jainen

>>on the right track<< If you doubt it, tell the husband he should liquidate the corporation first, and then transfer the assets.

>>He wants to give her a corporation<< Watch your language. She will get the property not because he "gives" it to her, but because she has a claim on marital assets and is giving up something else. With this kind of money, she needs a lawyer to advocate for her even if they use mediation. Your role is to calculate the tax effect and make sure her share is increased to cover it. You will probably need to push for full disclosure--the reason her old flame wants her to have that corporation is precisely because it represents a lot of taxable gain in a non-productive package.

>>Jainen, it appears you are against the LLC<< All I'm against is boilerplate answers.

>>stock transfer to ineligible shareholders automatically triggers disqualification<< Yes, you have two short years as of the date of transfer. But it needs to be to a bona fide stockholder, not an agent or nominee of the true owners just trying to get around the timing requirements.

>>Have seen cases where previous owners file 1120S until the time sale transaction took from Jan 1 AND new owners file 1120 from sale transaction<< Are you saying that is the correct way? Or that it is okay to do it because somebody else did it first? Or something else?

>>The best person to call at 3:00 A.M. is Hillary Clinton.<< This year, maybe. But by next tax season you'll have to go through the White House switchboard operators, civil service employees who go home at 5:00.

>>A bit odder actually for a large biz to be audited<< Maybe IRS is interested in whether businesses are treating the refund correctly, i.e., as TAXABLE income.

>>you can tier the LLC's to protect each property from the others and still have one tax reporting entity.<< Although the IRS accepts this position, most states do not allow it. California, for example, has specifically ruled against it. The idea also, once again, triggers my concern that the owner would not be treating the activity as a separate entity, which is the foundation for liability protection.

>>I'm sure they don't qualify for EIC<< I can't say about that, but the numbers fit. Her exemptions/deductions are at least $24000, about $8000 less than the EIC cap. 15% tax on $8000 is $1200, the maximum rebate amount that IRS challenged. Throw a 1099-MISC into the mix and you have some opportunity for creative math. Fill out FAFSA with the tax return in February and you have some motivation.

>>a number of unfortunate circumstances<< I agree that holding real estate in a small corporation has potential tax disadvantages and other risks. And even if a corporation is chosen for maximum liability protection, the first line of defense should still be excellent insurance.

>>A friend of mine got their stimulus payment LESS about $60 for S/E tax.<< If she expected the maximum rebate based on total tax (line 63) of $1200, she would be disappointed to learn that SE tax (line 58) is not included in the rebate amount (line 57 plus line 52). Those numbers suggest she is the kind of taxpayer who tries to optimize EIC benefits using Schedule C.

>>I was told that in general the IRS would not be questioning the returns<< I think you are right. Advise your client that the supposed audit letter is a scam to steal proprietary information, and they should ignore it.

>>I like LLC's for a number of reasons<< The original post only gave one reason -- liability protection. As an attorney you must admit there is far less case law supporting liability protection for LLCs than for corporations. One thing I have seen little mention of in the popularity contest is how the less formal procedures of an LLC may tend to blur the distinction between the entity and the owners, which is one of the key elements of liability protection.

>>new shareholders does not want S election<< The corporation can file a formal revocation with statements from consenting shareholders, effective next January 1. Or they can trigger automatic disqualification, such as by transferring stock to an ineligible shareholder. It seems kind of late to be asking this question.

>>my client does not have to pay the $300 fee<< Good work, OldJack! By saving your client that $300 fee, you have easily earned your $350 retainer.

>>then I can't deduct his expenses<< Why not?

>>what you can prove at audit.... there needs to be some kind of documentation<< In my opinion both of these statements violate professional ethics as established by Circular 230. The IRS is very clear that the possibility of audit can NOT be considered in determining a tax position. At the same time, the tax preparer has no obligation to document the client's circumstances (except when specifically required by the regulations). I support both of those Circular 230 proscriptions. All you have to do is ask the client to describe the work done, including the reason. Repairs that are part of a major remodel must be depreciated, but that does not mean capital improvements not part of a major remodel can be expensed. Still, there's quite a bit of fudge room, and you can't assume that expensing is necessarily the "best" thing. For example, if the owner plans to sell or refinance, excessive costs on the financial statements may be a problem.

