Have you ever wondered whether you were barking up the wrong tree? That the solution to a problem may be found, not in the approach to which you were already committed and invested, but in an altogether different direction?

Query whether Congress, if it ever experienced such an epiphany or moment of realization, would be capable of changing course and adopting what may prove to be a more fruitful, though politically more challenging, solution.  …

Continue Reading The Closely Held Business and The Tax Gap

“Gentleman Farmer”?

Every now and then, some well-meaning colleague will ask how I spend my free time. I usually pause before responding – to gather my thoughts – which prompts them to restate their question with what they believe is greater specificity; for example, how do I relax or what do I do for fun? After further delay on my part, the exasperated colleague will ask what I plan to do in retirement.

Continue Reading Generating Tax Losses as a Hobby

Don’t Be Unreasonable

Much has been written of late regarding the payment by a business of various personal expenses incurred by its owner or certain key employees.

The payment of an owner’s personal expenses appears to violate a basic precept of the tax law with respect to the use of business assets[i] – specifically, that their use be limited to furthering the purposes and interests of the business.

This precept emanates from what is perhaps the golden rule for dealings between a closely held business and any of its owners and “related” persons: that they transact with one another on terms that are as close to arm’s length as practicable.
Continue Reading Transacting With One’s Business – Keep It Arm’s Length

The Key Person

The closely held corporation is often a fragile creature. Too often, its continued success and well-being are overly dependent upon the continued involvement of one individual – namely, the founder and principal owner of the corporation’s business.

This strong-willed individual may be responsible for the day-to-day management and operation of the business. Their relationships with the customers and vendors of the business, and with the business community generally, may represent a significant part of the corporation’s goodwill.
Continue Reading Trusts, the Death of a Shareholder, and The S Corporation Election

Say It Isn’t So

At different times over the course of the last thirty days or so, I have seen reports describing various plans to increase income taxes and/or wealth taxes on the “rich” that have either been endorsed or proposed by the likes of China’s President Xi Jinping, California’s Gov. Newsom, the Commonwealth of Massachusetts, Democratic Party leaders, and the European Central Bank, as a way to facilitate economic growth, redistribute wealth, and support vulnerable groups.[i]   …
Continue Reading LLC as S Corporation: Square Peg Meets Round Hole?

Constructive Transfers

It is axiomatic that the tax treatment of interactions between a closely held business and its owners will generally be subject to heightened scrutiny by the IRS, and that the labels attached to such interactions by the parties will have limited significance unless they are supported by objective evidence.

Benefit to the Shareholder

Thus, arrangements that purport to provide for the payment of compensation, rent, interest, royalties, etc., by a corporation to a shareholder – and which generally would be deductible by the corporation – may be examined by the IRS and possibly re-characterized to comport with their true nature.

Similarly with respect to a corporation’s satisfaction of an expense or other obligation that, on its face, is owing from a shareholder to a third party but for which the corporation claims a tax deduction by characterizing the amount as an expense incurred by or on behalf of the business.
Continue Reading Business Expenses Paid by Shareholder, But Whose Deduction Is It?

Sibling Rivalry

You have probably encountered family-owned corporations in which the founder’s offspring are involved in the business to varying degrees. They may even own some equity, typically having received such equity as gifts from their parents.[i] These situations often evolve in a way that they present challenging succession planning issues for the family and its business.

Let’s assume that two siblings are active participants in the family-owned business. Each aspires to lead the corporation after their parents have retired. At some point, their competing goals, divergent management styles, or different personalities may generate enough friction between the siblings, and within the corporation, so as to jeopardize the continued well-being of the business.[ii]…

Continue Reading Dividing the Multi-Family Corporation