DANRVAN

In this particular situation I don't think it is a problem as long as the S-corp is dissolved in the same tax year as the asset transfer. The transfer to shareholder is a deemed sale of the asset. S-corp recognizes gain and passes through to shareholder (estate). Estate now has a basis equal to FMV on date of transfer to offset future sale of the property. Since the farm property was the only asset held by the S-corp, basis of stock held by estate = fmv on date of death. Estate will recognize loss on liquidation of S-corp which should offset gain on transfer of property.

IRS partnership rules say property and capital accounts are recorded at FMV. However, the contributing partner has a basis in the partnership equal to his basis in the contributed asset, that is also the basis of the asset in the hands of the partnership. As a result, you have tax vs book differences that are accounted for under section 704(c) in order to allocate the built in gain to the contributing partner and depreciation to non contributing partner. However, in your situation there is really no issue since both husband and wife made an equal contribution. The classic 704(c) situation is where partner A contributes cash and partner B contributes appreciated or depreciated property. By the way, welcome to the forum Casper.

Are you referring to gifts made with in 3 years of death? They are generally not included unless the decedent retained a life estate, made a revocable transfer or the transfer was effective upon death. Claw back is a concern when there is an increase in basic exclusion subject to sunset. For example taxpayer gifts $10 million in 2019 excluded under TCJA but dies in 2026 when exclusion reverts to $5 million. IRS has proposed rule to resolve that issue.

I think you need to have a thorough discussion with the client to determine what is the best arrangement and choice of entity. -who will be compensated and for how much -who is going to be in control -who will provide capital and financing -how will profits and losses be divided -who will assume liabilities -the list goes on. I am curious why you would choose Sub S over partnership? Partnership is less complex in formation and operation. Also more flexible.

If they don't accept it appeal it, you have the ammo to back it up.

That would depend in facts and circumstances Were they also living in the house while it was B & B? I believe the proper place to report expenses for a closed business in on Schedule C and would offset any other income of the same character: like SE, earned income......etc. In the same regard if there was a positive adjustment it would also go on C.

I would put on E so it retains the same character as originally reported.

I agree with Catherine, W-2'C showing total as reported and what should be reported. If you are paper filing you can attach an explanation. If you don't mind a suggestion, a payroll reconciliation should have caught the error: W-3 = totals from 941's = total from year end payroll summary.

Not sure how that works, but by my thinking the system will only accept one W-2 per employee per employer. Did W-3 include duplicates? Check with SSA for details

As Old Jack indicated, that is a wide open question. The TOD stock would be included in the estate for 706 purposes.

I make it a practice to review any open year tax return of a new client. That includes reviewing the information used to prepare schedule C, E or F and related depreciation which has resulted in a number of 1040X's. For this fly-by-night prepared return you might dig up some treasures or unearth some land mines.

The courts have held HVAC as personal property in cases where the primary purpose is to maintain the proper temperature and humidity of equipment. Such as in the case of Piggly Wiggly v Com. where primary purpose of HVAC was to meets the needs of refrigeration equipment instead of the comfort of customers and employees.

I agree since they were made out of generosity and without full and adequate consideration. Also not taxable as prizes, awards.. When a gift is received from employer there can arise the question of wages or bonus. But in this situation the money was clearly given out of generosity and not for compensation.

I don't see anything inappropriate with that. When working in a gray area where the IRS might take a different view I think it is a good idea to estimate what an adverse ruling might cost the client. If I am reading your last post correctly, it looks like you are taking a conservative approach by valuing the 1245 stuff at cost, so the maximum recap will be depr. allowed /allowable. In regards to the H2O heater example above, even though the asset might not have any salvage value, it does have value to the buyer of the building. While that value might not be much by itself, accumulated with other items the value can be significant. For example, say there are two equal buildings for sale except one needs a whole bunch of fixtures etc replaced. The building that has all the fixtures working is going to have more value even if they are fully depreciated, vs the building that needs thousands of dollars of new stuff to make it usable. That extra value comes from those depreciated assets. I would not let the finger point at me when the question arises as to how the assets were given a zero value. Now getting back to your question as to what the auditor is going to say. That would depend on fact and circumstances and potential understatement of income. The IRS will bring in their own experts when feasible as we see in tax court cases.

I see problems with allocating all assets based on original cost. First of all, while the value of the real estate has more than doubled, the value of the other assets have most likely decreased. Because of that, your client will end up with overstated 1245 gains and understated 1250 gains; to his disadvantage. The question is how much is it worth to find the fmv of the personal assets? If an appraisal is not feasible then work with the client to come up with values. I am cautious as an accountant to never put on an appraiser's hat but will use my judgment on what is reasonable.

You can't have the best of both worlds. Since you depreciated as 1245 you recapture as 1245. You allocated based on fmv.

SaraEA got me back on track, I think you could have a strong case that father has equitable ownership and your client would not report rental income. Case law has allowed taxpayers without legal ownership to deduct interest and property tax as equitable owners. Now flip it over and use the same argument that the legal owner is not the equitable owner and therefore not required to report the income. For example, look at TC MEMO 1997-551 and put your client in the place of the legal owner in the case. The case involved an unrecorded quit claim, if your client goes a step farther and records a quit claim deed it would help wash his hands of equitable ownership and pass it on to father. I would work with a trusted real estate attorney to address the equitable ownership issue. Then going forward, look at how equitable ownership is applied to a residence converted to rental in TC SUMMARY 2008-84. If father is not your client, then his United States income is not your concern, although it would not hurt if you were involved to see that it was properly reported. I would also look to see how much extra tax your client would have if income and expenses were reported by him if and if worth the trouble of doing otherwise. In regards to gift from a foreign country, although form 709 might not be required, I believe your client would report on form 3520 any foreign gift received over $100,000.

Since it is a business expense, why not report on C where it would also factor into calculation of earned income,.. SE income... etc if any?

Agree, client should get asset detail. Sounds like preparer mistake, maybe put in wrong date asset was placed in service.

Lion EA, I read this as an "assignment of income doctrine" issue vs sublease where father collects rent from unrelated tenant and turns it over to son (legal owner of property) to make payments. Does dad even touch the rent or does son collect and make the payment? Agree legal input is needed to sort this out. Phase one of the arrangement is grayer where dad was 'gifting" payments in return for college student to live in the house. Maybe not a gift since dad received a place for his son to live in exchange for providing cash to make payments. On the other hand, if dad had bought the house and kept client out of the transaction , there would be no tax consequence of allowing college age son to live there

and depreciation.

Sounds like your client is the owner and will need to report the rental income and deduct interest and property tax. If the house is sold he will also have to report the sale since dad is not on the title. Maybe dad will reimburse for resulting income taxes.

Agree, moving expenses for self-employed would have been deducted on form 3903; suspended by TCJA. Broker fee is not a moving expense.

Maybe some legal advice is needed.

Sounds to me like client is the owner of home purchased with gifted money. Maybe intent was to someday quit claim deed to father? Is father now living in house and covering mortgage?