At Buckingham & McGuire, LLC our Denver tax attorneys assist clients in resolving IRS debts, audits and other matters, as well as applying the tax laws to our client’s individual and business issues. All of our tax attorneys have obtained an additional degree in taxation known as an LL.M. Our additional knowledge and education in taxation not only helps resolve IRS issues, but allows us to better assist our clients regarding their business transactions, estate planning and overall tax planning.

Effect of a Deficit Restoration Obligation by Tax Attorney

Effect of a Deficit Restoration Obligation Denver Business Attorney

A deficit restoration obligation is a partner’s unconditional obligation within a partnership agreement to restore any deficit balance in their capital account when the partnership liquidates.  The presence (or absence) of a deficit restoration obligation within a partnership agreement impacts which partners can be allocated losses & deductions generated by a partner’s equity or partnership recourse debt, but also the allocation of partnership liabilities under I.R.C. Section 752.  A Denver business attorney and tax attorney at The McGuire Law Firm assist partners and partnerships regarding partnership agreements including deficit restoration obligations within a partnership agreement.

 

Allocations within a partnership agreement are respected to the extent that the allocation has substantial economic effect or are made in accordance with the partner’s partnership interest.  When reviewing an allocation and the substantial economic effect, the 704 Regulations apply a three-part test.  As part of this test, capital accounts must be maintained in accordance with the 704 Regulations, liquidating distributions must be in accordance with positive capital account balances and each partner must have a deficit restoration obligation.

 

Under the 704 Regulations the value of property is assumed to be the basis of the property and not the actual fair market value of the property.  Further, stacking rules deem deductions to be funded first by those with the least rights to receive proceeds upon the sale of the assets.  In general, lenders or creditors have a higher priority right than do owners.  Thus, deductions that are generated from a partnership are considered to have first come from the partner’s equity (lower priority) than from partnership debt (higher priority).  The equity deductions can generally be allocated amongst the partners to the extent that such deductions do not create a negative capital account balance for the partner in excess of the partner’s actual or deemed obligation to make contributions to the partnership upon the liquidation of the partnership.  Therefore, when a partner agrees to a deficit restoration obligation within the partnership agreement, the partner is more or less allowed to be allocated a deduction that can be attributed to other partner’s equity.

 

For example, John, Mike & Joe form an LLC.  John and Mike contribute $50 each and Joe contributes $25.  The LLC purchases an asset with the $125.  The partnership agreement holds that profits are to be allocated per the monies contributed, but that losses are to be allocated 1/3 to each partner.  If Joe agrees to a deficit restoration obligation, he can receive the 1/3 allocation of the partnership’s net equity losses.  If Joe does not agree to the restoration, he can only receive his pro-rate share (20%) of the partnership’s net equity losses.

 

A Denver tax attorney at The McGuire Law Firm can assist you and your partnership regarding partnership taxation and transaction issues.

 

Contact The McGuire Law Firm to discuss your tax and/or business questions!  Free consultation with a tax attorney and business attorney!

Transfers of Property to a Corporation In Exchange for Stock

Transfers of Property to a Corporation In Exchange for Stock Denver Business Attorney

A Denver tax attorney and business attorney at The McGuire Law Firm can assist clients with the formation and structure of corporations.  The article below outlines the tax implications when contributing property to a corporation in exchange for stock.

Many business owners inquire as to their gain or loss recognition when contributing property to a corporation in exchange for stock, as well as the implications to the corporations.  While certain business transactions may require the recognition of gain or loss, it is possible for gain or loss to be avoided.

 

In general, a corporation does not recognize gain or loss upon the issuance or sale of its own stock under IRC Section 1032.  Although, IRC Section 1001 treats the transfer of property for stock in a corporation as a sale where gain or loss is recognized under IRC Section 1002, IRC Section 351 may be able to avoid this gain recognition.

 

For IRC Section 351 to apply one or more persons must transfer property to a corporation; the transfer must be solely in exchange for stock in such corporation; and, the transferors must control the corporation immediately after the transfer and “control” is defined as 80% or more under IRC Section 368(e).  If Section 351 does not apply, gain or loss will be recognized under Section 1001.  Furthermore, Section 351 is mandatory and not an election.

