‘Tis the season to be at-risk. We mentioned yesterday how you can get basis for deducting S corporation losses by making a loan to the corporation. But not just any loan. If you borrow from another S corporation shareholder to make your loan, your basis won’t be “at-risk.”
A Monroe, Iowa farmer learned that the hard way with his 1991 loan, as we discussed long, long ago:
Larry Van Wyk, a farmer from Monroe, Iowa, got a taste of the dangers of the at-risk related-party loan rules back when farmers were their primary target. He owned an S corporation farm 50-50 with his brother-in-law, Keith Roorda. On December 24, 1991, Larry borrowed $700,000 from Keith. The loan was fully-recourse, so the brother-in-law could proceed ruthlessly against Larry in the event of non-payment. Larry used about $250,000 to repay money he owned the S corporation and loaned the remainder to increase his basis to enable him to deduct losses.
Unfortunately, Larry’s brother-in-law had “an interest in the activity” – he owned half of it. This made the deduction not “at-risk,” even though no loan from a brother-in-law is without risk in a very real sense. The efforts of some of the finest tax attorneys west of the Mississippi were unavailing; the Tax Court agreed with the IRS, and Larry lost his losses.
It’s not enough to avoid borrowing from another shareholder; you don’t want to borrow from somebody related to another shareholder. And as “interest in the activity” isn’t necessarily the same as “shareholder,” you should watch out for borrowing from anybody else involved in the business. The safe thing is to visit your friendly community banker for your loan.
This is another of our daily year-end 2013 tax tips — one a day through December 31!
Weekend update! In case you missed it over the weekend:
William Perez, Roth Conversions as a Year-End Tax Strategy
We have a Commissioner. Senate Votes 59-36 to Confirm John Koskinen as IRS Commissioner (TaxProf). A lot of folks have noted that once again we have a Commissioner who hasn’t done taxes for a living. That doesn’t have to be fatal. Anybody who has hung around CPA firms can tell you that somebody who is good at taxes can be pretty terrible at running an organization.
Still, it’s not a great sign. The new guy, John Koskinen, will be 79 years-old when his five-year term runs out. He got his reputation as a “turnaround guy” at Freddie Mac in the wake of the financial crisis, preserving the bureaucracy as responsible as any for the financial meltdown. I suspect he was hired to protect the agency, not the taxpayer.
By the way, there is another Koskinen.
The crumbling mandate. Tax Analysts reports ($link):
Individuals whose health insurance plans were canceled by insurers because they did not meet the requirements of the Affordable Care Act will be eligible for an exemption from the individual mandate penalty that takes effect in 2014, the Department of Health and Human Services said late December 19.
Megan McArdle says this means Obamacare Initiates Self-Destruction Sequence:
As Ezra Klein points out, this seriously undermines the political viability of the individual mandate: “But this puts the administration on some very difficult-to-defend ground. Normally, the individual mandate applies to anyone who can purchase qualifying insurance for less than 8 percent of their income. Either that threshold is right or it’s wrong. But it’s hard to argue that it’s right for the currently uninsured but wrong for people whose plans were canceled … Put more simply, Republicans will immediately begin calling for the uninsured to get this same exemption. What will the Obama administration say in response? Why are people whose plans were canceled more deserving of help than people who couldn’t afford a plan in the first place?”
Arnold Kling put it more pithily: “Obama Repeals Obamacare.”
They’re desperately improvising as they go. Not a good situation, considering the mandate tax is supposed to take effect in less than two weeks. I’m starting to doubt that it ever gets enforced.
Related: Paul Neiffer, Cancelled Health Insurance Policies
Brian Mahany, IRS Ordered To Pay Taxpayer’s Legal Fees
Peter Reilly, Woody Allen’s Blue Jasmine Has A Tax Lesson. If you don’t wan’t to stay married to a spouse, you might not want to file a joint return either.
Robert D. Flach has a special Monday Buzz!
Tax Justice Blog, Ultra-Wealthy Dodge Billions in Taxes Using “GRAT” Loophole
Michael Schuyler, Why A Death Tax “Loophole” May Make Economic Sense (Tax Policy Blog).
Jack Townsend, Swiss Bank Hype and Over-Hype. ” Merely having U.S. clients with undeclared accounts is not the problem for those banks; it is those banks actions to become complicit in the U.S. clients’ failure to report the accounts.”
News from the Professon. PwC Won’t Stop Beliebin’ In Ugly Christmas Sweaters (Going Concern)
Tags: 2010 Filing Season Tax Tips, 2013 year-end tax tips, ACA, Arnold Kling, at-risk rules, Brian Mahany, Ezra Klein, Going Concern, Jason Dinesen, John Koskinen, Kay Bell, maule, megan mcardle, Michael Schuyler, News from the Profession, Obamacare, Paul Neiffer, Robert D Flach, Russ Fox, S corporatons