Discussion:Can Commission Income every be considered a Recovery of Capital?
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Discussion Forum Index --> Tax Questions --> Can Commission Income every be considered a Recovery of Capital?
| 3 December 2006 | |
| A Client of mine made an investment for $100X in company Z, but then on that very same investment in Company Z, the Company Z paid him a separate sales commission of $50X for that $100K investment. Now for legitimate business reasons, my client would have never made the investment originally had he not received that separate, independent sales commission for half that value. Although there is the possibility that he may, two to three years down the road, earn a ten time return on his investment, am I wrong for claiming that that $50X commission was not earned income, but rather a recovery of capital. I can't seem to find any code or reg that discusses this. All of your thoughts are always appreciated!
Thanks, | |
| 4 December 2006 | |
| How is Company Z reporting it? Don't see how Sec. 61(a)(1) can be ignored. | |
| 4 December 2006 | |
| Company Z is reporting it exactly for what it is: a sales commission to the client for the investment that he brought in to them. The reason why I believe that Sec. 61(a)(1) can be ignored is that this is a recovery of capital invested and therefore not income. If we use the step - transaction doctrine and look at both steps of this transaction together, the investment and the commission, then all you really have is that my client made a good sound business investment for less dollars at the end of the day. My problem is that on face value, your comments about Section 61(a)(1) appear quite correct, although I am also certain that the recovery of capital doctrine is to be considered as well - that is why I am so confused. | |
| 4 December 2006 | |
| Well, if Company Z is reporting it as a sales commission it will appear I suppose on a 1099-MISC if it is not his employer. I was under the assumption the step doctrine has a negative connotation. In your proposed treatment, it looks like the stepped transactions would be intended to convert current ordinary income to future long term capital gain. I think your wording "...for the investment he brought to them" fairly well answers the question. He performed a service and got paid a commission. | |
| 4 December 2006 | |
| It will not get reported as a 1099 because the client is a corporation. Regarding the step transaction doctrine, it works in one of two ways: when one of the steps are purely done for tax avoidance purposes, then it has a negative connotation and the step transaction doctrine can be used by the IRS to collapse the steps. However, when both steps have a legitimate business purpose, then the step transaction doctrine can be used by the taxpayer to legitimate his position. What is still confusing to me is that if you are taxed because you perform a service then what you really saying is that when a real estate broker purchases a home for his or herself and thereby has to pay the brokerage commission which is then returned to him or her, that that entire commission would be taxable as well? Maybe you are right, it just doesn't appear to make sense and I think I have a reasonable argument to the contrary. | |
| 4 December 2006 | |
| Point of fact, when a stockbroker trades for his own account his share of the trading commission is reported on a w-2. When a real estate broker buys a house represented by his firm his share of the commission is paid to him by the firm. If there is no firm the deal is done without commission. In this case if client could have structured the deal so that he was only paying half he should have done so. Apparently he couldn't. I vote taxable income.♫ | |
| 4 December 2006 | |
| Well, if you think you have a one out of three, or better, chance of prevailing, give it a go. | |
| December 4, 2006 | |
| And the proportion of ownership for the orig. investment hasn't changed. By pretending that this is a return of capital, he gets twice the investment that other investors at that time received for same money. Or, to look at it another way, he's getting a 100k investment for 50k, then, which clearly kicks up income. If there was some timing difference, then MAYBE you've got some wiggle room to think about a return of capital, but this all happened at once, and either way, it's income. | |
| 4 December 2006 | |
| Since the company is recording the payment as an expense, its quite a stretch for your client to claim its a return of capital. If the company were to record the payment as a return of capital it would be a different story, but that could very well bring up ownership/income sharing issues among the various partners. | |
| 4 December 2006 | |
| I can't tell you how much I appreciate the comments from all of you. Dennis, I appreciate the facts that you shared. However, what really surprises me is that there doesn't seem to be any case law or anything on point about this issue which seems so pervasive. I can easily distinguish my particular set of circumstances from that of a stock broker or the person buying a home - I just thought that I could easily utilize that as a convenient illustration. In the situation at hand, the entire group of investors behind my client is precisely investing less than they would have because my client is sharing the commission back with them. My client just doesn't want the other company to be privy to his arrangement. If any of you could direct me to any case law or anything on this, I would be so appreciative. | |
| 4 December 2006 | |
| One more thing, I was thinking about Tax ref's comments. It may not be clear whether the company that is paying the sales commission is deducting it as an expense or is actually just making its' own internal adjustment to the cost of the investment itself. This may give me some more flexibility to wiggle my way out of it. However, I can see perhaps a point that when the company does have to expense such an amount that it should then be claimed as revenue by the agent. That may explain why the stock broker and realtor have to claim the income. However, in my situation, it wouldn't appear that simple. But again, I invite your thoughts and appreciate them dearly. | |
| 4 December 2006 | |
| From 2 messages above: "In the situation at hand, the entire group of investors behind my client is precisely investing less than they would have because my client is sharing the commission back with them. My client just doesn't want the other company to be privy to his arrangement."
I have to admit that I don't fully understand the situation, however, is your client sure what he is doing is legal? Is there any chance someone who is not to be privy to the arrangement might consider all this to be a breach of fiduciary duty and payment of kickbacks? | |
| 4 December 2006 | |
| That is a great question, and the answer is that "rebates" of of this type in the state of Caifornia is fully legal. | |
| 5 December 2006 | |
| The matter at hand is a life insurance policy that will be resold on the secondary market. This is not subject to the SEC. Any more ideas, though, I would really appreciate it. | |
| 5 December 2006 | |
| This just gets worse, doesn't it? Apparently we have a capital asset(?) being resold for a loss. On the other hand, if you can make the case for the policy as inventory you can run the discount through cost of goods sold. Client would only have to eat the income on the piece he kept. Regulation on this stuff is reserved for attorneys general Viatical Fraud | |
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