632598256894

Assume that a limited liability company passes through to a taxpayer more loss that she can use due to
the fact that she is not materially participating in the business in that year. Assume further that in the
following year she ramps up her activities in the business and is now deemed to be materially
participating. Can she now use the unused previous-year losses against active and portfolio income?
A taxpayer is the founder and CEO of a corporation owned by himself and his daughter. Getting
close to retirement, the taxpayer arranges for the corporation to buy back all his stock. In order to
avoid taxation as a dividend, he takes advantage of the waiver of family attribution rules by filing the
required agreement to end any participation in the corporation for 10 years. However, his daughter
requests that his expertise remain available and asks that he enter into a consulting agreement with the
corporation. Can he do that without jeopardizing the tax treatment of his redemption payments?
A taxpayer is a doctor who practices through a C corporation of which she is the sole stockholder.
All the corporation‟s revenue comes from fees for medical services, and all the services are rendered
by the taxpayer. After paying expenses, she distributes all the corporation‟s revenue to herself. The
corporation deducts all those distributions, and the doctor treats them as taxable compensation. In the
past few years, her medical practice has generated a very high level of income. Imagine her surprise
when the IRS takes the position that her distributions in those years were unreasonable compensation,
recharacterizing them as dividends and subjecting them to double taxation. Is the IRS correct?
For Further Reading
Daily, Frederick W., Tax Savvy for Small Business, 12th ed. (Berkeley, CA: Nolo, 2008).
Gevurtz, Franklin A., Business Planning (New York: Foundation Press, 2008).
Karayan, John E., Strategic Business Tax Planning (Hoboken, NJ: John Wiley & Sons, 2007).
Scholes, Myron S., Taxes and Business Strategy (Upper Saddle River, NJ: Prentice Hall, 2008).
10
Les Livingstone
The Integrity of Financial Reporting
Introduction