A personal service corporation generally is limited to the calendar year for reporting purposes. One exception to this rule is when the PSC can demonstrate a business purpose for a fiscal year-end. Discuss the business purpose exception, including examples of when the standard is and is not satisfied. Support your research with proper citations of tax authority. Use RIA Checkpoint for your search. Write a memo in Word format.
Sarah is the sole owner of Bluegrass Corporation. The basis and value of her stock investment in Bluegrass are approximately $100,000. In addition, she manages Bluegrasss operations on a full time basis and pays herself an annual salary of $40,000. Because of a recent downturn in business, she needs to put an additional $80,000 into her corporation to help meet short-term cash-flow needs (e.g., inventory costs, salaries, and administrative expenses). Sarah believes that the $80,000 transfer can be structured in one of three ways: as a capital contribution, as a loan made to protect her stock investment, or as a loan intended to protect her job. From a tax perspective, which alternative would be preferable in the event that Bluegrasss economic slide worsens and bankruptcy results? Explain your answer. Use RIA Checkpoint for your search. Write a memo in Word format.
Your client, White Corporation, has done well since its formation 20 years ago. This year, it recognized a $50 million capital gain from the sale of a subsidiary. Whites CEO has contacted you to discuss a proposed transaction to reduce the tax on the capital gain. Under the proposal, White will purchase all of the common stock in Purple Corporation for $200 million. Purple is a profitable corporation that has $63 million in cash and marketable securities, $137 million in operating assets, and approximately $280 million in E & P. After its acquisition, Purple will distribute $50 million in cash and marketable securities to Purple. Due to the 100% dividends received deduction, no taxable income results to White from the dividend. Purple will then resell Purple for $150 million. The subsequent sale of Yellow generates a $50 million capital loss ($200 million (stock basis) $150 million (sale price)). The loss from the stock sale can then be used to offset the preexisting $50 million capital gain. Will the proposed plan work? Why or why not? Use RIA Checkpoint for your search. Write a memo in Word format.
Fredstone Consolidated, Inc., a real estate developer, owns a 50% general partner interest in Realty Partners, Ltd (Realty). The 50% limited partner interests are owned by various individual taxpayers. Fredstone and the limited partner group each contributed $15,000 to form the partnership. The partnership uses the $30,000 contributed by the partners and a recourse loan of $100,000 obtained from an unrelated third-party lender to acquire $130,000 of rental properties (All amounts are millions). The partners believe they will have extensive losses in the first year due to depreciation expense and initial cash-flow requirements. Fredstone and the limited partners agreed to share losses equally. To make sure the loses can be allocated as intended, they included a provision in the partnership agreement requiring each partner to restore any deficit balance in their partnership capital account upon liquidation of the partnership. Fredstone was also willing to include a provision that requires it to make up any deficit balance within 90 days of liquidation of the partnership. This provision does not apply to limited partners; instead, they are required to restore any deficit balance in their capital accounts within two years of liquidation of the partnership. No interest will be owed on the deferred restoration payment. use RIA Checkpoint for your search. Write a memo in Word format.
Can Realty allocate the $100,000 recourse debt equally to the two partner groups so that they can deduct their respective shares of partnership losses? Explain.
Assume, instead, that Realty is an LLC, but that the lender has required that Frestone must guarantee 100% (all $100,000) of the debt and that Gradison must guarantee 50% ($50,000) of the debt. Assume, also, that Frestone and Gradison agree to waive their rights of contribution against each other. Under Proposed Regulations, how is the debt now allocated between Frestone and Gradison under tax code #752?