on the tax debt.

–          Because the statute continues to run, you may be able to use this time in non collectible status to place the debts in a position time wise whereby they could be discharged in a Chapter 7 bankruptcy, which could be part of an overall plan.

The Bad:

–          In general, non-collectible status is temporary and at some point in time the IRS is likely to request an updated financial statement to see if your ability to pay has increased.  Generally, taxpayers are placed in a non-collectible status for 12-24 months.

–          Penalty and interest continue to accrue on the tax debt while you are in non collectible status.  Thus, if your circumstances change and two years down the road you can pay the debt, the debt will have increased due to the accrual of penalty and interest.

–          Many tax attorneys and taxpayers feel that this status is temporary and therefore does not provide the overall mental relief they are seeking to know the tax debt is fully resolved.

–         Generally, given the new IRS regulations from May of 2012 that impact the calculation of an offer in compromise, if you are in a position to have the IRS place your liabilities in an non collectible status, you are likely also in a position to settle your tax debt through the IRS offer in compromise program. Thus, if your liabilities are only in a non-collectible status, you may be doing yourself a disservice by not trying to settle the tax debt now and fully close out the issue.

An experienced Denver tax attorney at The McGuire Law Firm can help resolve your IRS debts, problems or other issues.  Further, a tax attorney can assist you to prevent IRS problems in the future.

Contact a Denver tax attorney at The McGuire Law Firm and schedule your free consultation.

Offer in Compromise Calculation Explained by Denver Tax Attorney

How much will the IRS accept to settle my tax debt through an offer in compromise?  How much will my offer in compromise be?  Denver Tax LawyerThese are common questions a Denver Tax Attorney at The McGuire Law Firm may be asked.  In some respects, we answer each question the same initially, but our final and true answer is different for every client, because every case is different and the amount of an offer in compromise is determined by each taxpayer’s specific circumstances as opposed to a set percentage of the tax debt that the IRS is willing to accept to settle the tax debt.  The article below has been drafted by a tax attorney to help explain how an offer in compromise is calculated.

An offer in compromise is calculated by looking at a taxpayer’s disposable income and equity in assets.  Equity in assets is added to disposable income once disposable income is multiplied by either 12 or 24.  Prior to May of 2012, disposable income was multiplied by 48 or 60.  Thus, the most current changes to the offer in compromise calculation are very taxpayer friendly in terms of lowering a taxpayer’s offer in compromise amount.

Disposable income is calculated by looking at a taxpayer’s total household income for an individual taxpayer.  This includes all sources of income.  Thereafter, expenses are deducted from income and the remainder is disposable income.  The caveat is, the IRS establishes allowable amounts for expenses for items such as housing, utilities, food, clothing and transportation costs.  The allowable amount is determined based upon the number of dependents in the taxpayer’s household, county where the taxpayer lives and number of vehicles.  The issue created by the allowable standard is that if a taxpayer is paying more than the standard allowed by the IRS, what the taxpayer feels is their disposable income will be different than what the IRS feels the disposable income to be.

Equity in assets includes any equity in an asset from a home or car to retirement accounts and business interests.  The IRS does allow discounts for certain assets.  For example, a taxpayer can generally reduce the fair market value of their home by 20%.  Further, a taxpayer can generally reduce the fair market value of a retirement account by 30% to account for the taxes that would be paid on distributions from that retirement account.

In terms of putting the equation together, we will use an example.  Assume a taxpayer has equity in assets of $10,000 after allowable discounts, and disposable monthly income of $500/month.  The taxpayer’s offer in compromise amount would be $16,000 or $22,000.  These figures were calculated: $10,000 + $500 x 12= $16,000 or $10,000 x $500 x 24.

Our Denver tax attorneys have prepared and submitted many successful offer in compromises on behalf of our clients.  Our acceptance rate on the offer in compromises submitted within the prior 24 months is extremely high, much higher than the national average.  This success is due to our tax attorney’s experience in dealing with the IRS and honest & realistic review of our client’s situation.  If you have a tax debt and want to discuss your ability to settle this debt with the IRS, call our tax attorneys for a free consultation.

Contact The McGuire Law Firm to speak with a Denver tax attorney.  A tax attorney can assist you in resolving IRS debts, problems and issues.  You may be able to resolve your tax debt through an offer in compromise.  Free consultation with a tax attorney!

 

 

Corporate Liquidation and Assumption of Debt Discussed by Denver Tax Attorney

When a corporation liquidates, what happens to the corporate debt?  This is a common question many of our clients will ask a taxDenver Business Attorney attorney or business attorney at The McGuire Law Firm.  Our answer is usually, “it depends.”  While this is a typical (and maybe expected) answer from an attorney, it is correct.  The article below, drafted by one of our business and tax attorneys should help shed some light on the issue.  As always, please contact our office with any questions regarding your business or tax issues.

