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Short Note on Purging Earnings and Profits
I recently wrote on a strategy for old C corporations with appreciated properties. The idea is to make an S election and wait out the built-in gains period. Among the provisions of the Jobs Act which just passed the House and is now awaiting signature is a shortening of the period to five years. This is a lot less than 10, but it is still greater than 3. So a corporation that cannot rely on having active income will still want to purge its earnings and profits before the favorable rate on dividends goes away. The shortening of the recognition period makes this strategy much more viable.
OOPS I Should Have Had A LLC
What would have happened if this were an LLC? The entity’s operating losses would have been 100% allocated to Mr. Javorski (loss allocations to Mr. Eberle would not have had substantial economic effect). It is possible that the losses would have been suspended depending on how much time Mr. Javorski spent on the enterprise and whether it would have been permissible to group it with his manufacturer’s rep activity (possibly not). Even if the losses were suspended, they would have been allowed in full since the bankruptcy would have been a total disposition.
Incentive To Innovate
In order to qualify for capital gain treatment, the sale must be of all substantial rights in the patent or an undivided interest in all the substantial rights. This might create a significant business issue since a sale that is restricted to a particular industry or geographic area will not qualify. I think it is possible that 1235 is not thought about a lot, because the end game of a lot of startups is the creation of a public company or being taken over by one. I think this is what accounts for the strange popularity of C corporations. Nonetheless, it can be a great benefit in the right circumstances and should not be neglected.
Blast From The Past
Accountants understand cancellation of indebtedness income because they think in double entry. Some of them think there is a big balance sheet in the sky. If somebody writes something off without somebody picking up income the fabric of space-time will become disturbed. They can be extremely disturbed by asymmetrical results. Personally I put taxing debt discharge income in the same category as the GAAP going concern qualification. It’s kicking somebody when they are down.
Time to Purge C Corporations
To compute a corporation’s earnings and profits is often no simple task, especially if the corporation has gone through a series of reorganizations or other adjustments. It may be necessary to decide how a transaction occurring many years ago should have been treated under a long-interred statute because of its effect on accumulated earnings and profits; and, because there is no statute of limitations governing the effect of prior transactions on accumulated earnings and profits, it is advisable to retain corporate records permanently.
Have Some Free Insurance – Not
Eagle Financial Group, Inc, by some sort of wild coincidence a company owned by the agent who sold the policies, issued them a check in the amount of the first year’s premium. They issued a recourse note in the amount of the premium advance to Eagle. There were, however, never any payments made on the note. The policies were canceled in 2003 and Mr. Smith, the agent, was sued by Ohio National Insurance Co for “rebating”.
IRS Declines Rubbing Salt in The Wound
There is really no excuse for people having gotten themselves in this situation. It is true that some facilitators have a sort of black box business model in which the money disappears when you sell the relinquished property. In that model, it’s none of your concern where the money is in the meantime as long as they deliver the target property. That is not the only model though. It is also permissible for the funds to be segregated in separate bank accounts and some facilitators are affiliated with major banks
Deemed Partnership
The case of Holdner v Com TCM 2010-175 is giving me pause. When I read what William Holdner and his son Randal achieved over the years in business I am very impressed. Mr. Holnder seems a much sharper businessman than I am. It makes me hesitate to criticize him as an accountant, which he also is. It’s just that I think he picked an unnecessary fight.
Real estate election relief
If you have been posting negative numbers from real estate investments to your return on the theory that you or your spouse is a real estate professional, you should make sure that you have made the election. If not you may want to consider requesting relief. Furthermore, I generally believe in keeping tax returns indefinitely, but if you must dispose of some of them, be sure to keep the return for the year that you made the election. It is relevant for all future returns in which you are claiming its effect and I know from experience that you cannot rely on the IRS to preserve it for you.
Pigs Get Fed
“Pigs get fed. Hogs get slaughtered.”. I tried to research the origin of the expression and the claims of origin I found all post dated my first exposure to it. As one of my partners commented we really had no idea if there was any agricultural reality to the expression. Unlike some other expressions (“Same difference” “No harm. No foul.”), though, I had a pretty clear idea of the inherent advice. It was that you should be aggressive, but not too aggressive.