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Topic: Tax Law Type: Letter Subject: Accounting and Finance

Academic Level: Undergraduate Style: Turabian Language: English (U.S)

Number of Pages: 3 (double-spaced, Times New Roman, Font 12)

Number of sources: 3

Completed by: https://writersperhour.com

Task Details

Your client owns an apartment building in Los Angeles for which he paid a price of $500,000

which was his original basis. During the ten years he has owned the building, he has taken

depreciation deductions that total $120,000. An investor has offered to buy the building from

your client for a price of $850,000 which is agreeable to your customer if the customer can avoid

paying taxes on his gain. The client has found an office building located in San Diego, which

was legally converted into co-op shares in 2012. Two shares in the co-op are for sale for a price

of $425,000 each, so the client would like to acquire those as part of an exchange qualifying

under IRC sec. 1031. The client would have the investor buy the two shares immediately prior

to exchanging those two shares so that at the end of the exchange the investor owns the

apartment building and your client owns the two shares in the office co-op.

Write a letter to the client explaining all of the income tax-related consequences and risks of this

transaction. Try to identify issues in tax law (court cases and sources written by Congress,

Treasury, and the IRS).

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Dear Client,

Thank you for the chance to offer advice pertaining this legal matter at hand. Basing on

my personal investigations your situation involves a few related tax issues from a wider

perspective. For starters, one is required to consider the conditions under which one holds the

liability resulting from the building depreciation. Subsequently, it is of significance to whether is

achievable under tax laws to successfully withdraw tax payments under gains acquired from the

purchased building. Conversant with the related tax issues is the consideration of qualifying

exchanges under the IRC involving the tradable shares. Thus, taxation laws appear to be

relatively strict enough in the matters pertaining business deductions. Conversely, in the recent 1

periods in our developing financial industry, there have arose cases where case laws have indeed

devised altering stances in regards to such deductions. Therefore, in this letter, I will take full 2

interest in explaining a few of such possible upshots.

Under the recent income tax laws, “an individual is liable to pay taxes under the

conditions where the amounts are acquired from self-employment” Subsequently, “sales as well 3

as other dispositions relating to a business property producing long-term capital gains and

occurring ordinary losses are liable to tax as per the unrelated incomes” However, in this 4

particular scenario a transfer of the Los Angeles building holds to be a key transaction.

Therefore, in such a case the IRS rules that the changes in ownership is associated with the

Ferguson, N. The Ascent of Money: A Financial History of the World. The Penguin Press HC, 2008.1

Ward, Ruby, Trent Teegerstrom, and Joseph G. Hiller. "One Size Does Not Fit All." Choices 28.2, 2013.2

Balakrishnan, K., X. Li, and H. Yang. Mandatory Financial Reporting and Voluntary 3

Disclosure:Evidence from Mandatory IFRS Adoption. 2012.

IRC Sub-Section 512(b)(5)(B)4

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transfer of the tax burdens to the new holding party. Hence, it is significant to acknowledge tax

burdens as specified under Tax laws. In the US Social Security workforce taxes require that 5

every individual pay tax by paying half their totals. 6

However, from an economic perspective, “payroll taxes pose to be different; thus, as a

rule, it would be essential to every person to accept their tax burdens willingly as an individual” 7

Thus, in a similar case relating to section 1231, it was held that the new owner of the building

under sale considerations will be liable for paying taxes from his operational gains. Conversant 8

with the operational gains involves the incentives acquired from the operation of the building

after agreeing and signing the transaction contracts. Thus, this agreement will consider the 9

exclusions involving the depreciation values of the building. Therefore, this poses relevance to 10

the tax payment issues. Hence, in the end as a client, once the transfer of ownership is made

every participant will have to alter their tax payment schedules. Thus, the client will need to

avoid evading from his personal tax responsibilities by having a full agreement with the investor

on the transfer of the tax burden. 11

Lee, T. "The Changing Form of the Corporate Annual Report." The Accounting Historians Journal 21, 5

no. 1 (1994): 215-232.

Nobes, C., and R. Parker. Comparative International Accounting. Latest Edition. Prentice Hall, n.d.6

Hopkins, Bruce R. The law of tax-exempt organizations. Vol. 5. John Wiley & Sons, 2011.7

Onyebuchi, V. "Ethics in Accounting." International Journal of Business and Social Science 2, no. 12 8

(2011): 914-925.

VanStel, S., and Thurik. "The effect of business regulations on nascent and young business 9

entrepreneurship." Small Business Economics (2007): 171-186.

Hansmann, H., and H. Hansmann. The ownership of the enterprise. Harvard University Press, 2009.10

Reinhart., and Rogoff. This Time is Different: Eight Centuries of Financial Folly. Princeton University 11

Press, 2009.

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Subsequently, under the IRS based laws, shares, as well as stocks, hold to be subsidiaries.

Thus, a case in point involving an exempt organization deriving its substantial portions of its

income from the unrelated business. Hence, attempting to secure its tax-exempt eminence, the

company would establish a wholly-control for-profit subsidiaries. Thus, the individual is capable

of entering into the lease with the subsidiaries for fixed rental amounts almost equivalent to

100% of the relating after-expense net revenues. By deducting rental payments to the parent 12

from gross income, the subsidiary would incur almost no tax liability. Therefore, the extant Code

primarily includes rents, interests, as well as various other forms of passive revenues resulting

from controllable taxable subsidiaries as taxable unrelated incomes. Dividends and shares 13

remain to be omitted from taxation since the subsidiaries normally pay taxes on retributions

before the distribution of dividends to the exempt persons. 14

Therefore, a controlled entity is distinct by the IRS as an organization controllable to the

degree of 80% or more by other organizations. This percentage of control level is conventional

through share ownership as well as by interlocking the boards of directors. However, I would

endorse that you take part in the transaction since by the tax laws the transaction is considerate

Burkhauser, Richard V., et al. "Recent trends in top income shares in the United States (2012): 12

371-388.

IFC Forum. Research into the positive impacts of tax competition and tax planning. February 15, 13

2014. http://www.ifcforum.org (accessed March 10, 2015).

IRC Sub-Section 512(b) (13) Note: under distinct documentation applicable to every private 14

foundation, ownership is prohibited where an individual speculates to acquire more than 20% of a corporation's stock.

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on both sides as appropriate relating to IRS section 1031. Hence, in case of any pressing

inquiries please let me know.

Sincerely,

Sign

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