Tax Attorney in Denver Explains Form 2848

Tax attorneys can represent individuals and business taxpayers before the Internal Revenue Service.  What allows tax Denver Tax Attorneyattorneys to act on behalf of and represent these taxpayers?  The answer is, a Power of Attorney, and for tax purposes before the Internal Revenue Service, specifically, Form 2848.

Form 2848 is titled Power of Attorney and Declaration of Representative.  Form 2848 must be filed with the Internal Revenue Service for an attorney, certified public accountant or enrolled agent to represent a taxpayer before the Internal Revenue Service.  A different form, or another power of attorney will not work.

Form 2848 requests the name of the taxpayer and the taxpayer’s identification number.  If the power of attorney was for an individual, the identification number is generally going to be their social security number.  If the power of attorney is for a business, the identification number is going to be employer identification number, which is the EIN.  Thereafter the address and phone number of the taxpayer is stated and the name, address, CAF number and other contact information of the individual or individuals who are to be representatives is stated.

Under the Matters Section, you will state the type of tax or matter description, form number and periods for which the representative is authorized to act for on behalf of the taxpayer.  For example, if a tax attorney was representing an individual on 1040 Individual Income Tax issues for years 2008 and 2010, you would state, “Income, 1040 and 2008 & 2010” in the matters section.  If a tax attorney was representing a corporation the type of tax or matter description would likely be Income, employment and unemployment, and the associated form would be 1120, 941 and 940 respectively.  If you are sure there is only a single period at issue, than you state only this period on the 2848.  However, if you are unsure or feel there may be other issues, it is best to give your representative broader authority and thus maybe you state a number of tax periods, such as 2000-2013 to ensure the authorization will allow your representative to discuss the issues with the IRS.

Certain acts such as signing a tax return must be specifically designated to your power of attorney on the Form 2848 or such power will not be given to your power of attorney.  You may also delete or withdrawal certain powers by stating such on the Form 2848.

To execute Form 2848, the taxpayer will sign, print their name and date at the top of page 2.  If the taxpayer is a business, the individual signing the power of attorney, must also stated their title within the business.  Your representative can be a number of people or professionals, but those most commonly on the power of attorney and with the most general authority to act on your behalf are attorneys, certified public accountants and enrolled agents.  Your representative will complete their portion below where you have signed and the power of attorney is ready to be filed with the Internal Revenue Service.

Form 2848 can be filed with the IRS CAF Unit, which is a general unit that then notes the representatives authority for the taxpayer, or you can file the Power of Attorney with a specific individual such as a revenue officer, appeals officer or an offer in compromise examiner.  Form 2848 can be mailed or faxed to the Internal Revenue Service.

As a tax attorney, John McGuire has acted as Power of Attorney on behalf of many taxpayers to represent them before the IRS and resolve their tax debts and/or tax issues.  If you have a matter before the IRS please contact our law firm to speak with a Denver tax attorney.

Contact our office and schedule your free consultation with a tax attorney!  Offices in Denver, Colorado and Golden, Colorado.

What is Form 941 by Denver Tax Attorney

What is Form 941?  This is a common question many small business owners will ask tax attorneys.  Form 941, is a federal tax form titled, Employers Quarterly Federal Tax Return.  This form is filed quarterly by an employer to report wages paid and wages withheld.

 

–          1st Quarter covers January through March and is due April 30st

–          2nd Quarter covers April through June and is due July 31st

–          3rd Quarter covers July through September and is due October 31st

–          4th Quarter covers October through December and is due January 31st (following year)

On the form you will state: the number of employees, total wages paid, federal income tax withheld, social security tax withheld and Medicare tax withheld.  Additionally, the employer will stated the Federal Tax Deposits that have been made during the quarter and thus the remaining balance if any when the tax return is filed.  An employer will have depositing requirements that are dictated by the tax liability, and a look back period.  Generally, the employer will be required to make the federal tax deposit each time payroll is paid, on a monthly basis or payment can be made with the return.  If the employer is a monthly depositor the deposit is due on the 15th of the following.  For example, a monthly depositor would need to make the deposit for October on or before the 15th of November to be in compliance.