The majority of states have state law that would require corporate creditors to be paid upon the liquidation of a corporation or cause third parties, such as the corporate shareholders to pay these corporate debts or assume the debts.  If neither the corporation nor the shareholders were required to pay such debts, certain laws and other principles founded in equity will likely subject the shareholders to some form of transferee liability up to the value of the corporate assets received by the shareholders upon the corporate liquidation.

Often through a liquidation, the shareholders will receive corporate assets via liquidating distributions and assume these assets subject to the liabilities or assume corporate debt.  If shareholders take property subject to debt or assume corporate liabilities, their gain must be reduced or their loss increased to the extent of the debt assumed.

For example, if through the corporate liquidation, John received a distribution of property with a fair market value of $100,000 and such property was subject to $50,000 of liability, and John had a basis in his corporate stock of $50,000, John would realize no gain on the liquidating distribution.

However, the above analysis could change if the shareholder is already liable for the debt they “assume.”  This would occur if the shareholder made a personal guarantee on the debt or co-signed etc.  Under such circumstances, the assumption of debt upon liquidation has been held to not reduce the amount realized.  When the shareholder pays the debt of which they would have been personally liable, they may be able to deduct a loss given that the amount they realized was not reduced upon the liquidation.  If the shareholder pays the assumed debt and that debt reduced the amount received through the corporate liquidation, they may not deduct the subsequent payments.  This subsequent loss would likely be a capital loss due to the fact the shareholder would have recognized capital gain or capital loss upon the liquidation of the corporation.  Such treatment would be in line with the Arrowsmith v. CIR case.

A Denver tax attorney at The McGuire Law Firm can assist clients regarding corporate liquidations, sales and purchases.  All of these transactions have tax consequences and should be discussed with a tax attorney and/or a business attorney

Schedule a free consultation with a tax attorney in Denver or Golden Colorado by contacting The McGuire Law Firm!

Form Over Substance by Denver Tax Attorney

The Form Over Substance Doctrine is a doctrine finding its foundation on equity principals.  Tax attorneys have seen the InternalDenver Tax Attorney Revenue Service (and courts) use the Form Over Substance Doctrine as a means by which to “attack” certain transactions.  Tax attorneys may have represented taxpayers in matters before the IRS when the IRS was attempting to “restructure” a transaction or reclassify an item under the Form Over Substance Doctrine.

The Internal Revenue Service and courts can apply the Form Over Substance Doctrine when a taxpayer has arranged calculated transactions that may appear one way on paper, but operate another way in reality.  Generally, a taxpayer would create this discrepancy most often to pay less tax or provide another tax benefit.  Tax law requires a relationship between a tax benefit and a profit or business motive to prevent taxpayers from abusing Congress’ true intent as codified in the Internal Revenue Code.

If the applicable court or the Internal Revenue Service detects or feels that the taxpayer’s motive regarding tax benefits prevails over the business or profit motive based on a review of the contemporaneous documents, the Internal Revenue Service or the court may determine that the transaction’s form does not match its substance.

Although, tax law acknowledges a taxpayer’s right to pay as little tax as is legally correct, the Form Over Substance Doctrine applies when the taxpayer crosses a line, creating artificial designs that disguise the transactions true nature.  The taxpayer may have created a prearranged plan merely for the tax benefits.  Based on public policy, courts will generally not allow or permit a taxpayer to benefit from a noticeably tax advantaged transaction or series of transactions unless these benefits are associated with economic substance and the taxpayer is subject to some form of real economic risk.  Economic substance has been discussed by our tax attorneys in previous articles.

In general, if a business or individual proposes a transaction to you, or your business of which the tax benefit appears too good to be true, it probably is.  When looking at the transaction, you must see a business or profit purpose or motive that would exceed the tax benefits of the transaction.  If the sole purpose of the transaction is the avoidance of tax, the Form Over Substance Doctrine could allow the Internal Revenue Service or a court to deem the transaction in a light not as favorable as projected or anticipated.

If a transaction has been proposed to you that you are questioning, please contact a Denver tax attorney at our office to schedule a free consultation.  We can apply the facts of your case to the current tax law and provide our opinion regarding the transaction.  It is always better to enter into the transaction knowledgeable.

You can Contact The McGuire Law Firm to schedule your free consultation with a Denver tax attorney!

Keeping Real Estate out of a C Corporation by Denver Tax Attorney

For many reasons tax attorneys may think it desirable to keep real estate out of a corporation.  The transfer or sale of Denver Small Business Attorneyassets, such as appreciated assets from a C Corporation leads to double taxation issues that are not found when the real estate is owned by individuals or a partnership.  Even when a C Corporation distributes real property to a shareholder there are double taxation issues.  The article below, drafted by a Denver tax attorneys outlines a few issues to consider if you operate as a C Corporation.

