DANRVAN

Peace on Earth and Good Will to all Ye on this forum!

There is a donate button on top of the ATX community screen.

He is partly right. 80% of stock must be acquired for a tax free transfer of property, but there is no requirement to hold 80% of the corporate value. I didn't not catch that on my first reply.

But how can you seriously ask if taking out a loan is going to increase taxable income? As Lion explained it has no effect on profit and loss. Accounting 101.

I am curious as to where you saw that phrase.

My intent is not to criticize, but it appears you are not willing to educate yourself before you jump into a specialized area of tax practice. It is obvious you are unaware of some important issues that you would learn in a basic course, so what else are you missing or going to overlook in this engagement? Sometimes being the best you can be means you tell your client you are not experienced in a particular area and refer them to someone who is.

That got to bugging me. For control purposed of section 351, there is reference to section 368(c) which basically defines control as possessing 80% of all classes of stock. That might apply to certain corporate reorganizations, but not to a a 351 transfer that I am aware of.

Estate tax preparation 101. Actually that should read 12 months or less for the initial return. And you are preparing the 1041 with out basic knowledge. To be straight forward, that is an ethical violation.

Lately it has been great. I call after 6 pm Pacific time and they have picked right up in the last two weeks.

I had a similar experience with a C-Corp. which cashed the check and wrote a makeup check for the estimated payment. As expected an IRS letter come with an estimated tax penalty. I made a call to the TP hotline and was able to waive the estimated tax penalty due to the circumstances.

Not that I know of. It is a standard procedure to prevent a cp 2000 while preparing an accurate tax return. Sounds like he receiving a crop share so the payments would go on 4835.

That means that in order for section 351 to apply, 80% of the stock and 80% of the value of the corporation must be held by the controlling group immediately after the transfer occurs. Otherwise the transfer of property is considered a disposal under section 1001.

Your post deals with some 1041 / estate issues that would be covered in a basic course, so hope you are asking out of curiosity. As far as that goes, your K-1 question would also apply to a partnership or S-Corp on a fiscal year. An estate can elect a fiscal year including an initial short year. A short year can be powerful planning tool to defer income or offset with expenses. So in your example assume the estate elected a full 12 month fiscal year on the initial tax return. Since the year started in 2021, you report on a 2021 form 1041. The K-1'S will also be reported on 2021 forms, however they will show the year beginning in 2021 and ending in 2022. The beneficiaries will report their share of income on their 2022 tax returns since the year end of the estate falls in that time frame. I am sure you can find your answer in the 1041 instructions. Also 1065 should have similar instructions in regards to fiscal year K-1's.

It is supposed to be subtracted on line 1(b) of SE.

That method will result in the correct amount of income reported on either schedule. Another method is to put the negative number under other deductions on Schedule F. However that would overstate the amount of gross farm income which might be used for other purposes on the tax return. Depending on the client, I would probably inform them of a possible CP 2000 and see how it matches up out of curiosity.

The IRS has taken the position that all CRP is subject to SE tax (except for taxpayers who also receive SS income). However, there is some case law that rules in the favor of non active farmers, specifically Morehouse in the 8th circuit. For active farmers, case law, including Wuebker, has held that for active farmers CPR payments are subject to SE tax. The 2008 farm bill brought into law the provision that any taxpayer who receives social security in not subject to SE tax on their CRP payments. So for non-active farmers there is some gray area which the IRS will challenge.

Sounds like your client is reporting on both 4835 and F and your concern is a CP 2000. I don't know if the IRS system will net and match the amounts from both 4835 and F to the 1099-G. To be safe, you can enter the full amount on line 3 of F and then back out the amount which is reported on line 3 of form 4835. Or, if your client is at low risk for heart failure, you can reported the exact amounts on each form, inform you client of a potential IRS letter and see what happens.

It depends on fact and circumstances. For instance if the replacement property consisted of multiple units, there could be a partial disposition with the conversion to personal use. On the other hand, if this is a commercial building rented out for high dollars, constructing personal living quarters might have minimal tax consequences with the continued use of the rental portion. If the garaged is converted to personal use then 1031 is probably shot to pieces.

I caught that part Lion EA. My question is what are the plans for the garage. Is this a commercial garage like a repair shop? Is there other replacement property other than a garage?

What are his plans for the garage?

So B also wants property, then they need to look at a 1031 followed by a corp split. The exchange is completed before the split and two separate replacement properties are picked out by the respective shareholders. The replacement properties are valued in proportion to each shareholders interest. After the split each shareholder owns 100% of their respective company which holds their property. That is a simplified explanation, you will need to do more research to determine if that is right path for your clients.

Would that be an actual distribution of cash, or would it be a redemption of B's stock so A becomes 100% shareholder? There could be a cash flow concern with making the payments. The shares of B could also be sold to A on an installment. It is not clear here what the objectives are. Is the idea to get shareholder B out?

You might be surprised on how that would work out. Say for example the only asset of the corp was bare land in a prime location, basis of 100,000 and fmv of 200,000, clear title. So B's stock value of 25% = 50,000. First option is for A to buy B's stock for 50,000 out right if he has the cash, either before or after 1031 transaction with zero boot received. If he does not have the cash, the property can be sold through a partial 1031 and 50,000 of cash received, which is used to redeem B's stock. Then a gain of $50,00 is recognized. A's 75% share of the gain is 37,500. Assume the gain is taxed at 15% federal and 10% state for a total of $9,375. So now instead of spending 50,000 to become 100% owner of corp worth $200,000, he has paid $9,375 in taxes to to become 100% owner of a corp worth $150,000. A third option is to complete the 1031 in whole, then borrow 50,000 against the replacement property at the corporate level. The $50,00 is then used to redeem the 25% stock owned by B. In that scenario A has not spent any money personally to become 100% owner in a corp worth $150,000, including a note payable of $50,000. Also, "A" does not incur a tax bill under that option. Hope I am not overlooking anything here, but if you run the numbers for your client he or she will have some solid footing to make a decision.

If shareholder A is 75% and wishes to "own" 100% of the property as sole shareholder he will have to pay a price one way or another. So his choices are basically to buy out the shares of B or pay tax on his share of the gain if proceeds from the sale are not fully invested in replacement property. Gain is recognized at that point and allocated to the shareholders since less than 100% of the proceeds were reinvested. Then the cash from the sale is used to redeem the stock of B and A becomes 100% shareholder. That would involve a corporate reorganization coordinated with the 1031 where each shareholder ends up with a separate company; which in turn hold their separate replacement properties. Does not sound like the direction your client wants to go.

There are not any specific rules for that. You just follow code 1031 and apply it to the entity level which is the corporation. Then you follow the rules for shareholders. Your client has the advantage of owning 75%, so that puts him in the drivers seat.