 

The statute does not define “property” but “property” includes cash as well as tangible and intangible property.  Regarding intangible property, if the property has value separate and apart from the existence of the business, it is considered property.  It is important to note that services are not considered property; however, the stock issued for the performance of services does not necessarily cause the transfer to fail to qualify as a Section 351 transfer.  Under such circumstances the person receiving the stock for the performance of services is not counted or considered when the 80% control requirement is calculated.

 

If non-qualified preferred stock is issued by the corporation, this non-qualified preferred stock is treated as “boot” for purposes of gain when received in exchange for property that is transferred to a controlled corporation.

 

The Receipt of “Boot”

 

If a shareholder (transferor) receives money or property in addition to the stock, this money or property is considered “boot.”  If a shareholder does receive boot through the transaction, gain is recognized at the lesser amount of the realized gain or the boot received.   The receipt of a short term note or certain stock rights and warranties would be considered boot, but debt is not considered boot although it would lower basis.

 

Contact a tax attorney and business attorney at The McGuire Law Firm to assist you with the formation and structure of business entities as well as the tax implications to the business & business owners.

 

You can schedule a free consultation with a small business attorney in Denver by contacting The McGuire Law Firm.    John@jmtaxlaw.com

 

 

Year End Tax Planning by Tax Attorney

Year End Tax Planning Denver Tax Attorney

Time moves fast, especially this time of year.  Soon we will be gathering for Thanksgiving feasts, and in what would seem like the following day, be celebrating the holidays and bringing on 2014.  Although, the up and coming holiday season makes many busy, this can also be a wonderful time of year to plan for your tax returns due in 2014.  Below are just a few considerations from a Denver tax attorney and estate planning attorney at The McGuire Law Firm.

Gifting and Charitable Giving:

If you are concerned about a taxable estate, this time of year can be a great time to gift to family members and take advantage of the annual gift tax exclusion while lowering your taxable estate.  You can gift up to $13,000 to each individual without creating any gift tax issues and/or lowering your lifetime ability to gift property.  If gifting certain property, you may still want to file a gift tax return, which allows the clock to begin ticking on the time available for the IRS to audit the return and question the fair market value of the gift.  Furthermore, you may wish to look at your year-end tax position and consider donating to your favorite charity or creating a charitable trust.  However, depending upon the outlook of 2014, maybe you should wait for such charitable contributions.  The key is to make these considerations now and look at the tax implications before it is too late.  Do not wait until 2014 and find yourself outside looking in on what you should have done in 2013.

 

College Funding:

Take advantage of the state income tax deduction and make a contribution to a child’s or grandchild’s 529 college savings plan.  Not only does this 529 savings plan contribution have current tax benefits, it is a wonderful way to help provide financial assistance for the education of your loved ones.

 

Take Advantage of Certain Capital Losses Now:

Many investors have witnessed capital gains with the increases in the stock market.  If you have loss property, now may be a good time to consider the sale, transfer or disposition of such loss property to offset other capital gains in 2013.  Capital losses can offset capital gains and an additional $3,000 of ordinary income.  Further, these capital losses can be carried forward to offset capital gains in following years, or $3,000 of ordinary income each year in the years to follow.  Thus, ask yourself if it is time to cut bait on certain investments and take advantage of the loss now depending upon your other circumstances.

A Denver tax attorney and estate planning attorney at The McGuire Law Firm can assist you with year-end tax planning and tax planning at anytime depending upon a client’s circumstances, questions and issues.

Contact The McGuire Law Firm to schedule a free consultation with a tax attorney in Denver!

Partnership Basis by Denver Tax Attorney and Business Attorney

Partnership Basis Denver Tax Attorney

A Denver business attorney at The McGuire Law Firm can assist business owners in understanding their ownership interest in their business and how such value can impact their tax consequences upon sale or transfer.  The article below has been drafted by a business attorney to discuss a partner’s basis in their partnership interest.

Just as your basis in a share of stock is important for determining gain or loss upon the sale of that stock, a partner’s basis in their partnership interest is important in determining gain or loss after sales, exchanges or distributions, and also when computing certain basis adjustments.

A partner’s basis in a partnership interest acquired by contribution is the sum of the money contributed and the adjusted basis of any property contributed.  However, if gain is recognized, the partner does not receive an income in basis for the amount of the gain recognized under Internal Revenue Code Section 731.  The contribution of promissory note by a partner does not increase the partner’s basis because Under IRC Section 722, the partner has a basis of zero in the note.  When losses or deductions are passed through from the partnership to the individual partners, a partner’s distributive share of the partnership loss or deduction is deductible only to the extent of their basis at the end of the taxable year under IRC 704(d).  If a partner has disallowed losses, these losses are carried forward until the partner has sufficient basis to take the loss, which is stated under Regulation 1.704-1(d).

