06 - Related Parties - Controlled Groups 1

Transcription

1 06 - Related Parties - Controlled Groups 1

2 Page 105 I. Controlled Groups C 1 C 2 C 3 C 4 C 5 A Sea of C s C 6 Carl s C Corporation TI = $50, Related Parties - Controlled Groups 2

3 Page 105 I. Controlled Groups IRS issues Information Letter As an S Corporation each S Corp will determine its own IRC 179 amount, which will be limited at the shareholder level Related Parties - Controlled Groups 3

4 Page 106 I. Controlled Groups C. As the Affordable Health Care Act includes numerous mandates for employers that are 50 or more IRC 414(b), (c), (m), or (o) define the methodology of the controlled group for the mandate. 1. Parent-Subsidiary 2. Brother-Sister 3. Combined Groups 4. Life Insurance Controlled Groups 06 - Related Parties - Controlled Groups 4

5 Page 106 II. Parent-Subsidiary Controlled Group 1. Parent-Subsidiary Controlled Group Parent Sub 1 95% Sub 2 100% Sub 3 80% SubSub 1 95% SubSub 2 80% Can elect to file a consolidated return 06 - Related Parties - Controlled Groups 5

6 Page 107 III. Brother-Sister Controlled Groups First The 50% Test are they Brother/Sister A B C Identical Ownership Samantha 34% 33% 33% Heather 33% 34% 33% Erin 33% 33% 34% Total 100% 100% 100% 33% 33% 33% 99% Each shareholder of each corporation owns at least xx% of ownership Which totals at 50% or more they pass the brother/sister test Related Parties - Controlled Groups 6

7 Page 108 III. Brother-Sister Controlled Groups First The 50% Test are they Brother/Sister A B C Identical Ownership Samantha 10% 80% 10% Heather 10% 10% 80% Erin 80% 10% 10% Total 100% 100% 100% 10% 10% 10% 30% Each shareholder of each corporation owns at least xx% of ownership Which totals less than 50% they fail the brother/sister test Related Parties - Controlled Groups 7

8 Page 108 III. Brother-Sister Controlled Groups Determining what we have: 1. Allocation, if the group meets the 80% rule, will be required of tax brackets, IRC 179, i.e. the rules of IRC 1563 apply constructive ownership. 2. If common ownership or two or more entities total 50% or more there is a brother/sister group. 3. The five person test must be satisfied by the same people that met the 50% and 80% rule Related Parties - Controlled Groups 8

9 Page 109 III. Brother-Sister Controlled Groups Second The 80% Test are they Constructively Owned A B C D ABCD ABC 15% 15% Samantha 30% 15% 25% 80% Heather 45% 40% 30% 0% Erin 25% 35% 35% 0% 80% Test 100% 90% 90% 80% 0% 0% 30% 35% 50% Test 15% 70% If they pass the constructive ownership test then the rules of IRC 1563 apply, allocation of tax benefits 06 - Related Parties - Controlled Groups 9

10 Page 109 IV. Combined Group 06 - Related Parties - Controlled Groups 10

11 Page 109 IV. IV. Combined Combined Group Group 06 - Related Parties - Controlled Groups 11

12 Page 110 V. Constructive Ownership We care about the constructive ownership rules of IRC 1563(e) for all of the 5% or greater ownership holders of: 1. Options 2. Partnerships 3. Estates and Trusts 4. Corporations (All types) 5. Spouses 06 - Related Parties - Controlled Groups 12

13 Page 111 V. Constructive Ownership The good news, they operate independently and have NO authority with each other s corporation Related Parties - Controlled Groups 13

14 Page 111 V. Constructive Ownership Oops Dallas is a director of his spouse s company 06 - Related Parties - Controlled Groups 14

15 Page V. Constructive Ownership Okay, spouse just helps out occasionally and has ZERO participation in decision making 06 - Related Parties - Controlled Groups 15

16 Page 111 V. Constructive Ownership Be wary of ownership by children, parents, grandparents and grandchildren of the taxpayer: Minor Children (Less than age 21) Will be attributed to the parents Adult Children If an individual owns greater than 50% of all classes of stock, then that taxpayer shall also be attributed any shares owned by lineal ascendants or descendants Related Parties - Controlled Groups 16

17 Page 113 VI. Consolidated Groups IRS provides guidance on the successor agent of a consolidated group Related Parties - Controlled Groups 17

18 Page 105 VII. Related Party Transactions The members of an ESOP, i.e. the employees were related parties under IRC 267, i.e. were on the cash basis for purposes of deducting accrued compensation Related Parties - Controlled Groups 18

19 Page 117 VIII. Constructive Dividends Come on Man Failure to respect the divisions of personal and corporate lead to an almost predictable outcome. Does this sound like any of your clients, we try to fix it at year end. The courts have run out of patience for these types of events Related Parties - Controlled Groups 19

20 Page 117 VIII. Constructive Dividends We see this all the time One entity of the taxpayer pays the bills for another entity. Trying to fix this stuff at year end is playing with matches, your client is going to get burned at some time in the future Related Parties - Controlled Groups 20

21 Page 118 VIII. Constructive Dividends Do it right you win 06 - Related Parties - Controlled Groups 21

22 Page 105 IX. Self Rental Recharacterizations Taxpayer rents realty or equip to business Taxpayer materially participates in business Net rental income is treated as non-passive but not subject to IRC 1411 Net rental LOSS is treated as passive Heads IRS wins, tails taxpayer loses. This rule blocks taxpayer from using self rental as a way to utilize passive losses Note: this rule applies to employees of the business not just stockholders! 06 - Related Parties - Controlled Groups 22

23 Page 119 VII. Self Rental Recharacterizations Another variation on the old Carlos case (123 TC No. 16) Trying to convert losses to non-passive never wins Related Parties - Controlled Groups 23