Feuding brothers

When brothers feud, they can split up their corporation in two and go their separate ways in a tax free exchange.

In a recent private letter ruling (PLR 201411012), the IRS ruled that no gain or loss would be recognized on division of corporation by feuding siblings.  This is a carefully laid out plan needing to qualify under a plethora of carefully planned criteria to qualify the transaction for non-recognition treatment of the split off.  Under the scenario painted by the taxpayers to the Internal Revenue Service, each corporation will operate one of the two businesses currently being run by the existing company.

By way of background, the Code provides nonrecognition treatment for reorganizations listed in Code Sec. 368(a). Under Sec. 368(a)(1)(D), a so called type "D" reorganization, a transfer of all or part of the assets of one corporation to another corporation qualifies if: (i) immediately after the transfer, the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the transferee corporation; and (ii) stock or securities of the corporation to which the assets are transferred are, under the plan, distributed in a transaction which qualifies under Sec. 354, 355, or  356.

The IRS ruled that the split will qualify for tax-free treatment and specifically ruled that the transaction qualified as a “D” reorganization, neither corporation nor shareholder will recognize any gain, the basis in all assets of both corporations are maintained and the holding periods are tacked on from the prior corporation and the earnings and profits, if any, will be allocated between the two companies under Sec. 312(h) and Reg. §1.312-10(a).

Be aware that there are numerous pitfalls in trying a “D” reorganization.  Among other items, IRS expressed no opinion regarding whether the Split-Off: (i) satisfied the business purpose requirement of Reg. §1.355-2(b)); (ii) was used principally as a device for the distribution of the earnings and profits of either company; or (iii) was part of a plan (or a series of related transactions) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50% or greater interest in either company under Code Sec. 355(e) and Reg. § 1.355-7 .

FBAR Filing

Today is April 16, 2014 and the 2013 filing season is now behind us.  Some of us filed on time and others are on extension until October 15.  So all of us have temporarily forgotten about our tax filings for a while.  But there is another filing deadline creeping up on June 30.  That is the deadline for reporting foreign accounts aggregating at least $10,000.  For many years, filing an information return to report foreign accounts was done on a paper return called a TD F 90-22.1.  This form no longer exists.  Now that form can only be filed electronically.  It is form 114 and it is filed with the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department.  Get started at http://bsaefiling.fincen.treas.gov.  Happy filing.

Tax Court Rules on an IRA Prohibited Transactions Case

Tax Court Rules on an IRA Prohibited Transactions Case:

In Ellis v Comm., T.C. Memo. 2013-245 (T.C. Memo 2013), the United States Tax Court ruled that funding an IRA with the taxpayer’s used car business was a prohibited transaction.  The Court determined that by paying himself a salary and pay rent to an entity owned by his immediate family was prohibited under Section 4975 of the I.R.C.   The Court ruled that it was not a prohibited transaction when the taxpayer first caused the IRA to invest in the business since the business did not have owners at the time.  But when the taxpayer became a fiduciary by virtue of the IRA holding more than 50% of the ownership interest in the business, the Court ruled that the company then became a disqualified person.  When he paid himself salary, this was a prohibited transaction also.  Thus, the IRA was deemed to have distributed the entire account subjecting the whole to income tax and a 10% additional tax on early distributions.

Prior to ever having an IRA invest in any business, be sure to consult your tax advisor as disastrous results could result as evidenced by the Ellis case above.