The penalties for failing to timely make the federal tax deposits and/or timely filing the 941 tax return can be quite severe.  The failure to file penalty is 5% per month or a portion of a month that the tax return is late, and can be assessed up to 25%.  The failure to timely deposit penalty is generally 10%, but may depend upon how late the federal tax deposit was made.

A 941 tax debt to the Internal Revenue Service is a very serious matter.  Our Denver tax attorneys have worked with many clients who paid the net payroll to their employees but did not pay the taxes over to the Internal Revenue Service.  The reason why a 941 tax liability to the IRS can be so severe is that in addition to the business owing the tax, the individual business owners can be responsible for the trust fund portion of the 941 debt through the Trust Fund Recovery Penalty.  The Trust Fund Recovery Penalty is a “penalty” whereby the taxes withheld from the employee’s paycheck can be personally assessed to the willful and responsible parties, which is generally the business owners.  The trust fund portion is the social security and Medicare tax, and federal income tax that was withheld from the employee’s pay check.  The business owners or other responsible parties can be held personally liable for this portion of the tax debt and the IRS can collect from the both the business and the individual parties at the same time.

You can calculate the total trust fund amount from a quarter by reviewing the 941 tax return.  If you add the total federal income tax withheld to 50% of the social security and Medicare tax, this amount is the total trust fund for such quarter.  Of course, if deposits were made, the trust fund actually due or that an individual may be exposed to, would be less.

Due to the severity of the 941 taxes, our Denver tax lawyer recommends that all business owners understand the process of how these taxes are paid and when the deposits and tax returns are due.  The Internal Revenue Service also has instructions for the 941 tax return, which may be of help.

Contact The McGuire Law Firm to speak with a Denver tax lawyer and schedule your free consultation!

 

 

Carryovers From C Corporation by Denver Small Business Attorney

Many small businesses may have been formed and operated as a C Corporation.  Thereafter, for taxation reasons or other purposes the shareholders, officers and/or directors may deem it more appropriate for the business to operate as another entity such as an S Corporation.  Under such circumstances, our small business attorneys are asked what tax carryovers of the C Corporation can be carried over to the S Corporation.  For example, a client my ask us, “if we make the election to be taxed as an S Corporation, will our current net operating loss carry forward?”  The article below has been drafted by a Denver small business attorney at The McGuire Law Firm to discuss a few issues regarding carryovers from a C Corporation.

In general, no carry forward or carry back that arises from a C Corporation taxable year can be carried over to a year for which the corporation is an S Corporation under Internal Revenue Code Section 1371(b)(1).  Further, this issue was discussed in Rosenberg v. Comr., 95 T.C. 451 (1991) and it was held that the Tax Benefit Rule does not override and trump the plain code language of Internal Revenue Code Section 1371(b)(1).  Examples of items applying to the law as stated under 1371(b)(1) would be:

–          Net Operating Losses (See IRC 172(b))

–          Charitable Contributions (See IRC 170(d)(2))

–          Capital Losses (See IRC 1212(a))

–          Foreign Tax Credit (See IRC 904(c))

Generally, it is believed and held that an exception exists to the rule above for certain carry forwards that could offset built in gains tax.  Although, there is a general disallowance of carryovers from C Corporation years to S Corporation years, certain items may be able to be carried forward to the S Corporation years to reduce the built in gains tax.  These items may include: capital losses, net operating losses and general business credit carry forwards.  In regards to any restriction on time for the use of a carry forward, under Internal Revenue Code Section 1371(b)(3), a year in which the corporation is or was an S Corporation is treated as a taxable year for the purpose of determining the number of years for which the corporation level item, such as a capital loss, may be able to be carried back or forward.

