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ACC 690 Tax Planning – Compliance
ACC 690 Tax Planning – Compliance
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You have been retained by a new client, Jane Black, to file her 2017 federal return. In 2017, Jane received $1M from her deceased husband’s former employer, Marvelous Holdings.Her husband, Sirius Black, had worked for Marvelous Holdings from 1969 up until his death in 2017. In 2017, Marvelous Holdings sold its 100% ownership interest in Ollivanders, Inc. (“Ollivanders”) to Precision Casting Corp. for $10M.
ACC 690 Tax Planning – Compliance
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Marvelous Holdings has informed Jane that it is the company’s position that the $1M paid in 2017 is compensation owed to Sirius. The company intends to issue a W-2 to Sirius Black for the $1M. Jane claims Sirius was a highly compensated officer, her husband was not owed any back wages, nor did Sirius have any claim against Marvelous Holdings for additional compensation owed.
Contrary to how Marvelous Holdings intends to report the $1M to the IRS, Jane intends to take the position that the $1M is long-term capital gain from the sale of her husband’s interest in Ollivanders (i.e., a “return on equity” or ROE position). While over the years Sirius claimed to own a “piece of the action” in Marvelous Holdings, Jane had never seen any corporate documents showing he had an ownership interest in Marvelous Holdings or any of its subsidiaries (i.e., no Articles of Incorporation, stock share certificates, company minutes, etc.)
ACC 690 Tax Planning – Compliance
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Jane does not recall receiving a Schedule K-1 from Ollivanders or any ownership interest of Ollivanders being reported on the Blacks’ returns. Jane did, however, locate online a Ministry of Magic Committee on Experimental Charms Staff Report entitled Request for an Award from the Ministry’s Recovery and Reinvestment Act of 1749, and dated August 14, 2013, wherein Sirius was identified as a principal of Ollivanders. While Jane’s ROE position is tenuous, it meets the reasonable basis standard (i.e., you can sign the return!)
Advise Jane on the consequences of taking her ROE position, to include:
· Options available to Jane to minimize her risk in taking her ROE position on her 2017 Form 1040 or other form;
· The likelihood of an IRS audit if Jane takes the ROE position on her 2017 Form 1040;
· An explanation of what Jane should expect during an IRS audit (i.e., what the audit process entails);
· If the auditor disallows Jane’s ROE position, the administrative procedures available to her to contest the disallowance; and
· Should an administrative resolution with the IRS be unobtainable, the options available to Jane to litigate the matter (i.e., what courts are available, pros/cons of these courts, procedures to file a claim, etc.).
