You Make the CallEach week the Tax Knowledge Center will pose a question to you. Please note that the question and answer provided does not take into account all options or circumstances possible. The feature is intended to create some interest and insights into the topic provided. The answer will appear here. This week's question is brought to you by Jim Vanden Branden, CPA, MAS, CFP, from NATP's Tax Knowledge Center. November 20, 2008Question:
Ronald has had many successful real estate transactions over the past twenty years. The crown jewel of his holdings is a beautiful downtown Shiocton, Wisconsin, building with an eclectic blend of retail, office, and high-end residential tenants. Ronald has contributed this property to a partnership with four other equal partners. The fair market value of Ronald's contributed property is $4,000,000 and the property is not subject to any liabilities. This contribution provides Ronald with a 20% interest in the new partnership. Because of a series of successful Sec. 1031 exchanges over the past two decades, Ronald's adjusted basis in the property is $300,000. What amount should Ronald's Schedule K-1, Part II, Section L report for capital contributed during the year for this property? What is Ronald's tax basis in the new partnership venture? What is the new partnership's tax basis in the contributed building? Answer:
Ronald's adjusted basis in the property, $300,000 is the correct answer to all three questions. IRC Sec. 723 provides the general rule for determining a partnership's basis in contributed property. A partnership's basis in such property is the contributing partner's adjusted tax basis in the property, plus any gain that partner recognizes under the Section 721(b) investment company rule. The general rule of IRC Sec. 722 provides that the basis of a partnership interest acquired in exchange for a property contribution is the partner's adjusted tax basis in the contributed property.
November 13, 2008Question:
Your client Barbara stops by your office to discuss issues she is having with her Schedule C business. Her first issue relates to one of her difficult clients with whom she has just had a falling out with. Barbara has not been paid for services her business provided to Donald Deadbeat and when she last asked him when he was going to pay her the $5,000 bill he still owes, he told her she would never collect a dime from him. Barbara is angry with Donald and has asked you to prepare Form 1099-C, Cancellation of Debt, for the unpaid bill. What do you tell Barbara? Answer:
At this point, Form 1099-C is probably not appropriate as Barbara has not met the requirements for issuing the form. Normally, Form 1099-C is issued only by financial institutions such as banks and credit unions and taxpayers who are in the trade or business of lending money. However, in Service Center Advice 1998-020, the IRS ruled that there is no prohibition in the code or regulations to reporting of debt discharges by entities other than financial institutions and those in the business of lending money. Thus, a private business that extends credit to its customers, but is not a financial institution, may issue a Form 1099-C to a defaulting customer. The IRS cautioned that an entity which is not required to report, should not issue a Form 1099-C unless there is either a discharge of indebtedness or a specific identifiable event described in the regulations. For purposes of the reporting requirement for debt discharges, indebtedness is considered discharged on the occurrence of one of the following identifiable events: - A discharge of indebtedness under Title 11 of the U.S. Code (bankruptcy);
- A cancellation or extinguishment of an indebtedness that renders a debt unenforceable in a receivership, foreclosure, or similar proceeding in a federal or state court, (other than the discharges under Title 11 listed in (1) above;
- A cancellation or extinguishment of indebtedness on the expiration of the statute of limitations for collection of the indebtedness, subject to the limits described below or on the expiration of a statutory period for filing a claim or commencing a deficiency judgment proceeding;
- A cancellation or extinguishment of an indebtedness under an election of foreclosure remedies by a creditor that statutorily extinguishes or bars the creditor's right to pursue collection of the indebtedness;
- A cancellation or extinguishment of an indebtedness that renders a debt unenforceable under a probate or similar proceeding;
- A cancellation or extinguishment of an indebtedness under an agreement between the applicable entity and a debtor to discharge an indebtedness at less than full consideration;
- A discharge of indebtedness under a decision by the creditor, or the application of a defined policy of the creditor, to discontinue collection activity and discharge debt; or
- The expiration of the non-payment testing period.
Unless, as defined in (7), Barbara has a defined policy in her business that would apply to the nonpayment at this time, Barbara has not yet met the requirements to issue Form 1099-C to Donald Deadbeat because neither a discharge of indebtedness nor a specific identifiable event described in the regulations has occurred. Therefore, Form 1099-C should not be issued to Donald until those requirements are met.
November 6, 2008Question:
Dr. John has come to you for assistance. He decided to set up his own medical practice beginning February 1, 2008, and with the assistance of an attorney, set up an LLC. However, the attorney set up the LLC as a C corporation even though Dr. John told him he wanted to be an S corporation. Dr. John put himself on the payroll of his corporation, beginning February 1st. However, he has come to you because he wants to make sure the LLC will be taxed as an S corporation for 2008. After checking with the attorney, you discover that the attorney expected you to file the S election, but overlooked relaying that message to you. Can Dr. John still file as an S corporation for 2008? If so, what do you need to do? Answer:
Since Dr. John began his business February 1, 2008, his Form 2553, Election by a Small Business Corporation, should have been filed by the 15th day of the third month after the beginning of his tax year, April 15, 2008. In reviewing the instructions to the December 2007 revision of Form 2553, you notice it states that if there is reasonable cause for late filing, and other requirements are met, you can file a late S election simply by attaching it to Dr. John's 2008 timely-filed Form 1120S. Since Dr. John relied on a professional to file the proper forms, he does have reasonable cause. To request relief for a late S election, as long as the beginning date listed on Line E of Form 2553 ends on or after December 31, 2007, and Dr. John has reasonable cause, Form 2553 can be filed with the Form 1120S for the first tax year within six months of the original due date of the Form 1120S tax return. For more information, see Revenue Procedure 2007-62.
October 30, 2008Question:
An accrual-basis corporation is planning to pay a bonus for 2008 to all employees who are not related-parties (i.e., shareholders). However, the corporation will not actually pay the bonus until after January 1, 2009. How long does the corporation have to pay that bonus and still be allowed a deduction on its 2008 corporate tax return? Answer:
The bonus must be paid within 2 ½ months after the end of the tax year by an accrual basis taxpayer in order for them to take a deduction on its 2008 tax return. Generally, under the accrual method of accounting, a liability is incurred and is taken into account for federal income tax purposes in the tax year in which the all-events test has been met. The all-events test means that all of the events have occurred that establish all of the following: (1) the fact of liability, (2) the amount of liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability [Reg 1.461-1(a)(2)(i)].
October 23, 2008Question:
Your client, Richard paid Sandra, his 20-year old nanny, $2,000 for child care services that Sandra provided in Richard's home. Richard did not withhold the $153 of FICA taxes from Sandra's wages, instead choosing to pay both the employee's and the employer's share of the FICA. How should this be reported on Sandra's Form W-2? Answer:
When an employer pays the employee's portion of the FICA taxes, this is normally considered additional compensation to the employee, which is also subject to FICA and income taxes. However, when the employee is providing agricultural or child care activities, the additional compensation is only subject to income taxes, not FICA taxes. Therefore Sandra's Form W-2 will show $2,153 in the Box 1 - Wages, $2,000 in Box 3 - Social Security Wages, $124 in Box 4 - Social Security Withholding, $2,000 in Box 5 - Medicare Wages, and $29 in Box 6 – Medicare Withholding.
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