A small business attorney at The McGuire Law Firm can assist you and your business in making business decisions based off of the legal and tax ramifications, drafting business contracts and documents and negotiating the sale or transfer of business assets or business interests.  John McGuire holds an LL.M. in taxation.  This knowledge in taxation is directly applicable to almost every decision or transaction a business executes or considers entering into.  When was the last time you made a “major” business decision and did not wonder what the tax effect or implication would be?  The McGuire Law Firm has law offices in West Denver and Denver, Colorado.  Mr. McGuire works with businesses throughout the state of Colorado, and in other states depending upon the circumstances.

Contact The McGuire Law Firm to speak with a Denver small business attorney and schedule your free consultation!

Denver Business Attorney Discusses the Definition of Liability in Partnership Context

A partnership is a very common entity format for a small business.  Small business owners can form a partnership as a general Denver Small Business Attorneypartnership, limited partnership, limited liability limited partnership (LLLP) and a limited liability company (LLC) is a partnership as well.  The treatment of partnership liabilities can have large impact to the taxation of the individual members as items of gain, loss and deductions etc. are passed through to the individual members or partners. John McGuire, as a Denver small business attorney has drafted articles relating to partnership liabilities in certain contexts, but the article below is specific to what constitutes a partnership liability and how “liability” is defined in the context of a partnership and the applicable Internal Revenue Code sections and Treasury Regulations.

The Section 752 Treasury Regulations define the term “liability” by referring to the term “obligation.”  The term “obligation” is defined as any contingent or fixed obligation to make payment without regard to whether the obligation is otherwise taken into account for purposes of the Internal Revenue Code.

Below are examples of obligations:

–          Short Sale Obligation

–          Debt through a loan or note or other contract obligation

–          Tort obligation

–          Pension obligation

–          Derivative financial instruments- forward contract, an option or options, futures contracts

For the purposes of Internal Revenue Code Section 752 and in the context of a partnership, an obligation is a liability if, or when and to the extent that the obligation: creates or increases the basis of any obligor’s assets (including cash); gives rise to an immediate deduction to the obligor; or, allows for an expense that is not deductible in computing the obligor’s taxable income and is not properly chargeable to capital.  In Revenue Rule 88-77, the Internal Revenue Service ruled that unpaid expenses and accounts payable of a cash method partnership were not partnership liabilities or obligations.

For partners to share an IRC Section 752 liability, the partnership must be the obligated party.  If for example, another individual or entity is obligated and thus the obligor, the liability would not be considered a partnership liability unless an agent-principal relationship exists between the obligor and the partnership.

Under Section 1.752-5 of the Federal Treasury Regulations, a liability is an obligation to the extent that either: the obligation is not a Section 752 liability or the amount of the obligation exceeds the amount taken into account when incurring the obligation.  For these purposes the amount of the obligation is the amount a willing assignor would pay to a willing assignee in assuming the obligation via an arm’s length transaction.

Recourse Liability: A liability is treated as recourse to the extent any partner or a related person bears the economic risk of loss for the liability.  A related person is defined in Regulations Section 1.752-4(b).

Non-Recourse Liability: A liability is treated as non-recourse liability to the extent that no partner or related party bears the risk of economic loss for the liability.

A Denver small business attorney at The McGuire Law Firm can assist you and your partnership in understanding what constitutes a partnership liability, the type of liability and the impact of such liability.  Mr. McGuire holds an advanced degree in taxation, which is applied to business issues given the close relationship of business and tax.  Law offices in Denver  and west metro.

Contact The McGuire Law Firm to speak with a Denver small business attorney and schedule your free consultation.

 

Article on Corporate Bylaws by Denver Small Business Attorney

Previously a Denver small business attorney from The McGuire Law Firm has drafted articles and discussed corporate articles of incorporation that are filed Denver Business Attorneywith the Colorado Secretary of State.  Now a business attorney now wishes to discuss another corporate document, the corporate bylaws.  The article below has been drafted by a Denver small business attorney at The McGuire Law Firm, and we hope this article will provide you with a better understanding of corporate bylaws.

