Gift To Son, Rework

[geekgirldany]

I was wondering if the following could be done.

-------- S-Corporation says money gave to the son was a loan that is to payable within one year May 2008. Interest is to be accured on the loan at federal apr. When son pays back the money plus interest, the shareholder (father) takes the loan money out as a distribution, this is then gifted to the son and his wife at $13,000 each plus shareholder's wife $13,000 each. Any excess is distributed to them in later years as a gift.

Is there anything wrong with doing this?

[Bees Knees]

The annual exclusion for having to file a gift tax return for 2008 is still $12,000, not $13,000. All that means is you don’t have to file a gift tax return. Father can still gift the entire $70,000 to son in one year, file a gift tax return, and not pay any gift tax as long as lifetime gifts are under $1 million.

As to saying the $70,000 payment from the S corporation (the employer) is a loan to the son (the employee), I doubt it would fly if audited. The S corporation is not a loan company. What was the business purpose of saying the $70,000 was a loan? To avoid payroll taxes?

I suppose I would do it that way not wanting the idiot client to pay a bunch of tax, but I would lecture the client up and down if he ever gets audited, the IRS is going to have a field day with him.

[geekgirldany]

I don't know what to do. If it came back on them it would come back on me because they would say I told them to do it. I posted the questions to NATP and the person there said it would be "okay". It seems to be it would be okay unless audited then you would have to prove why.
Why oh why did they not listen.

[geekgirldany]

After some thought I do not feel comfortable telling them to do this. My gut is saying it isn't right. I am going to call the customer and tell them so. I am going to recommend they go to another accountant for a second opinion.

[Bees Knees]

Like I said, I probably would go ahead and treat it as a loan, as long as I had it in writing the IRS would give them problems if audited, and they signed my letter acknowledging I warned them about it.

We all have to live with the advice we give clients. We also have to give them advice that will benefit them the most. Making the S corporation treat a $70,000 payment in May of 2007 as payroll is going to cost big money. I'm not sure 100% you would lose the fight, if audited, provided proper loan documents are signed with AFR rates charged. I'm just saying there is a good chance they would give your client trouble if audited. However, there is a less than 3% chance your client gets audited, and there is about a 10% to 90% (take your pick) chance you could win the argument it really was a loan.

You have to do what you have to do, and then be willing to argue for your client if you choose to prepare the return as if it was a loan.

[geekgirldany]

Thank you so much for talking this over with me Bees. I just called the customer and told them how I felt. I can not take the stance that this was a loan and do not feel I could defend it as one. On this issue I feel like someone else might could make a better case for them to take it.

[Davc]

Like I said, I probably would go ahead and treat it as a loan, as long as I had it in writing the IRS would give them problems if audited, and they signed my letter acknowledging I warned them about it.

We all have to live with the advice we give clients. We also have to give them advice that will benefit them the most. Making the S corporation treat a $70,000 payment in May of 2007 as payroll is going to cost big money. I'm not sure 100% you would lose the fight, if audited, provided proper loan documents are signed with AFR rates charged. I'm just saying there is a good chance they would give your client trouble if audited. However, there is a less than 3% chance your client gets audited, and there is about a 10% to 90% (take your pick) chance you could win the argument it really was a loan.

You have to do what you have to do, and then be willing to argue for your client if you choose to prepare the return as if it was a loan.

And if you get caught advising them to back date documents you could be in serious trouble.

[Bees Knees]

And if you get caught advising them to back date documents you could be in serious trouble.

Did I say anything about back dating documents?