A partner’s basis within the partnership is adjusted as the partnership operates and income & losses are distributed to the partner.  A partner’s basis will increase under IRS Section 705 by the sum of the distributive share for the taxable year and prior taxable years regarding the following items: taxable income to the partnership; income of the partnership exempt from tax; the excess of the deduction for depletion over the basis of the property subject to depletion; and, additional capital contributions.  A partner’s basis will decrease under IRC Section 705(a)(2) (but not below zero) by distributions from the partnership (property or monies) and by the sum of the partner’s distributive share for the taxable year and prior taxable years for losses of the partnership and expenditures of the partnership not deductible in computing taxable income & not properly chargeable to capital (meals & entertainment).

When individuals are considering forming a partnership and contributing money and/or property, it is advised that the partners or the partnership consult a tax attorney or business attorney regarding the importance of basis and adjustments to basis.  Because a partner’s basis “follows” the partner it is important to correctly and accurately track each partner’s basis, and for the partner’s to understand how certain transactions can impact their basis.

A Denver business attorney and tax attorney at The McGuire Law Firm can assist clients regarding partnership transactions and partnership issues including: formation, contribution of property, partnership taxation, allocation of partnership items, purchase or sale of partnership interests and other transactional matters.

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

 

Liquidating Distributions & Shareholder Gain or Loss by Denver Business Attorney

Liquidating Distributions & Shareholder Gain or Loss Denver Tax Attorney

At The McGuire Law Firm, a Denver business attorney and tax attorney can assist you with all types of business transactions from formation to sale.  The article has been drafted by a tax attorney to discuss liquidating distributions from a corporation and tax consequences to the individual shareholders.

When a corporation liquidates, generally the monies due to the corporation are collected, corporate debts are paid and then cash and/or property is distributed to shareholders per their ownership interest in the corporation.  These distributions of cash and/or property are considered liquidating distributions and are likely to receive different treatment than if distributed to a shareholder when the corporation was operating and intended to continue such operation.

Under IRC § 331(a), the amounts received by a shareholder through the complete liquidation of a corporation are treated as full payment in exchange for the shareholder’s stock.  Therefore, the shareholder is afforded capital gains treatment regarding the liquidating distribution(s) assuming the stock is a capital asset under IRC § 1221, which it usually is.

As a capital gain, the amount of gain or loss will be determined by the shareholder’s basis in his or her stock, and whether the gain or loss is short term or long term will depend upon the shareholder’s holding period.  If a shareholder owes a debt to the corporation and the debt is cancelled through the liquidation, the amount of debt owed by the shareholder is also treated as a liquidating distribution.  The shareholder’s gain or loss must be computed on a per-share basis and therefore, gain or loss is calculated separately when stock was acquired a different times and for different prices.

When a shareholder receives multiple liquidating distributions, the shareholder can apply all of their basis first before reporting gain or loss.  Therefore, shareholders may be able to defer the recognition of gain for multiple tax periods or years when they receive multiple liquidating distributions.  In regards to recognizing a loss through multiples distributions, the loss is not recognized until the final distribution is received by the shareholder.  If a shareholder is receiving payments from a third party note received by the corporation in a liquidating sale, the shareholder may be able to use the installment method when reporting gain.

The shareholder’s gain or loss will be the difference between the adjusted basis of their stock and the fair market value of the liquidating distribution.  While the fair market value of cash distributed to a shareholder in a complete liquidation may be easily ascertained, issues arise when property is distributed to a shareholder through a complete liquidation.  Appraisals may be necessary for certain tangible assets, but appraising certain intangibles may prove futile.  If the value of certain assets cannot be ascertained with reasonable accuracy, the calculation with respect to these assets is left open until the assets are sold to a third party or an ascertainable value is available.

A Denver, CO tax attorney and business attorney at The McGuire Law Firm can assist clients regarding the liquidation of corporations and tax treatment.

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

Foreign Account Tax Compliance Act (FATCA)

Foreign Account Tax Compliance Act (FATCA) Denver Tax Attorney

As a Denver tax attorney, John McGuire works with clients to ensure their compliance with the Foreign Account Tax Compliance Act.  The article below outlines compliance issues and considerations.