The Articles of Incorporation of a corporation can be somewhat considered the constitution of the corporation.  But, what are corporate bylaws?  The corporate bylaws of a corporation can be viewed as the legislation or “law” that regulates the internal operations of the corporation and how the corporation carries on business internally.  Unlike the articles of incorporation, corporate bylaws do not need to be filed to be effective.  At the initial meeting or the organization of the corporation, the bylaws will be adopted by the incorporators or the directors.  This initial meeting whereby the corporation’s bylaws are adopted may also include the election of the corporate officers, authorization of buy-sell agreements or restrictive stock transfer agreements, the issuance of corporate stock, tax elections (making the S Corp election), bank resolutions and other pre-incorporation actions.  A majority of the board of directors or initial incorporators may call the initial organizational meeting.  The corporate bylaws will thereafter provide the notice requirements for subsequent corporate meetings.  Unanimous written consent by the board of directors may be utilized as opposed to a formal organizational board meeting unless such action is prohibited in the corporate bylaws.  Later formal board meetings can also be avoided through unanimous consent of the board of directors if the action is not prohibited in the bylaws.

Generally the corporate bylaws will cover a broad range of issues and corporate matters such as designating the first annual corporate meeting, the corporation’s fiscal year, the authority and duty of the corporate officers, the number of corporate directors, form of stock certificates, places(s) of meetings, quorum requirements and indemnification issues.  The corporate bylaws can also outline detailed voting procedures.  Section 7-110-201 of the Colorado Business Corporation Act, gives the power to adopt, alter or repeal the bylaws after the organizational meeting to the corporation’s board of directors, unless a particular provision specifically prohibits the board from doing so, or such powers are reserved solely to the corporate shareholders in the articles of incorporation.  Provisions within the corporate bylaws are considered binding on the shareholders and the corporation, but not always binding to 3rd parties because the provisions are not necessarily a matter of public record.  Generally, the bylaws will be kept in the corporate minute book.

A Denver small business attorney at The McGuire Law Firm can assist you with the formation of your corporation and the drafting of corporate documents such as the corporate bylaws, or a buy-sell agreement.

Contact The McGuire Law Firm  to speak with a Denver small business attorney and schedule your free consultation.

What is a Schedule SE by Denver Tax Attorney

Many clients will ask their tax attorney and business attorney, what is a Schedule SE and why do I need to file a Schedule SE?  The article below has been drafted by a Denver tax attorney at The McGuire Law Firm to provide background on, and explain a Schedule SE.

Schedule SE is used to calculate self employment tax and is titled just that.  When a small business owner who is operating as a sole proprietor completes a Schedule C, the net profit from the Schedule C is transferred to the Schedule SE to calculate the self employment tax.  Additionally, income from a partnership on Form K-1 is stated on a Schedule SE to calculate the self employment tax.

Self employment tax is the social security tax and Medicare taxDenver Tax Lawyer.  When an individual is working for an employer, the employer pays half of the social security and Medicare tax, which is known as the employer matching portion, and the employee pays half of the social security and Medicare tax, which is known as the employee matching portion.  Thus, when you are an employee, only half of the self employment tax is deducted from your paycheck.  Therefore, when an individual starts a business and is operating a sole proprietorship, they are often shocked at the amount of tax that is due on their net earnings that first year, or the first year in which they have earned a decent net profit because paying the total amount of the self employment tax can be a large tax burden, especially when considering that the self employment tax is in addition to the federal income tax and of course state income tax (in most states).

The taxpayer is allowed to deduct half of the self employment tax in arriving at their adjusted gross income and although a benefit and helpful, I am sure each self employed taxpayer would rather not have to pay half of the tax as opposed to lowering their taxable income by half of the tax.  The social security portion of the self employment tax does max out at a certain amount of income whereas the Medicare tax does not.  The social security portion is the larger portion of the self employment tax, so this can be helpful to taxpayers, but the max out generally occurs at a relatively high income when compared to the median income in the United States.

