JHyre Rants: “Agreeing to Disagree” with IRS results in penalties and large involuntary boyfriends - Posted by JHyre in Ohio
Posted by JHyre in Ohio on June 05, 2000 at 11:34:48:
(This is a follow-up of the related entity discussion conducted many posts ago- and specifically a response to David Alexander- for whom I have both repect and a liking- even though I disagree with him on many tax issues.)
I know that sounds crass, but it’s true. When they disagree, interest and penalties can and do get applied- and the penalties are a killer. Now, alot of the “rich” think you can just pay the mouthpiece to negotiate the penalties away. So they take positions based on “great tolerance for risk” (I’m being very, very polite in my phrasing)- not on the law. And they get away with enough to justify what penalties they do pay…or so the story goes.
It generally doesn’t work that way.
Oh, sure there are anectdotes where the auditor has given away things that could have hammered the taxpayer. Counting on that sort of behavior is a bad idea. Maybe I’m jaded- because I’m the guy who would get caught. Sure, there are those who never get nailed. In which case, ANY discussion of the law is moot, because such people are above the law- they can do anything, so who cares about the law if you’re not going to get caught (e.g.- Mr. & Mrs. Clinton)?
When I make a post, I focus on the law. I do not get into audit lottery or “creative” arguments. Note the quotes around “creative”- I mean stuff like one-man sales contests where the Rolex is the prize. That sort of thing is pure audit lottery. Indulge in it if you’d like- you’ll not hear ME advise it. Maybe- just maybe- you can get away with it- IF your VERY well represented by VERY pricey counsel AND VERY LUCKY. Leona Helmsley pays the best- and still spent time in Club Fed. Are you feeling lucky?
Well, nothing like a good rant to get things out of my system. If you are going to play games with related companies, get good, WRITTEN advice. Advice based on the specific laws involved- here IRC 267, among others. I will tell you this: If you directly or indirectly (i.e.- through mom, your corporation, a chain of corporations, a business partner, your son, your dog, your evil twin in a parallel universe, or all or some of the above) own 50% or more in two or more entities, those entities ARE related. No question about it. If the auditor is not a complete moron, you have a problem.
There ARE ways around IRC 267- like owning less than 50% of buying entity (remember directly AND INDIRECTLY). So if you ONLY own 1%, no problem. But if you get too cute- for example, own 1% control stake with the ability to require distributions out-of-proportion to 1% to you or a related entity- then common law principals can be used to foil the scheme. My recollection was that Kiyosaki uses an entity owned by his accountant to funnel management fees, thereby (ostensibly) avoiding IRC 267. That may work- IF it is not deemed a sham (for example, accountant kicks back money via another means without STRONG business purpose for so doing).
Bottom line- if you are generating losses by selling to a company in which you (or your mom, dog, etc.) has an interest, get REALLY good advice in WRITING. You’ll probably need it. Please do not engage in a transaction that you’ve seen others do (I mean Kiyosaki, among others) without getting the written advice you need to ensure that the transaction works for YOU. You are a neat guy, I’d not want to see you get hammered by the IRS. They can and have ruined businesses and lives, their kinder, gentler rhetoric notwithstanding.