Discussion:How to reply to client questions

Q 1. Why does stock need to be issued?

My response: since business is a corporation, stock needs to be issued. It indicates the ownership in the company which is needed for the tax returns.

Client's reply: Company is in start-up phase where profits will be nil. Why issue stock?

Q 2. Why do vendor "peace offerings" need to be reported as gifts?

Initially I sent them information about substantiation requirements for gifts. After seeing their "marketing" account, I reiterated the requirement that gifts are only deductible up to $25 per person per year.

Q 3. How would you respond to this:

Me: The amount for these “uniforms” (work shoes and jeans) is $xxx. I recommend the accounts be adjusted and the amount put in as an advance to shareholder.

Client: I have re-categorized these expenses under a Job Related Costs as these items are absolutely needed for a job at that time.

Q 2. Maybe these are not gifts, but promotional items. Q 3. You will have to disclose that you have taking, such and such, position as NOT following the rules. Note as an aside, I have clients who provide work clothes to employees, such as mechanics.

2) Who gives vendors gifts? They give ME gifts. I give some of my customers gifts.

3) Personal use items are non-deductible. Putting them in 'advance to shareholder' ensures that I won't miss them and subject the client to a negligence penalty when doing the tax return.

On the issuance of stock, remind them in addition that failure to tend to the legal side of their corporation my result in the corporate veil being pierced in a lawsuit.

Although not addressed in your post, it's implicit that the owner of this corporation considers him/herself to be self-employed. Until he "gets it" that he/she is no longer self-employed and instead is chief executive officer of a corporation, he/she will find it difficult to make decisions for that "other person".

It is sometimes a lengthy task to get the client to make the transition, but if you are consistent in your communications, it usually happens.

Back in high school, even before I had a driver's license, I bought a rusted out 1976 Triumph Spitfire (that didn't even have a transmission) with the hopes of putting it back together. The car wasn't going anywhere anytime soon. However, when I bought the car, I insisted on the former owner giving me the title. Why? Because some day the car would run and when it did I wanted to make sure I was ready to go.

Why worry about stock for a company that is still up on blocks? Simple: some day your company will be up and running and when it is you want to make sure all your paperwork is in order.

In explaining the need for stock, Crow said it, but I wouldn't use the term "pierce the corporate veil" with the client or the bookkeeper. Instead, put it in stark terms: if the corporation is not properly set up, with all the technical requirements including stock issuance taken care of, it may be easy for a creditor of the corporation to take away your personal assets. You could lose the liability protection that is the main reason why you set up the corporation in the first place. There is no point in going to the trouble and expense of creating the corporation if you don't make it effective.

As RoyDale suggests, the vendor "gifts" may actually be deductible as promotional or marketing costs.

Part of the dynamic of getting the client to shift gears is that, when you take them out of their comfort zone, you also need to build them up by referring to them as an executive, community leader, grand poobah, etc. If they will buy into that, you can lead them anywhere.

What are the client responses to the questions?

Rule One: Anything can be made to balance. Rule Two: If it balances, it's right.

I didn't stay in that job long enough to clean up the mess.

DEBIT LEFT - CREDIT RIGHT

Gifts vs. promotion - "There are no gifts. These are items purchased for marketing purposes given to businesses and individuals to market the services." I guess I opened a can of worms with this one. Sounds like a possible compensation issue to me. Any other thoughts?

Uniforms - "they will not be used for street wear." Well, I clearly stated that is not the test. I'm running out of patience with this one.

Re: gifts. Companies give away promotional items all the time. No problem with that, it's just that when the value exceeds $25, the company can't deduct it. Do a lot of companies ignore that rule? Of course they do. However, I think that logoed Titleist golf balls have a different connotation than a gift card.

Re: uniforms..she is way off base, just as you say.

It sounds like the two of you are getting along like fire and ice. There are some human dynamics at play that you are probably not going to work out with her in the short term. What you have going for you is professionalism and an ability to document your assertions, whereas she can only flail her arms.

It would be interesting to get the client's take on this.

I replied to the bookkeeper's email and just simply stated that if there were additional questions, the president should call me. It's simply inefficient to keep going back and forth like we have been. And we weren't fire and ice in the beginning. I'm not sure what has changed.

1. Stock agreement referred to, but there's no mention of any dollar amounts.

2. Truck expenses should be 100% deductible -- no mention that personal use is not.

3. Meals are 100% deductible "when tied to contract." I guess that refers to lunch by shareholder-employee while on the job site.

