Kenneth Guarino founded Capital Video Corp. to distribute pornographic videotapes. Fearing that organized crime would try to take control of the company or interfere with its other activities, Guarino paid $1,728,000 in tribute to Natale Richichi, a well-known crime boss. The payment should ensure Richichi`s help to avoid problems. Guarino helped Richichi hide the payment from the IRS and hide other assets from the government. Both men were charged with conspiracy and fraud. Capital Video paid and deducted $250,000 in 1996 and $517,000 in 1997 for Guarino`s legal fees. The IRS rejected the deductions, saying the payments represented a constructive dividend for Guarino. The Tax Court ruled on behalf of the IRS and the taxpayer appealed. The Tax Court has agreed with the taxpayer that these restructuring costs will be duly deducted by the company as legitimate operating expenses. A subject may acquire premises (all or part of them) rented to a tenant of the former owner.
All costs incurred during the eviction of the tenant are not deductible. These expenses are part of the cost of acquiring the property and a capital expenditure for income tax. It is likely that the expenses could be part of the “cost base” of the property, since the liquidation of the insured`s property or a right in the asset is a capital expense. Tell us if they are relevant to your situation. Legal and accounting fees to represent the rating agencyIt is a deduction that can go under the radar of most Canadians. These are fees paid for advisory or support services during a review by credit rating agencies or to oppose or complain about a rating. These royalties are fully deductible in the year in which they are incurred. What does this mean for the Canadian taxpayer? This means that if an application letter is already sent to you, or if there is a verification or reassessment of your tax return that is subject to a fee to help you, it will be fully deductible on your next tax return. The cost of preparing, registering and stamping a lease is deductible if the taxpayer uses or uses the property to generate assessable income. The rents themselves are deductible according to the general deduction rules and are therefore subject to specific prior rules (please find out more). Section 15 of the Income Tax Act provides that shareholder benefits received by a corporation must be included in the shareholder`s personal income if they are generated for the benefit of a shareholder who is a natural person.
The taxpayers` record was significantly weakened because it helped the co-defendant hide income and wealth from the IRS, shares that would not benefit the company. In addition, the fact that the instalment payments also affected other companies invalidated the conclusion that the expenses were ordinary and necessary for the paying company. Before shareholders` attorneys` fees are deductible, the corporation must prove that a lawsuit is the direct result of actions taken by the shareholder for the principal benefit of the paying company. Courts generally rule that actions that benefit the shareholder or are not directly beneficial to the business do not promote its operations. If a company cannot prove an exclusive corporate purpose, the deduction is refused and the shareholder is charged with receiving an implied dividend. Shareholder pension rules are designed to prevent companies from financing shareholders` personal expenses from corporate funds before tax. The inclusion of a benefit in the shareholder`s personal income is a refusal of deduction for the corporation. The IRS and the courts typically evaluate the second criterion based on the origin of the legal doctrine. These are the factors that led to the dispute, not the outcome. Never mind that an indispensable employee was involved and that without him, the company would struggle to survive. If the second test is applied to the present case, the subject must demonstrate that the illegal activities created or carried out in the vicinity of the companies` activities are not aware of the impact of a conviction on the shareholder or company. In court, it was recognized that the legal fees of 1500 $US paid for the establishment of the family trust were personal and represented the benefits of the shareholders.
However, the company argued that the restructuring of the company, including the reorganization and modification of the company`s share capital and the freezing of the estate, were necessary business costs for the company and not expenses related to the personal profit of the owner/manager. Tax distributions under a shareholders` agreement of an S corporation or in an operating agreement or partnership agreement of a corporation taxed as a partnership are both customary and prudent. A typical tax distribution provision in an S Corporation shareholders` agreement would apply a tax rate to S Corporation`s income. As discussed in more detail below, one issue to consider is whether the allocation of tax should be based on annual taxable income or cumulative income from the date of incorporation of the corporation or possibly from the date of conclusion of the shareholders` agreement. The revenue from the tax rate and income is the amount of the annual tax distribution. S companies are limited to having a single class of shares and only differences in voting rights are allowed. No special allocation may be made and all distributions, including tax distributions, must be made on a pro rata basis between shareholders on a shareholding basis. The IRS and the courts generally evaluate the second criterion based on the origin of the claims doctrine. These are the factors that led to the dispute, not the outcome.
The fact that an indispensable employee was involved and that the company would struggle to survive without him is irrelevant. By applying the second test to this case, the taxpayer must prove that the illegal activities related to the company`s business activities arose out of or are directly derived from it, ignoring the effects of a conviction on the shareholder or company. The tax court found no evidence that the payment or conspiracy benefited the company. It therefore concluded that the payments did not meet the deductibility criteria. Since the taxpayer did not prove that the finding of fact was manifestly erroneous, the Court of Appeals for the First Circuit upheld the Tax Court`s decision. The corporation was denied the deduction and the taxpayer was forced to declare an implied dividend equal to the legal fees paid on its behalf. The Treasury Regulations for S Corporations recognize that state tax laws may impose withholding tax or income tax payment requirements on certain owners, e.B non-residents, but not others. The Regulation provides that these laws are not taken into account in the application of the single class of shares rule, provided that constructive distributions resulting from the payment or withholding tax by the company are taken into account in distributions to other shareholders. A temporal difference between constructive distributions and actual distributions to other shareholders does not result in the company being treated as having more than one class of shares.  The main caveat for an S corporate tax allocation provision is that owners may face different tax rates. For federal tax purposes, some homeowners may be in higher tax brackets than others. In addition, owners may reside in different states and have different state and local income tax rates that apply to the S corporations assigned to them.
In addition, some states may require a company to withhold taxes or pay taxes for some shareholders but not for others. Such planning is usually associated with significant accounting, legal and valuation costs. Are these expenses deductible by the corporation or do they represent a tax benefit to the shareholders themselves, who, if paid by the corporation? This issue was raised directly in the Tax Court Truck Base Corporation v. . .