The Foreign Account Tax Compliance Act and related provisions became law in 2010.  The act targets United States taxpayer who may be using foreign accounts and not reporting income or gain from these foreign accounts and therefore not complying with the Internal Revenue Code.  Under the Internal Revenue Code and federal law, United State citizens are taxed on world-wide income.  Although, credits exist from foreign earned income, all income must be properly reported and accounted for on the 1040 Individual Income Tax Return.

The primary focus of FATCA is to encourage United States citizens to report certain foreign financial accounts and foreign assets.  Further, FATCA focuses on reporting by foreign financial institutions to report financial accounts held by United States taxpayers and/or foreign entities in which United States taxpayers hold a substantial economic interest.  Therefore, the provisions of FATCA impact individuals holding foreign accounts or assets, in addition to economic interest in certain foreign entities.

Individual taxpayers must report foreign accounts and other offshore assets on Form 8938, and attach Form 8938 to their 1040 Individual Income Tax Return.  If a taxpayer’s total foreign assets are below a threshold, the individual does not need to file Form 8938.  If an individual’s value of foreign assets is $50,000 or less at the end of the tax year, and never exceeded $75,000 during the tax year, the individual does not have to file Form 8938.  This threshold may be higher for individuals who live outside the United States, and the threshold can change depending upon a taxpayer’s filing status.  It is important to note that the reporting requirement for Form 8938 is different than the reporting requirement to comply with the FBAR rules (Report of Foreign Bank and Financial Accounts).  The Internal Revenue Service is also expecting to issue regulations that would require an entity holding foreign financial assets above the threshold to file Form 8938.  However, until these regulations are issued by the Internal Revenue Service, the reporting requirement under Form 8938 only applies to individuals.

The Internal Revenue Service has initiated voluntary disclosure programs for individuals to disclose foreign assets and accounts, whereby the penalties that can be assessed to the individual are significantly lessened.

Contact The McGuire Law Firm to discuss FATCA issues with a tax attorney.

Formation of the Partnership: Contribution of Property & Basis by Denver Tax Attorney

Formation of the Partnership: Contribution of Property & Basis Denver Business Attorney

At The McGuire Law Firm a Denver tax attorney and business attorney can assist clients with the formation of their partnership and the tax consequences based upon the property contributed by the partners.  The article below has been drafted by a tax attorney may be useful when property is contributed to a partnership for a partnership interest.

When a partnership is formed, the partners will generally contribute property to the partnership.  Under Internal Revenue Code Section 721, the partners will recognize neither gain nor loss when they contribute property to the partnership in exchange for a partnership interest.

There are exceptions to IRC Section 721.  The non-recognition rule of Section 721 does not apply to, the receipt of an interest in partnership capital in return for services that are performed for the partnership or for services to later be rendered, and when the deemed money under IRC Section 731(a)(1) exceeds the sum of the adjusted basis in the property contributed.  Further, Section 721 would not apply to a disguised sale under IRC 707(a)(2)(B) where a partner contributed property and received a priority distribution of cash and property within 2 years from the time the original contribution was made to the partnership.  You must always consider whether the value of the property contributed is equal to the value of the partnership interest received by the partner.

What constitutes property for purposes of IRC 721?  Property includes both tangible (money, personal property & real property) and intangible property.  Intangible property would be goodwill, contract right, accounts receivable, patent rights, secret processes and other types of intangible property, but the property must be owned by the partner who transferred the property (transferor) on their own behalf.  When looking at property transferred to a partnership, if the property has value separate and apart from the partnership, the property should be considered Section 721 property.

What is the partner’s basis?  When a partner contributes property in exchange for a partnership interest, the partner’s basis is the amount of money contributed and the adjusted basis of the property contributed.  Thus, a partner receives a carryover basis in their partnership interest for the property they contribute.

When a partner receives a partnership interest for services performed, this service partner’s basis in their partnership interest is the sum of money paid by the partner for their partnership interest and any amount included in income in connection with the interest transferred.  This recognition of income will only increase the partner’s basis in the partnership if the gain resulted from the non-applicability of Section 721.

What is the partnership’s basis in the contributed property?  The partnership’s basis in the property contributed would be the adjusted basis of the property in the hands of the contributing partner under IRC Section 723.  The contributing partner’s basis would be measured or calculated at the time the partner made the contribution to the partnership.