4. Customer gifting is 100% deductible "being generic for customer's office and/or staff."

5. Cell phone is 100% deductible -- again ignores any personal use.

6. Uniforms are deductible. Are jeans "protective trousers"?

So, now what? I would like to just say I cannot work with them, but then I would not be fulfilling my engagement letter.

This has happened to me perhaps ten times in 25 years; someone else comes with a client (spouse, boy or girl friend, parent, adult child etc) and begins to tell me how to do the return. If isn't a 'second chair' it is a college professor carrying a book, Taxes for College Professors. Almost every time I have pointedly told them that if it is my signature on the return, I will follow my own knowledge.

I would simply tell them that you disagree with their desired treatment of the items in question and will not prepare or sign a return that you, in your professional judgment, believe is wrong. Let THEM end the engagement and find a new professional.

In the future, perhaps is would be a good idea to add a paragraph to your engagement letter that leaves you an "out" in cases of disagreements such as these.

I was looking at the comment "purchasing furniture and equipment for job sites and making sure they are put in properly. They purchase the gifts because that's the Hawaiian way of doing business." Is there any federal money involved in these job sites? The Feds take a very dim view of "customer gifts". Improper tax accounting for the “gifts” would make you appear complicit to the who scheme ... better to walk away from. Only another angle ...

Many years back, the company I worked for had an independent dealer that gave gifts to customers (county road commissioners), the dealer's new mailing address was the federal pen.

I'm not the Service and I'm not their priest. My responsibility is simply to exercise due care and make sure the information provided passes the sniff test when performing my duties. I'm not going to sneak into their place of business under the cover of night like an accounting superhero (worst comic book ever) and root through their real corporate books. That would add -- not lower -- my liability.

On the other hand, I won't lie to or lie for a client. Ever.

Lying isn't in my best interest and -- whether the client believes it or not -- lying isn't in the client's best interest. Clients who ask me to lie aren't my clients for long. I'll be aggressive as a client wants but draw the line at aiding and abetting. Aggressive is fun, exciting, sharpens my skills and keeps me interested in a project. Put one toe over the aggressive line and into illegal and you're just asking for trouble and a new advisor.

In this case, Natalie, your client is making unbelievable statements and asking you to play along. That isn't good for your client and it certainly isn't good for you. It sounds as though your heart-to-heart talk put the client back on the straight and narrow. Good for you.

My only other piece of advice if this sort of thing comes up again would be to get all the parties in the same room for a discussion. When shooting the bull on the golf course, 'experts' will often exaggerate, stretch the truth and generally brag about all their tax saving ways. Get them at your conference room table and they tend to tone it down a lot. I can't tell you how many times I have heard 'well, what I meant to say is' or 'yes, that's what I said, but it may not apply in this case because' or, my favorite, 'the client didn't tell me that, I guess you're right'.

TITLE 26, Subtitle A, CHAPTER 1, Subchapter B, PART IX, Sec. 269. STATUTE (a) In general If - (1) any person or persons acquire, or acquired on or after October 8, 1940, directly or indirectly, control of a corporation, or (2) any corporation acquires, or acquired on or after October 8, 1940, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation, and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then the Secretary may disallow such deduction, credit, or other allowance. For purposes of paragraphs (1) and (2), control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation. (b) Certain liquidations after qualified stock purchases (1) In general If - (A) there is a qualified stock purchase by a corporation of another corporation, (B) an election is not made under section 338 with respect to such purchase, (C) the acquired corporation is liquidated pursuant to a plan of liquidation adopted not more than 2 years after the acquisition date, and (D) the principal purpose for such liquidation is the evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which the acquiring corporation would not otherwise enjoy, then the Secretary may disallow such deduction, credit, or other allowance. (2) Meaning of terms For purposes of paragraph (1), the terms "qualified stock purchase" and "acquisition date" have the same respective meanings as when used in section 338. (c) Power of Secretary to allow deduction, etc., in part In any case to which subsection (a) or (b) applies the Secretary is authorized - (1) to allow as a deduction, credit, or allowance any part of any amount disallowed by such subsection, if he determines that such allowance will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or (2) to distribute, apportion, or allocate gross income, and distribute, apportion, or allocate the deductions, credits, or allowances the benefit of which was sought to be secured, between or among the corporations, or properties, or parts thereof, involved, and to allow such deductions, credits, or allowances so distributed, apportioned, or allocated, but to give effect to such allowance only to such extent as he determines will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or (3) to exercise his powers in part under paragraph (1) and in part under paragraph (2).