Here is the Mountain:
Client owns 100% of a seasonal rental house. I believe he offers service that would make the income subject to SE tax.
Client owns 100% of a corporation.
This corporation is a 1% partner in a partnership. The other 99% is held by a charitable foundation. The partnership also holds a bunch of stock and receives dividends and capital gains.
The partnership leases the residential rental from the Client for $10 per month. Doesn't sound like he can take expenses because it is so far below FMV. Client has never depreciated the rental property. Doesn't sound like he would be able to do that in any event - Right? Would love to hear your response on that.
Here is the Molehill:
The partnership pays the corporation a management fee out of rental profits and stock transactions. This is generally around $25k per year.
The corporation takes the $25k and pays the Client a salary.
BTW: This client was subjected to a field audit last year that resulted in no change. It was no fun explaining the way this thing works to the IRS. They had trouble believing anyone would set up something like this without using it to hide income. I had the same thought when this client came to me initially, but couldn't find anything except that this fellow got snookered by a slick outfit who talked him into donating all of his stocks to the charitable foundation and charged him a fortune to set this mess up. That is also what the IRS concluded.
I'm especially curious about the following:
1. No depreciation on the rental? Is that right? Because he is leasing the property to the partnership for only $10 per month and is a related party, sort of?
2. What happens if he sells it? Depreciation allowed or allowable? Neither would apply?
Thanks for your time.
Client owns 100% of a seasonal rental house. I believe he offers service that would make the income subject to SE tax.
Client owns 100% of a corporation.
This corporation is a 1% partner in a partnership. The other 99% is held by a charitable foundation. The partnership also holds a bunch of stock and receives dividends and capital gains.
The partnership leases the residential rental from the Client for $10 per month. Doesn't sound like he can take expenses because it is so far below FMV. Client has never depreciated the rental property. Doesn't sound like he would be able to do that in any event - Right? Would love to hear your response on that.
Here is the Molehill:
The partnership pays the corporation a management fee out of rental profits and stock transactions. This is generally around $25k per year.
The corporation takes the $25k and pays the Client a salary.
BTW: This client was subjected to a field audit last year that resulted in no change. It was no fun explaining the way this thing works to the IRS. They had trouble believing anyone would set up something like this without using it to hide income. I had the same thought when this client came to me initially, but couldn't find anything except that this fellow got snookered by a slick outfit who talked him into donating all of his stocks to the charitable foundation and charged him a fortune to set this mess up. That is also what the IRS concluded.
I'm especially curious about the following:
1. No depreciation on the rental? Is that right? Because he is leasing the property to the partnership for only $10 per month and is a related party, sort of?
2. What happens if he sells it? Depreciation allowed or allowable? Neither would apply?
Thanks for your time.
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