A Denver small business attorney or tax attorney at The McGuire Law Firm would welcome the opportunity to discuss tax and business issues with you.  There are entities that would allow you to lower the amount of self employment tax you pay.

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

Denver Small Business Attorney Article: Does a DRO in an LLC Shift the Risk of Economic Loss?

Previous articles have been drafted regarding the impact of a deficit restoration obligation on recourse debt and loss allocation andDenver Small Business Attorney the impact of a deficit restoration obligation on equity allocations.  As a Denver small business attorney, John McGuire would like to discuss one more issue regarding a deficit restoration obligation and a Limited Liability Company, which is discussed below.

By virtue of being a limited liability company, the liabilities of a limited liability company generally constitute liabilities of which the creditor’s rights to repayment are limited to one more assets of the limited liability company because the members of the LLC are not obligated or required to make contributions to the LLC to satisfy or discharge LLC liabilities.  Therefore, in the opinion of our Denver small business attorneys, the presence of a deficit restoration obligation creates an interest issue.  This issue and question being, does the presence of a deficit restoration obligation expand the creditor’s right to repayment such that something beyond the assets of the limited liability company could be exposed to repay the debt?  Thus, the debt of the limited liability company could in fact be recourse debt as opposed to non-recourse debt?

Answers to these questions will depend upon whether the deficit restoration obligation is an asset of the limited liability company, and whether the creditor has the right to pursue the deficit restoration obligation under state law.  If the deficit restoration obligation is considered an asset of the limited liability company and the creditor can collect through the deficit restoration obligation under state law, the deficit restoration obligation would be deemed to shift the economic risk of loss of the applicable debt.  The reason for the shift is, the assets of the LLC would be considered sold for nothing thus the limited liability company would experience a loss and trigger the deficit restoration obligation partner’s LLC capital account in the red.  If the deficit restoration obligation was an asset of the limited liability company that a creditor could pursue, the creditor’s rights would be limited to the assets of the limited liability company.  Thus, if the deficit restoration obligation was an asset of the LLC there would be no shifting of economic risk of loss because the assets (including the deficit restoration obligation) would be considered sold for the debt’s face and there would be no negative capital account balance.  With no negative capital account balance, there would be no negative capital account for a deficit restoration obligation to apply to.

The McGuire Law Firm can assist you with business issues such as those discussed above.  Mr. McGuire holds an advanced degree in taxation known as an LL.M. This degree helps him as a business attorney when analyzing your options and goals due to fact that tax plays an intricate role in the vast majority of business issues and decisions.

Contact The McGuire Law Firm to speak with a Denver small business attorney and schedule your free consultation.

Common Business Tax Returns & Forms by Denver Small Business Attorney

Many small business owners ask their tax attorneys and business attorneys what type of tax return they need to have prepared and filedDenver Small Business Attorney with the Internal Revenue Service.  The article below has been drafted by a Denver small business attorney regarding common tax returns and forms filed by small businesses.

If you are a sole proprietor or single member limited liability company you will file a Schedule C with your 1040 Individual Income Tax Return to report your business income and expenses.  The net income from your business will also be reported on Schedule SE to calculate the self employment tax.  A single member limited liability company is considered a disregarded entity and thus unless the limited liability company makes the election to be taxed as an S Corporation it will file a Schedule C as if it were a sole proprietor.

If you are a partner in a multi-member limited liability company or a partnership you will file a 1065, which is a U.S. Return of Partnership Income.  The 1065 will state all of the partnership’s income and expenses and thus the ordinary business income (or loss) of the partnership.  The partnership’s income (or loss) and other items are passed through to the members or partners and reported on Form K-1, which is titled K-1 Partner’s Share of Income, Deductions and Credits etc.  Thus, the K-1 is the form by which the income and other items is reported for each partner to the Internal Revenue Service.

If you are a shareholder in a corporation, and the corporation has made the election to be taxed as an S Corporation, the S Corporation will file an 1120S, which is a U.S. Income Tax Return for an S Corporation.  The 1120S will state the S  Corporation’s income and expenses and the S Corporation’s business income or loss. Like a partnership, an S Corporation is considered as pass through entity and the income, loss and other items are passed through to the shareholders on a Schedule K-1, titled Shareholders Share of Income, Deductions and Credits, etc.

