Discussion:Reporting individually-owned real properties on sole shareholder's C Corporation's 1120 tax return

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Discussion Forum Index --> Advanced Tax Questions --> Reporting individually-owned real properties on sole shareholder's C Corporation's 1120 tax return


Discussion Forum Index --> Tax Questions --> Reporting individually-owned real properties on sole shareholder's C Corporation's 1120 tax return

Brokehouse (talk|edits) said:

5 July 2009
I am representing a shareholder in a piercing the corporate veil case. My question is: Is it considered conmingling of personal assets with business assets if the sole shareholder reports his multiple real properties on his C Corp's 1120 tax returns because his CPA (at the time) stated that he (the CPA) had to carry over these properties onto the business' tax returns because the shareholder had reached the reporting limit on his individual 1040 return? Is there such a limitation on a 1040 return? I appreciate any clarification in this complicated matter.

KatieJ (talk|edits) said:

5 July 2009
IRC Sec. 469 limits the deduction of losses (and the utilization of credits) from passive activities of individuals. Such losses are allowed only to offset passive income. Passive losses in excess of passive income are suspended and can be utilized in later years when (if ever) there is passive income to absorb them.

Real estate activities are generally treated as passive. However, a taxpayer can deduct up to $25,000 of losses from real estate activities in which the taxpayer actively participates. If the taxpayer's AGI is over $100,000, though, the $25,000 allowance is reduced by 50 cents for every dollar of AGI over $100,000.

So maybe the CPA put the real estate losses into the corporation to utilize losses that the stockholder could not deduct on his individual income tax return because they exceeded the $25,000 limit, or the $25,000 allowance was reduced or negated by his AGI. A closely held C corporation is also subject to the Sec. 469 limits, but perhaps the corporation had passive income to offset the losses. Or maybe more than half of the corporation's gross receipts were from real estate businesses in which the corporation materially participated, in which case the Sec. 469 limits would not apply to the corporation.

Whether reporting the real estate held by the stockholder as an individual on the corporation's returns constitutes commingling of assets for purposes of piercing the corporate veil is a legal question that I'm certainly not qualified to answer. From a common sense perspective, though, it seems the plaintiff would have a reasonable argument that it does. Maybe you could argue that the client just got bad advice from his CPA, that he didn't understand, and the properties were never really commingled, just reported that way erroneously for tax purposes. It would help that argument, I'd guess, if you could prove that the bills (taxes, insurance, maintenance, etc.) relating to those properties were consistently paid from the stockholder's personal bank accounts rather than by the corporation. All this is just speculation, though. I'm not a lawyer.

And as JR will almost certainly tell you, NEVER put real estate into a corporation, never, no not ever <G>. If the corporation really holds the real property, you generally can't get it out without paying tax on the gain twice -- once at the corporate level, and again at the stockholder level when the proceeds are paid out as a dividend. Even if you win the corporate veil issue, the client will still have a problem when he goes to sell those properties.

I wish you luck on this one. I hope you'll let us know how it turns out.

JR1 (talk|edits) said:

July 5, 2009
NO NO NEVER NOT EVER for sure! But if this is a legal case already, as it sounds, do NOT make up an answer. Follow instructions of legal counsel only.

Harry Boscoe (talk|edits) said:

5 July 2009
Brokehouse: Are you an Esq?

In what matter are you representing this client?

Death&Taxes (talk|edits) said:

5 July 2009
Maybe I am being too nice to the preceding CPA, but are the properties actually titled in the Corporation name, or was this an 'assignment of the income and expense' into the corporation? I wonder because of the use of the word 'report' rather than 'titled.' If so, the problem is one of tax reporting, not one of assets being where they should not be.

CrowJD (talk|edits) said:

5 July 2009
I am learning something new here. I did not know that you could just take losses and put them wherever you wanted them. Can you assign losses in this manner?

I think D&T raises an interesting question: are these properties actually titled to the corp?

If they are titled (or even if they are "assigned losses") wouldn't the corp. have to give consideration (FMV?) for the value of the properties or the assigned interest, for that matter?

If he's merely transferring things of value without condsideration, then it does seem like he is treating the corp. as his alter ego ("I'll just put it over here if it suits me."); putting aside the tax implications this suggests.

