William is president of a small corporation. He is interested in equal measures in saving taxes and
Question:
William is president of a small corporation. He is interested in equal measures in saving taxes and in providing financial help to his daughter Donna, who is also an employee of the corporation. Because William believes he already has all the income and assets he needs, he is not concerned with accumulating more. He tells you of the following actions he plans to take this year and asks you to confirm that they are effective tax-saving steps for him.
(1) At the beginning of the year, William will ask the corporation's board of directors to reduce his compensation this year from $200,000 to zero. He will work this year for free. He will also ask the board to increase Donna's compensation this year by $200,000. The board is expected to approve both proposals.
(2) William has an accumulated balance of $500,000 in his account under the corporation's nonqualified deferred compensation plan. William has, appropriately, not yet been taxed on this amount because it has not been available to him. Assume the $500,000 is scheduled to be distributed to him on July 1 of this year and will be taxable at that time. William plans to give the corporation's financial officer a directive on June 30 to pay the $500,000 to Donna instead of to him.
(3) William owns all of the stock in the corporation. A wealthy friend of his wants to be a part owner of the corporation and offers to pay $1,000 per share for any shares William is willing to sell. William's adjusted basis in each of his shares is only $100. William plans to give 100 shares of his stock to Donna and he will instruct Donna to sell the shares to his friend for $100,000.
(4) William will give all of his corporate stock to Donna for one year but will retain the stock's voting rights. After one year, the stock will revert to William. During the year Donna holds the stock, William estimates about $75,000 in corporate dividends will be paid to Donna.
(5) William owns the building that serves as the corporate headquarters. The corporation rents the building from William for $150,000 per year. William is planning to sell to Donna for $150,000 the right to this year's rental income. Pursuant to this plan, Donna will pay William the $150,000 purchase price plus interest at the beginning of next year.
(6) As an alternative to (5), William is planning to transfer title to the building to Donna as a gift. Donna can then lease the building to the corporation for $150,000 per year. In addition, because the building contains some vacant space that is not used by the corporation, Donna can generate additional rental income by renting the unused space to another tenant for about $25,000 per year. As a further alternative, assume William, rather than operating the business in the corporate form, had been a sole proprietor and used part of his building to conduct his business.
Could William claim a rental deduction if he transferred the building to Donna and then rented part of it back from her to continue to conduct his business?
Auditing a business risk appraoch
ISBN: 978-0324375589
6th Edition
Authors: larry e. rittenberg, bradley j. schwieger, karla m. johnston