If your business sold assets during the tax year, you will likely need to file Form 4797.  Form 4797 is titled Sales of Business Property and as the title would dictate is used to report the sale of business property and gain from such sale(s) of property.  Form 4797 also calculates depreciation recapture amounts and involuntary conversions.

The McGuire Law Firm can assist you with your tax questions & issues, tax returns & forms, tax planning, the drafting of business documents and overall legal advice regarding business operations.

Contact The McGuire Law Firm to speak with a Denver small business attorney or Denver tax attorney.  We offer a free consultation to all potential clients.

Denver Small Business Attorney Discusses the Impact of a DRO on Recourse Debt & Loss Allocations

In a previous article by The McGuire Law Firm, a Denver small business attorney discussed the equity generated rules relating to deficit restoration Denver Small Business Attorneyobligations.  In addition to these equity rules, there are more complex issues and considerations to make regarding a deficit restoration obligation’s impact in respect to a limited liability company debt that is considered recourse debt for state law purposes.  In general, a partner will be allocated both the debt under Internal Revenue Code Section 752 and the related deductions under Internal Revenue Code 704(b) to the extent that partner bears the economic risk of loss.  The key issue is whether the allocation of full recourse limited liability debt would be shifted to a partner solely because the partner agrees to a deficit restoration obligation.  Does a partner’s agreement to a deficit restoration obligation allow the partner to be allocated full recourse LLC debt?  The article below drafted by a Denver small business attorney discusses this issue.  However, it appears there may no clear answer to the above question and issue.  Of course, prior to entering into any agreement relating to your partnership we recommend you consult your business attorney, and a tax attorney.

The allocation of recourse debt and related allocations of a partnership are controlled under the 752 and 704(b) Treasury Regulations.  The regulations consider who bears the economic risk of loss if the partnership were liquidated.  Thus, the regulations view the situation under a “constructive liquidation.”  The partners who would be obligated to make payments to creditors or make contributions of cash or property to the partnership to satisfy any debts, and have no right to reimbursement, are considered to bear the economic risk of loss for the debts of the partnership.  Therefore, these partners bearing the risk of loss are allocated the debt and loss attributable to the debt.  Below is an example that may help illustrate a related situation.

Supposed the general partnership of ABC incurs a $1,000 recourse debt obligation and purchases an asset for $1,000.  Partner A has a full deficit restoration obligation, partner’s B and C only have a deficit restoration obligation limited to $200 each.  Under a constructive liquidation, A would be allocated $600 of the loss and B and C would each be allocated $200 of the loss.  The debt would be allocated $600, $200 and $200 to A, B and C respectively and would the losses.  See Treasury Regulations Section 1.752-2(f).

The Section 752 and 704 regulations are pretty straight forward when applied to the lack or avoidance of a deficit restoration obligation in the context of a limited partnership or general partnership, but issues appear through the application to a partnership in the form of a limited liability company.

To consider the implications of the applicable regulations, you must start under the context of a constructive liquidation whereby partnership debts are payable in full, all partnership assets are considered worthless, the partnership disposes of all partnership assets in a fully taxable transaction for no consideration and the only relief would come in the form of a non recourse debt whereby the creditor’s right to repayment is limited to the asset or assets.

For example, assume A, B and C contribute $1,000 each to ABC, LLC, which is a newly formed limited liability company.  ABC, LLC borrow $5,000 on a full recourse basis from an unrelated third party and the loan is not subject to anti-abuse, property pledge or the interest guarantee.  ABC, LLC uses the cash to buy an asset for $10,000.

Based off of the example above, in the absence of a deficit restoration obligation, the LLC’s debt is nonrecourse for the purpose of Section 752 and 704(b) because no member is obligated to make a contribution to the LLC or make payment to the creditor upon a constructive liquidation.  Thus, upon a constructive liquidation the LLC’s assets would be considered sold for the $5,000 debt.

