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TOP TAX QUESTIONS OF THE MONTH

This is a monthly reference source. By providing these samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. We can call and talk over your particular situation with the Research Department before we try to answer the specific problem YOU may have. You may not rely on any answer given to avoid a penalty assessed by IRS.

1. My father died late last year and I am the executor for his estate. He had a trust drafted several years ago. However, all of the asset accounts are in his name and under his social security number; evidently nothing was transferred to the trust. My father’s estate is relatively small (no 706 required) and I expect to settle in a month or two. Do I still have to file a tax return for the trust?

   As the trust was apparently never funded, there are no assets within it to generate income. If no taxable income and less than $600 of gross income is generated, no return is required to be filed for the trust. The income, loss and deductions associated with the estate will be reported on a Form 1041 filed for the estate. If the estate is settled within 12 months of the date of death, the estate return may be a first and final return. Any net income is passed through and taxed to the beneficiaries with the income reported for the tax year within which the estate ends (e.g., if the estate ends in 2008, the income reported on the final K-1 from the estate is reported on your 2008 Form 1040).

2. I was divorced several years ago. My wife continued to occupy our house after the divorce under the divorce decree. We continue to own the house jointly. It will be sold soon and we will divide the gain. Can I use the exclusion under Section 121 for my share of the gain?
   

   Under regulations, you will be treated as using the house as your principal residence for any period that you have an ownership interest in the house and your former spouse is granted the use of the house under a divorce or separation instrument (provided that your former spouse used the house as her principal residence). Therefore, as long as she owned and occupied the house for at least 2 out of the 5 years prior to its sale, you may qualify to exclude up to $250,000 of gain on your share of the proceeds.

3. I am the principal member of a two member LLC that is taxed as a partnership. I am buying out my partner. May I still file a Form 1065 and take guaranteed payments?

   A multi member LLC that has elected to be taxed as a partnership change its status by becoming a single member LLC. The LLC is taxed as a sole proprietorship (change status to a disregarded entity single member LLC) and is reported on Schedule C unless you elect to be taxed as a corporation. You may not pay yourself from the proprietorship. You may elect to be taxed as an S corporation (file Form 1120S). This would allow you to be paid a salary and would allow pass-through profit to be received without being subject to self-employment tax.

4. I have a sole proprietorship and employ five people, including my son (who is still my dependent). I want to establish an education assistance program. It is likely that my son and one other employee would participate. Will it work?

   Under Section 127, if an education assistance program is found to be discriminatory, all participants must include the benefits received (generally, education assistance may provide excludable benefits of up to $5,250 per year) in income. An education assistance plan will be deemed discriminatory if more than 5% of the benefits are paid to the employer’s “limitation class”- which includes you (as a more than 5% owner), your spouse and your dependents.

5. My regular corporation (I am the sole shareholder) has a carryover net operating loss. I am thinking of liquidating. Does the loss pass out to me?

   On liquidation of a regular corporation, any remaining net operating loss that is unused at the corporate level is lost. It does not pass out to the shareholder. The corporation will have gain or loss on liquidation depending on the difference between the net book value of the assets and their fair market value. If a gain, the net operating loss will be applied against the gain at the corporate level. Your gain or loss depends on the difference between the fair market value of assets net of liabilities and your basis in stock. If a gain, it is a capital gain (long term if the stock is held more than 12 months) and if it is a loss, you may have a Section 1244 loss (ordinary).

6. I just bought a piece of property that I will use to build a new office. There was a dilapidated shack on the property that I demolished. Any problem with claiming an expense for the basis I allocate to the building?

   Under IRC §280B, the basis of the building and the costs of demolishing the building must be added to the basis of the land. No amount may currently be deducted.

7. I filed for bankruptcy under Chapter 7. I received a discharge for unpaid income taxes for the 1998, 1999, and the 2000 tax years. However, the IRS refuses to remove a tax lien on my residence for those taxes. Why doesn’t the IRS recognize the bankruptcy discharge?

   A personal discharge of past-due income taxes under bankruptcy does not affect any tax liens that were properly recorded before the filing of the bankruptcy petition. Such liens will generally survive the bankruptcy. A personal discharge means that the discharged debt may not be collected from you as the taxpayer. The IRS may, however, collect the debt from property subject to the lien as long as the statute of limitations for collections (generally 10 years from the original assessment date plus the period of the automatic stay imposed by the bankruptcy court plus 60 days) is open.