A Denver tax lawyer and business lawyer at The McGuire Law Firm can assist you regarding the formation of partnerships, tax implications of partnership contributions & distributions and partnership transactions.

Contact The McGuire Law Firm to schedule a free consultation with a tax attorney!

IRS Action During Government Shutdown

IRS Action During the Government Shutdown Denver Tax Attorney

As we all know, the U.S. federal government “shutdown” on October 1, 2013 due to the house and senate’s inability to pass a short term spending bill that would continue to keep the government funded.  As a Denver tax lawyer, John McGuire has been paying close attention to the impact the shutdown will have on IRS action.

This government shutdown has impacted federal agencies including the IRS.  As tax attorneys, we represent a number of individuals and businesses before the Internal Revenue Service regarding tax audits, tax debts and other federal tax controversies.  Thus, we have received a number of inquiries from our clients regarding what the IRS is doing in terms of collection, enforcement and tax audits during the shutdown.  Additionally, in many circumstances, we have been unable to contact Internal Revenue Service revenue officers, and Internal Revenue Service departments such as the automated collection division and tax practitioner hotline.

In regards to IRS federal tax liens, the IRS announced that federal tax liens are not being issued and filed during the shutdown by revenue officers and nor are they being automatically generated.  Additionally, IRS bank levies are not being issued during the shutdown.  However, certain taxpayers may have received these notices with October 2013 dates, but these federal tax lien and IRS levy notices were issued prior to the shutdown.  Certain notice that a taxpayer may be subject to a federal tax lien or IRS levy may be automatically generated and issued to the taxpayer during the shutdown.

Regarding IRS enforcement action, the only enforcement action currently occurring in non-criminal cases involves cases and situations where action must be taken now to best protect the government’s interest.  For example, if a taxpayer owes a tax debt, and the collection statute on the tax liability is in jeopardy of expiring in the immediate future, the IRS may be taking enforcement action at this time.  Regarding criminal cases, the majority of criminal tax cases continue to be prosecuted by the applicable criminal investigative departments and units.  This corresponds with the fact that most federal law enforcement agencies have continue to operate and function during the government shutdown.

If you have a tax debt with the IRS or an ongoing tax audit and have questions regarding the impact of the government shutdown, it is recommended that you contact a tax attorney to discuss your situation and circumstances.  A tax attorney at The McGuire Law Firm can assist you with  tax matter or tax problem before the Internal Revenue Service.

Contact The McGuire Law Firm and schedule a free consultation with a Denver tax attorney to help resolve your IRS tax matters.  A free consultation is offered to all potential clients.

C Corporation Considerations When Selling Your Business

C Corporation Considerations When Selling Your Business Denver Business Attorneys

As a business and tax attorney, John McGuire at The McGuire Law Firm is commonly asked, “how should I sell my business, and what are the tax implications?”  This question brings about many issues; way too many to be discussed in a short article, but the owners of a C corporation should understand the basics behind a stock sale versus and asset sale and the advantages and disadvantages to each.

When the business owner is considering the sale of their business they must determine whether they wish to sell the stock or the assets of the business.  A shareholder or seller would usually prefer a stock sale and a buyer would usually prefer an asset sale.  When the stock of a C corporation is sold sale or exchange treatment is given to the transaction and therefore the shareholder will receive capital gain treatment on the amount received above the basis in their stock.  The buyer prefers an asset sale because the purchase of the assets allows for a step up in basis, and the buyer does not carryover the seller’s depreciation schedule.  This generally will afford the buyer greater deductions and less tax.  Furthermore, when the stock of a corporation is purchased, the seller is relieved of liabilities and liabilities or exposures to such are transferred to the buyer.

The above issues show why the sale of C corporation assets is not favorable due to the fact there are not capital gains rates for corporations.  A C corporation selling appreciated assets will pay corporate level tax even if a capital gain is generated.  If cash is distributed to the shareholders after the sale of corporate assets, this is also a taxable event likely to be treated as a dividend or receive capital gains treatment.  Regardless, double taxation has occurred.

A C corporation may be able to mitigate some or all of the double taxation based upon the current tax attributes of the corporations.  For example, the corporation may have a net operating loss or certain credits that carry forward.

Any business considering liquidating or the sale of stock or assets should contact their business attorney and/or their tax attorney to discuss the full implications of the transfer.  A Denver tax attorney or business attorney at The McGuire Law Firm can assist you with your tax or business questions or issues.

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