Assuming an individual member (or an individual related to a member) guaranteed ABC, LLC’s debt, but there was no deficit restoration obligation, the debt would become recourse for the purposes of Section 752 and partner nonrecourse under 704(b) because a member bears the economic risk of loss for a liability of the LLC that is really a non recourse liability to the LLC.  Therefore, the debt and deductions would be allocated to the member who personally guaranteed the debt or was related to the individual who guaranteed the debt.

Assuming there is a deficit restoration obligation, the treatment of the debt and deductions is somewhat unclear and are likely to depend upon whether the deficit restoration obligation expanded the creditor’s right’s beyond the assets of the LLC.  If it is determined that the deficit restoration obligation has expanded the rights of the creditor beyond the assets of the partnership, the deficit restoration obligation can convert a nonrecourse debt into a recourse debt obligation for purposes of Section 752 and 704(b).

The implementation of deficit restoration obligations into a partnership agreement or operating agreement, and partner’s guaranteeing partnership debt can significantly impact a partner’s allocation of losses and deductions.  These issues impact the business and taxation of the individual partners.   Any partnership or individual considering these issues may wish to consult a business attorney and a tax attorney.

Contact The McGuire Law Firm to speak with a Denver business attorney or tax attorney.  Free consultation!

Partnership Spin Off by Denver Small Business Attorney

In general, as a Denver small business attorney, I would recommend that most small businesses consider a pass through entity for their Denver Small Business Attorneybusiness ventures.  If a business is operating as a C Corporation, the business may be able to make the S Corporation election.  However, a business entity may not qualify as a “small business” under Internal Revenue Code Section 1361(b), or the corporation may have accumulated earnings and profits, and passive investment income that would be subject the double taxation under Internal Revenue Code Section 1375, and thus ultimately terminate the S Corporation election.  In the situation above, a business attorneys may advise a client to consider a partnership spin-off.  The article below has been drafted by a Denver small business attorney to provide a brief outline of a partnership spin-off.

Through a partnership spin off a C Corporation contributes property that is expected to appreciate to a partnership.  In exchange, the partnership gives the C Corporation a preferred interest in the partnership.  Thereafter, some or all of the C Corporation shareholders, individually or through a pass through entity (such as a limited liability company) contribute cash or other property for the remaining interest in the partnership.  This remaining interest in the partnership could be considered analogous to the common stock of a corporation.  Thus, the future appreciation will belong to the shareholders of the C Corporation, but outside of the C Corporation and thus a portion of the appreciation can avoid double taxation or disadvantageous C Corporation issues.

The partnership in this partnership spin off can be a general or limited partnership or a limited liability company (LLC).  This partnership can generally be formed with no tax liability because under Internal Revenue Code Section 721, generally, gain or loss is not recognized by a partnership or by a partner when cash or property is transferred to the partnership in exchange for an interest in the partnership.  However, one issue to consider is that a partner can recognize gain when the net amount of the debt from which they are relieved on the transfer of property that is subject to a liability exceeds the basis of the property transferred (see Internal Revenue Code Sections 752 and 731(a)).

It is also important to keep in mind that the partnership could recognize gain if the partnership is an investment company within the meaning of Internal Revenue Code Section 351(e).

The partnership must be classified as a partnership for federal income tax purposes.  Further, the C Corporation’s interest in the applicable partnership must constitute an equity interest in the partnership and not debt.  The corporation should also receive some of the partnership profits and losses as opposed to solely receiving guaranteed payments from the partnership.

Once you have met the above requirements, the most important issue may be valuation.  The value of the property contributed by the corporation must equal the value of the interest received by the corporation.  If the value of the property exceeds the interest received, the corporation is deemed to have distributed the excess amount to the partners of the partnership, which could be deemed a dividend distribution.

Please contact The McGuire Law Firm to speak with a Denver business attorney or tax attorney.  Free consultation!