Generally real estate appreciates in value creating more built in gain.  Further, as the real estate is depreciated, the built in gain is increased by the depreciation taken and as time passes, a large gap grows between the fair market value of real estate and the adjusted basis.  This creates even more gain to be recognized by the corporation when the property is sold, distributed or transferred.

Although, a section 1031 like kind exchange may be an option for transferring real estate out of a corporation, a partnership is likely to provide more flexibility, as the partnership may be able to transfer out an undivided interest in real estate to each partner who can then sell or transfer their share.

An additional issue to consider is exposure and asset protection.  When real estate is held in a corporation it is subject to the claims of creditors.  Therefore, it may be better to hold the property individually or in a partnership such as an LLC.

When analyzing the sale or transfer of property from a corporation, the analysis should include considerations at both the corporate and shareholder level.  Regarding the gain at the corporate level, a C Corporation will be taxed at the C Corporation tax rates on any gain.  A common problem arises when a C corporation distributes property to a shareholder as is thereafter taxes, but the corporation lacks the cash to pay the tax.  An S Corporation may still be taxed at the corporate tax rates for any built in gain to the extent there was built in gain when the S Corporation made the S Election.  If the S corporation has no built in gain, the gain will pass through to the shareholders and taxed at the shareholders applicable tax rates thus avoiding double taxation.

If the property is sold for fair market value to a shareholder, as opposed to distributed as a dividend, there will be no tax at the shareholder level.  The shareholder’s basis in the real estate would be the purchase price.  If the property were distributed to the shareholder from a C corporation, the fair market value (less any debt on the property) would be taxed to the shareholders, initially as a dividend to the extent of the corporation’s earning and profits.  Distributions above earnings and profits would be considered return of capital (return of basis) and thereafter capital gain.

Because of the above tax implications and consequences, the sale or transfer of real estate or liquidation of the corporation creates a large amount of tax due and may not be practical.  A business considering the sale or transfer of real property should always consult with their business attorney or tax attorney to review all of the implications.

You can schedule a free consultation with a tax attorney in Denver or Golden by contacting The McGuire Law Firm!  John@jmtaxlaw.com or www.jmtaxlaw.com

FTS Program Discussed by Denver Tax Attorney

Denver Tax AttorneyA Denver tax lawyer at The McGuire Law Firm recently learned that the IRS Fast Track Settlement (FTS) program will be expanded nationwide.  As a  tax attorney John McGuire works extremely hard to stay up to date with all IRS notices and publications that may impact our clients.  Information regarding the FTS program is stated below.

The FTS Program was designed to help small businesses and the self-employed who are being examined by the IRS.  Typically, small business and self-employed individuals would be examined by the division within the IRS called the Small Business/Self Employed Division called the SB/SE Divisions.  The goal of the program is to expedite these examinations so small businesses can settle any issues with the Internal Revenue Service quickly.

Generally the FTS Program may be available to taxpayers within the jurisdiction of the SB/SE if:

–          The issues are full developed

–          A limited number of issues are disputed and thus the majority are agreed upon

–          The taxpayer states a written position, or has filed for a small claims request where the total amount of tax liability for any period is $25,000 or less

 

The FTS Program is not available under the following circumstances and cases:

–          Offers in compromise, Trust Fund Recovery Penalty cases, Collection Due Process cases and cases within Collection Appeals

–          When certain issues are set to be litigated

–          When an issue that would be resolved for one party could result in an inconsistent treatment in the absence of participation from another party

In terms of maintaining and protecting taxpayer rights, which is a concern of our tax attorneys, the program does not inhibit or prevent the taxpayer from exercising their appeal rights if the FTP program is deemed unsuccessful by the taxpayer.  The goal of the IRS is to have IRS audit issues resolved within 60 under the FTS Program, as opposed to months or years. 

Taxpayers who are under examination will work directly with IRS Agents in the SB/SE area and the IRS appeals office in the FTS Program.  It is anticipated that the IRS appeals officer will primarily serve as a mediator.  Certain cases can even be fast tracked.

Interested taxpayers or tax attorneys representing taxpayers can contact the examination group manager or specialty program group manager.  Form 14017 needs to filed and the taxpayer submits a brief written response to the IRS’ current position.

As a Denver tax attorney, John McGuire has represented many individuals and businesses before the IRS in audit and examination proceedings.  We offer a free consultation to discuss your tax issue.

Please feel free to contact The McGuire Law Firm at anytime to schedule a free consultation with a Denver tax attorney.