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Tax talk.

More on LLCs

The IRS has classified limited liability companies (LLCs) organized under Virginia and Colorado state law as partnerships for Federal tax purposes. In both cases, the IRS ruled the LLCs lacked the corporate characteristic of continuity of life because, under both state law and the terms of the articles of organization, the LLCs would dissolve upon any event terminating a member's membership, absent the consent of all remaining to continue the business. Free transferability of interests was also lacking because unanimous consent of the members was required before an assignee or transferee of a member's interest could acquire all attributes of membership, including the right to participate in management. (Rev. Rul. 93-5 and 93-6)

More Revenge of the 100% Penalty

A person responsible for collecting and paying over-withheld employee income tax, FICA or collected excise taxes who willfully fails to do so is personally liable for penalties. IRC Section 6672 subjects these individuals to a penalty equal to 100% of the tax liability. Until now, the Service has imposed this penalty in a way designed to maximize collection of these "trust-fund" taxes with little regard for actual responsibility of the party from whom collection was sought. As a result, the penalty impacts lower-level employees acting on orders from a top manager or company owner.

Under a revised policy statement, recovery of "trust fund" taxes and the related penalties should become more equitable. The policy states:

"Those performing ministerial acts without exercising independent judgment will not be deemed responsible persons. Responsibility will be determined by a person's status, duty, and authority. In general, non-owner employees of the business acting under the dominion and control of others and not in a position to make independent decisions will not be hit with the penalty.

"The penalty will not be imposed on unpaid volunteer board members or directors of charitable organizations so long as they serve only in an honorary capacity, do not participate in the organization's day-to-day financial operations and/or do not have knowledge of the failure to collect or pay the taxes.

"A person will not be penalized unless he or she was actively involved in the business at the time when taxes were not being paid.

"Field investigations to determine the penalty liability will be conducted promptly to enhance IRS access to relevant information.

"The penalty generally will not be imposed on a responsible person if 1) the business has entered into an approved installment agreement or bankruptcy plan to pay the required taxes and 2) has adhered to the agreement.

"The taxes, penalty or both will be collected only once, whether from the business, responsible persons or both. The taxes will be considered to be collected when the Service's right to retain the collected when the Service's right to retain the collected amount is established."

Reporting Rules for Direct Rollovers

The Service has supplemented the instructions to Form 1099-R for reporting direct rollovers from qualified plans or tax-sheltered annuities. Distribution Codes G (for direct rollover to an IRA) and H (for direct rollover to a qualified plan or tax-sheltered annuity) are used to report direct rollover distributions.

No other codes need to be used with Code G or H in box 7 of Form 1099-R, except when a spouse makes a direct rollover to an IRA due to the plan participant's death. In that case, Code 4 (Death) is used with Code G.

The instructions to Form 1099-R say that if a total distribution from a plan includes deductible voluntary employee contributions (DECs), a separate Form 1099-R should be filed to show the distribution of DECs. The Service has now clarified that only one Form 1099-R is needed to report the direct rollover of an entire amount, including DECs. However, separate forms must be used if an actual distribution of DECs is made to a participant.

The Service also reminds plan administrators to report the plan participant's name and TIN on the 1099-R, not those of the trustee of the plan to which the direct rollover is made. (Ann 93-20)

Minority Discounts for Intra-family Stock Transfers

The Service has just reduced the tax cost for family business owners who transfer shares to their children and other family members. It has reversed its staunchly held position that minority discounts generally are not permitted on intra-family transfers of stock if the family in the aggregate maintains either voting control or de facto control immediately after the transfer. Under the Service's prior rule, a taxpayer had to show family discord to warrant a discount for a minority interest.

The taxpayer in the new ruling owned all of the only outstanding class of stock in Family Corp. He transferred 20% of the shares to each of his five children. The Service said that notwithstanding the family relationship of the donor and the donees, the shares of other family members will not be aggregated with each transferred minority block to determine whether they should be valued as part of a controlling interest.

The factor of corporate control in the family is not considered in valuing each gift of stock. The Service will not disallow a minority discount solely because the transferred interest would be part of a controlling interest if aggregated with other family-owned stock. However, the Service will not allow for a minority discount when control is still effectively maintained.

The fact that the Service will not aggregate stock owned by family members to impute a control element to the minority interest of any particular family member does not prevent the Service from doing so in situations where family control is assured by virtue of voting agreements or other devices that guarantee its control. (Rev Rul 93-12)

Bad Debt and Startup Company

In what is turning into a major business trend, many executives and managers have started their own enterprises as an alternative to complete retirement, working for someone else, or remaining unemployed. What happens if the new business goes south and the entrepreneur loses money loaned to the corporation or must make good on a loan guarantee to a lender? Under the Supreme Court's holding in US v Generes, 405 US 93 (1972), the answer turns on the dominant motive behind the loan.

If the dominant motive behind the shareholder employee's loan or loan guarantee was to protect his investment in the corporation, the loss will be a non-business bad debt treated as a short-term capital loss. Such losses have limited utility because of the $3,000 annual limit on capital losses used to offset ordinary income.

On the other hand, if the dominant motive behind the loan or loan guarantee was to protect the shareholder's status as an employee, the loss is a business bad debt, which is fully deductible when the debt becomes worthless.

Historically, a shareholder in a corporation cannot treat the corporation's business as his business even if he is the sole shareholder. Thus, an individual shareholder's loan to his corporation is not a business debt unless he shows the debt is related to his own business (sole proprietor or partnerships). Devoting one's time and energies to the affairs of a corporation is not itself a trade or business. Such an infusion of moneys to a corporation is likely to be deemed a debt investment.

The Service often takes a tough line on this basic question but, as the new Tenth Circuit decision illustrates, courts may be inclined to be more tolerant of entrepreneur-owners who see their cash disappear along with their dream. (Litwin v US, 10th Cir, January 12, 1993)

Note: Taxpayers establishing a new business also can protect themselves against the tax risks of failure by using Section 1244 stock. If the venture goes under, the entrepreneur can claim an ordinary loss of up to $100,000 a year on his or her stock investment.

Installment Procedures Now Easier With IRS (Can You Believe It??)

If allowing a taxpayer to pay tax in installments will facilitate collection, the Service can enter into an installment payment agreement with the taxpayer. Until now, however, taxpayers had to receive a tax bill from the Service before requesting payment agreements. Now those who cannot pay their tax in full can request payment agreements when they file their returns by attaching new Form 9465 to returns showing a balance due. They can expect a decision back from the Service within 30 days.

Form 9465, Installment Agreement Request, is a simple, one-page form requesting minimal identifying personal and tax information, the monthly amount that the taxpayer proposes to pay and the date on which payment would be made each month under the agreement. It is available by calling the Service toll-free at 1-800-TAX-FORM.

The Service hopes that allowing taxpayers to request a payment plan when they file will remove inability to pay as a reason for not filing. It cautions that taxpayers with monthly payment plans are liable for interest at the underpayment rate (currently 7%), and for a late-payment penalty of 1/2% per month on any unpaid balance.

All offices within the Service can now approve agreements of up to $10,000; previously, only the collection division could approve accounts over $5,000. The Service will not require taxpayers to complete financial statements for accounts under $10,000. If a financial statement is not required and the taxpayer adheres to the payment schedule, the Service will not file a tax lien against the taxpayer's property.
COPYRIGHT 1993 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:six tax issues
Author:Green, Gary L., Jr.
Publication:The National Public Accountant
Date:Jun 1, 1993
Previous Article:Liability, quality and delusion.
Next Article:Automating your accounting.

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