>>the mess that blatant fraud can make<< I'm sure all tax professionals are clear about fraud (unfortunately, not always of the same mind). A more difficult question is the willful failure to file. It seems to me "he kept running from it instead of taking care of it" is a pretty solid statement of that crime. Of course, proof is more difficult still. Most likely FTB will not put out any extra effort for a taxpayer who is trying to comply and even making payments (albeit by levy). But sometimes things go wrong despite our best efforts. So here's a little survey about my point of view. When there is any kind of tax problem, who will the client blame? a ) himself b ) his partners or employers c ) his finance or legal guy d ) his tax guy.

>>it comes down to a penalty fight<< Well, Tom, either you are too naive about FTB and IRS power or else I am too paranoid about it. If you are right and you follow my advice anyway, everything will be fine. But if I am right and you go the other way, the catastrophe could easily drag the tax preparer in. FTB already has their hooks in this guy. If you stand up to them they just might decide 23 years is blatant enough to make a point about under-reporting in the construction industry, always a favorite target. By then you will have his records, and you can't prevent them taking your file.

>>If it does not extend the useful life of the structure and it is not part of a "major" remodel << Those are not the only criteria. It is also a capital asset if it provides a new use, such as new (not restored) design or upgraded materials. That is more usual in owner-occupied than rental property, but lots of old rentals have functional obsolescence in the kitchen so are upgraded to fit current market demand. In that case the intention is to increase the rental value, which is clearly one of the tests for capitalization. (It does not have to be a "major remodel," which is a way to describe a group of repairs as well as a complete makeover.)

>>medicare took over because she went into a nursing home<< Medicare typically doesn't cover more than 21 days in a nursing home, and also implies the patient has her own income. Perhaps the client means Medicaid, or is otherwise not giving you the full story. Anyway, medical expenses can be deducted for a relative who would be a dependent except for the earnings test. Dependency is determined annually, so the mother apparently fails the support test instead.

>>if I report it there, the client will be paying MORE than what is owed on the amended return<< If the refund has already been applied to 2008 estimates, I wouldn't trust the IRS computers to reallocate it. You'll get more reliable results dealing with a real person on Practitioners Priority Line. Call them before you mail the X, or after the client gets a balance due statement.

>>why he thinks he needs a tax attorney<< He needs a tax attorney because he hasn't filed for 23 years. That puts him deep into felony territory, and at least one taxing authority is hot on the chase. He has already told you things that need more privilege than you can offer, so please don't ask him anything else.

>>Please do not call my office<< Suppose they passed a new tax law that generated a lot of interest for every one of your clients, and they were eager for your advice. And suppose it was a very simple thing that required nothing on the client's part, so your advice couldn't possibly go wrong. And suppose that even if something COULD go wrong, you could easily correct it in the normal processing of the 2008 return. And suppose you had somewhere read that contacting and helping clients in the off-season helps to build up your practice.

>>what do I say that is new?<< I don't think praying is necessarily a bad choice but I believe you have other and stronger options. #2 is not one--I certainly wouldn't specifically remind the IRS about earlier failures. If they don't know, that's not your problem. Just in case they DO know about the history, you can admit in a general way that the organization has had some continuity problems, but only to emphasize the CHANGES (detailed in an attachment) that now ensure tax compliance is a top priority. It is not lying to say they previously had a good record of timely filing (you don't have to point out that said record was short-lived), and this isolated incident was corrected as soon as possible within the same tax year. In fact, you might even be able to show that the internal reorganization that caused the problem is also what provides the solution! Of course, this approach requires that there actually be some changes that you can detail. Plus all the "standard" stuff, I suppose, although I've never written a standard letter so I'm curious as to what you think that is and why you think it would convince anyone of anything.