Is It Time To Consider Sale Or Disposition Of S Corporation Assets?

Blog Post by John A. Sikora

Taxable gains from the sale or other disposition of property by S corporations are typically taxed only to the shareholders.  However, if the property was held by the corporation when it converted from C corporation to S corporation status (or was acquired by such a converted S corporation in a nontaxable transaction), then part or all of the gain from the sale or disposition may also be subject to taxation at the S corporation level.   This corporate-level tax, commonly referred to as the built-in gains tax (or “BIG tax”), is imposed at the highest marginal C corporation tax rate.

For many years, the BIG tax applied to sales or dispositions occurring within ten years following conversion to S corporation status.  For 2009 and 2010, the period was reduced to seven years and, for sales and other taxable dispositions in 2011, the tax applies only if five years of S corporation status have not elapsed.   The BIG tax period is scheduled to return to 10 years for 2012.

Therefore, if a corporation elected S status more than five and less than ten years ago, and it expects to sell or dispose of property at a gain in a taxable transaction in the next few years, it may want to consider selling it, or perhaps distributing it, this year.  Though doing so will result in gain at the shareholder level this year, it may eliminate a sizeable BIG tax otherwise payable in those upcoming years.

Federal Tax Installment Agreements Are Now Easier

Blog Post by Robert Teuber

Unfortunately, when money is tight, certain tax debts go unpaid. Yet, because of the significant collection powers that the IRS possesses, these unpaid taxes can result in the unraveling and failure of a business enterprise. When a business cannot pay the taxes shown on a return, often the business or its owner simply fails to file the tax return. This is a bad idea. When this happens, not only must the tax and interest be paid, but penalties based on the failure to pay and the failure to file will be added.

To limit the assertion of penalties, it is best for a taxpayer to file tax returns even if the tax cannot be paid. The unpaid tax can then be addressed by an installment agreement. If an installment agreement is entered into, the IRS will not attempt to collect any tax by forcible means (i.e. levies, garnishments or seizures) and unless the debt is substantial, it may refrain from filing a federal tax lien.

The lesson is that by filing and working to address the tax liabilities, rather than running from the tax, the result will be a more manageable resolution to the debt.

The IRS has also made the payment of taxes under certain dollar amounts more manageable by changing how certain repayment plans are administered. Historically, the IRS would file a federal tax lien against a taxpayer owing more than $10,000. It has recently raised that threshold to $25,000 for both businesses and individuals if certain requirements are met. To avoid the filing of a federal tax lien, an individual taxpayer must be able to pay off the tax debt over a period a period of sixty (60) months, agree to have payments directly debited from their account and must otherwise be compliant with the federal tax law (filings and payments as required). A business entity must meet the same requirements, however, the tax debt must be paid off in the same manner over a period of 24 months. Of course, this is an IRS policy and not a provision of the Internal Revenue Code so the IRS reserves the right to modify or apply the policy differently based on the facts and circumstances of a particular case.

The reason for the change is purported to be an accommodation for the hard economic times facing individuals and businesses. Currently, many taxpayers are struggling to pay their tax obligations. By creating a more flexible framework for those repayments, the IRS hopes to collect additional tax due. Additionally, the economic times have created an increased workload on the IRS collection agents. Hiring has not been proportionate with the increased workload and the least popular agency in government must find new mechanisms to relieve the burden on its employees while collecting as much of the outstanding tax obligations as possible.

Remind Me Again – What is Probate and Why Do I Want to Avoid it?

Blog Post by Keith R. Butler

A frequent goal of the estate planning process is the avoidance of probate. Most people have some vague knowledge of probate or the probate process, but other than those who have firsthand experience, perhaps serving as a personal representative, they probably aren’t too sure what it really is and why so many folks strive to avoid it.

Probate is a legal action commenced at the county level for court supervised disposition of probate property, administration of claims against the deceased’s estate, and payment of debts and expenses. This process rarely takes less than 9 months or so, and frequently much longer, depending on many factors such as complexity of assets and the nature of claims against the estate.

The court only administers, and a Last Will only applies to, “probate property.” What is probate property? All property owned by the deceased that is not non-probate property, which is easier to define. Non-probate property, which is property that vests in another by operation of law upon the owner’s death, can take many forms, such as:

  1. Titled jointly with rights of survivorship. (Property held as “joint tenants” qualifies, but not property held as “tenants in common,” which means that each owner can dispose of his or her share as he or she pleases upon death.) This includes survivorship marital property, which is essentially a joint tenancy between husband and wife in Wisconsin.
  2. Property subject to a beneficiary designation (unless the beneficiary is the estate), such as:
    1. Life insurance
    2. Tax deferred qualified plan assets, such as 401(k), profit sharing, SEP plans and IRAs
  3. Accounts held with a POD (pay on death) or TOD (transfer on death) designation.
  4. Property held in trust, which is disposed of upon death pursuant to the terms of the trust.
  5. Property disposed of pursuant to a “Washington Will,” which is a provision in a marital property agreement between husband and wife in Wisconsin that directs the transfer of property upon death of either spouse outside the probate process.

Property that is owned by the deceased but without some mechanism making it non-probate as provided above is probate property and thus subject to the probate process. A probate is avoided if there is no probate property. Thus, avoiding probate is accomplished by classifying all assets as non-probate.

Why does one wish to avoid probate? The time and expense involved. As noted above, the process takes at least 9 months, because notice to creditors must be published, even if there are none or they will be paid in full. Creditors are given a deadline several months from the commencement of the probate to file a claim. Then, tax returns must be filed, and the probate may not be closed until tax clearance is received from the Wisconsin Department of Revenue, indicating that the state is not owed any money by the deceased. The Department is rarely as eager to close a probate as the parties involved, so they are in no particular hurry. Also, even a simple probate will cost thousands of dollars in attorney’s fees, simply because of the paperwork and court appearances needed.

Are there circumstances when one would want to have a probate? Yes. Generally speaking, the situations involve having a court supervise and issue orders to remove uncertainty and instruct the personal representative as to what to do, and thus protect the personal representative from liability. This may arise if there are complex debts, or claims by creditors that the family wishes to challenge. Another case is when there may be disputes among the heirs, and having a court involved will give direction and certainty to the actions taken. There may be other situations where court supervision is advisable.

Lastly, there are statutes allowing settlement of small estates. If the deceased has left no more than $50,000 worth of probate property, an heir can sign and present to the custodians of the deceased’s property an affidavit to that effect, promising to dispose of the assets properly and pay all debts. There are other summary processes available for small or insolvent estates.

Disclaimer

The comments and opinions expressed in this blog are intended for informational purposes only and do not constitute legal advice. Reading or using the information in this blog does not create the existence of an attorney-client privilege. Due to the changing nature of the law, the blog posts may contain dated material. For an update on the current law and the application of the law to your particular facts and circumstances, consult a legal advisor. The information contained herein is not a substitute for obtaining legal advice from a qualified attorney licensed in your state.