Corp owning Corp tax scheme

[WhiteOleander]

Client has a S-Corp. Had it for a long time. He allowed some "group" to review his return. They have told him they can save him about 40,000.00 in taxes. They will set up C Corps. One will hold vehicles, one real estate, and one business as it is now. The 3rd corp will lease the vehicles and RE from the other two corps. Some how this is going to lower tax liability. My client has asked the group to put this is writing so we can evaluate the plan.

I'm sure this is some kind of scheme. They will tell him how to save 40,000 for 16,000. They will not do any of the filings or tax returns. Just tell him how to structure the deal. I have googled and searched IRS. Most of what I see are about foreign corps which I'm pretty sure this does not involve.

I think this would fall under "Controlled" cop rules woudn't it? Has anyone had any of their clients come to them with one of these schemes. I'm looking for info to give to my client.

Thanks

[JG EA]

IRS notices probably won't be specific enough. http://www.irs.gov/businesses/small/...106788,00.html

I've had a few clients come up with elaborate schemes from seminars and lawyers (they always seem to be from out of town). I never know what I think I should know, but I do notice when something doesn't fit into a "pattern". If it seems strange I back off. My head hurts enough keeping up with the normal tax issues.

[oceanlovin'ea]

Sometimes clients need to see something written down or spelled out for them. I have had clients that were debating changing from schedule C to s corps. They wanted to know how it would change their bottom line and what were the costs. So I just roughly penciled it all out for them, one column as Schedule C and one as S corp with some wages. I included payroll taxes too. I use very round figures like $10,000 or $100,000 to make it easier to do.
Then I told them the cost to do a 1040 with a schedule C versus the cost of doing an s corporation return and a personal return. Add to that the cost of 4 quarterly payroll reports to be filed and the annual report that must be filed with state. Add bookkeeping costs because an S corp will require a debit and credit bookkeeping system.
Then they can actually see the amounts and where they will go.

You might have to do that with him. Show him income from the different corporations and where that income ends up and what the bottom line would be. from all the corporations and what the cost would be.

Linda, EA

[JohnH]

Has the client not figured out that it's a fishy situation from the start? After all if these guys are smart enough to devise an elaborate plant that will work, why wouldn't they be smart enough to also prepare the returns? Seems to me they're pretty bad businesspeople.

A $16,000 one-time fee is nice, but if they're saving him $40k every year, seems like they'd want a piece of the pie every year. They're selling themselves short at $16k if its a good plan, but they're making out like bandits if it it's full of holes and they just want to collect the fee, get out of Dodge, and let somebody else worry with the headaches (that would be you).

[WhiteOleander]

Thanks for the responses. I was hoping someone had had a client contact them with the same scheme. This is a long time client and he really wants to obey the laws. He's not trying to cheat. But, when you are told you can save that much tax "legally", it can be very attractive. My boss told him if it were legal, he would do it himself on his own return!!!!

Anyway, thanks.

[Lion]

Real Estate?

Is his real estate currently in his S-corp? How much will it cost him in taxes to distribute the real estate. And, why would he turn around and contribute real estate to a new corporation? How much will you charge him to prepare three corporate tax returns each year? How much will you charge him to dissolve his S-corp? How different are corporate tax rates from his own marginal tax rate, currently passing through profits from his S-corp? Is he planning on reducing his salary? Does he have a retirement plan? Health plan?

[ChEAr$]

Putting myself in the place of those charlatans for a moment.

If I were selling such a scheme, I would not divulge the method until I had my $ 16,000.
Otherwise, any accountant looking over the proposal could, by careful analysis, duplicate the same procedures for his client.

I'm also betting that these promoters do NOT offer a money back guarantee.

Scare your client away as fast as possible.

[WhiteOleander]

Is his real estate currently in his S-corp? How much will it cost him in taxes to distribute the real estate. And, why would he turn around and contribute real estate to a new corporation? How much will you charge him to prepare three corporate tax returns each year? How much will you charge him to dissolve his S-corp? How different are corporate tax rates from his own marginal tax rate, currently passing through profits from his S-corp? Is he planning on reducing his salary? Does he have a retirement plan? Health plan?

All valid questions. We have brought each one up to our client. His real estate is not currently in a corp. I said that some say it can be considered malpractice to advise someone to put RE into a corp. Also, each corp would have to file it's own Franchise Tax return with Texas. So, more fees for him to pay for prep. I really can't see the savings.

[veritas]

Did this come about

by a cold call?

Who are they?

Setting up corporations? Do they use attorneys to setup the corporations?

What is their background?

[Gary2]

There's only one legitimate savings that I know about involving corporations, and that's the conversion of self-employment income (subject to SE tax) to investment and/or passive income. Of course, the simple way to do this is with just one S Corp, paying a legitimate salary, but paying some of the profits in dividends. If there's a lot of money invested in tangible assets, then putting them into separate businesses may make it easier to justify this division of income, but I can't claim enough experience that I'd actually suggest this to a client.

One non-advantage that is more of a trap than a promotion scheme is trying to convert non-passive income to passive income, in order to take advantage of other passive losses. The IRS is on to this, and a search for "self-rentals" and S-Corps will bring up plenty of material on how the IRS is reclassifying self-rentals as non-passive.

The promotion schemes, which generally fail the layman's "too good to be true" test, often involve structuring deals that individual meet a set of requirements on paper, but in reality fail the "economic substance" test.

[ttbtaxes]

Tread water very carefully my friend

I'd be very wary of people peddling tax 'gimmicks' or 'shelters'.

You need to be sure you are intimately familiar with reportable and listed transactions, and the material advisor rules.

The preparer who signs a tax return which does not disclose such transaction, whether the preparer knew it or not, could potentially find him/herself facing a $100,000 or $250,000 non-abatable penalty.

This is an area you better not monkey around with unless you know exactly what you're doing.

http://www.irs.gov/businesses/corporations/article/0,,id=97384,00.html

[DaveO]

We had some new clients come in a couple years ago with a similar plan. We looked it over and while it all seemed legal the problem was the complexity of the thing. We tried to explain that the plan required them to pay rents and keep seperate books for each entity. Our suggestion was to have a single corp for the business and put the real estate in an LLC for protection. The client had already forked over $40k for this wonderful plan and already had an attorney forming the entities so proceeded to throw good money after bad.

In the end their business didn't produce near the income they expected and 2 of the 3 entities sit idle while we are carrying back an NOL to better days instead of chasing tax savings.