Brokehouse (talk|edits) said:

5 July 2009
I really appreciate everyone's response to my query. To answer Harry Boscoe, yes I am an attorney representing the sole shareholder who is being accused of conmingling personal assets (his real properties) with his closely-held corporation's assets. To respond to D&T, these real properties are titled to the shareholder, not to the C Corp, and he no longer owns these properties as all of them were either foreclosed on or sold in a short sale transaction. I appreciate's Katie's response, but I am a novice in this type of tax matter. So is this more of a tax reporting error done by the tax accountant (who is MIA) or a transfer in assets problem?

JR1 (talk|edits) said:

July 5, 2009
I would say transfer in assets. It's quite common for corporations to treat as their own assets that are not in fact titled to the corp. Vehicles are very common since commercial insurance, sales tax issues, etc. usually force the s/h's hand in keeping them titled personally, even tho' we then treat them just as if they are corp assets. I don't see why real estate would be handled any differently, apart from state real estate law which might preclude that. And yes, it's extraordinarily dumb to put real estate into a corp, but that sounds like what was done. Note that that does NOT change the character or deductibility of passive losses, which retain their character and treatment regardless of choice of entity.

Harry Boscoe (talk|edits) said:

5 July 2009
And I would say not a "transfer in assets" problem. No assets were transferred anywhere. At worst, the shareholder and the corporation misrepresented that the corporation owned certain real estate. Puffery. Overstatement of assets. Attempted assignment of income. Sounds like the shareholder lost these assets to [other?] creditors and now somebody is trying to make the shareholder liable for the corporation's debts. Did the corporation ever present financial statements showing these properties as assets when applying for credit?

Last ditch effort: Real estate can't be commingled, by definition. Its ownership can be misrepresented but that doesn't rise to the level of commingling of assets. Is the corporation's tax return the only place that the real estate was shown as an asset of the corporation?

What are the indicia of "commingling of assets" anyway? Is there some definitional stuff here that a simple tax accountant never encounters and never considers?

I am not an attorney; I never sat for the bar exam; I almost flunked Business Law 101; I think the graders gave me a "something-below-70-rounded-up-to-70" on the CPA exam so they wouldn't have to see me again. My sense of legality versus fairness has been honed by decades of drinking Pabst Blue Ribbon beer.

JR1 (talk|edits) said:

July 5, 2009
So in that case, you'd take the position that the prior accountant intentionally walked over the line in order to use passive losses improperly, that the properties were never conveyed to the corp, nor intended to be conveyed to the corp. That it was merely a charade to shift the losses to somewhere they could presumably be used (that presumption also in error since, again, the character and deductibility of passive losses doesn't change).

That's probably the real answer anyway.

RoyDaleOne (talk|edits) said:

5 July 2009
"piercing the corporate veil case", because the exact nature of the complaint was not posted, there is no need to ask. This is a legal question and maybe at best the tax return would be evidence as to the intent of the shareholder, either good or bad, still a legal question?

I am not an attorney, and the foregoing is posed to be questions and not answers.

There is no limit on the number of rental properties that is included in any income tax return.

Brokehouse (talk|edits) said:

6 July 2009
I like Harry Boscoe's last ditch effort statement. That was my original thoughts, but finding conclusive case law on such a statement has proven to be tough. All that I have found re: commingling of assets include real property when trying to pierce the corporate veil. JR1 also brings up a good point as well re: transfer in assets. However, nothing was transferred. The accountant simply stated that the s/h had exhausted his limit on reporting investment property for the tax years in question ('04 and '05) and the remaining properties had to be reported some where. So he reported them on the biz returns.

KatieJ (talk|edits) said:

6 July 2009
Just to make things clear, I never meant to suggest that it was appropriate or allowable for the CPA to put losses from properties owned by the stockholder on the corporation's tax returns. If my guess as to what the CPA did and why he did it turns out to be correct, Brokehouse's client's corporation owes some back taxes. Depending on the amounts involved, this might rise to the level of fraud, in which case there is no statute of limitations on IRS (or, probably, state) assessments of additional tax against the corporation.

Anyway, if my conjecture is correct, Brokehouse's client won't be going into court to defend himself against liability for the corporation's debts with very clean hands. At the least it will be embarrassing to explain this to a judge or jury.

As for documentation (which Brokehouse asked about on my talk page): The authority is just in the statute itself. Read IRC Sec 469 (you can link to it on Tax Almanac) and look at the corporate and individual tax returns to see whether the losses would have been limited by Sec. 469 if they had been reported on the individual return, and whether the corporation got a tax benefit from claiming them -- and if so, how much. You may need to get an accountant to do the analysis for you.

Death&Taxes (talk|edits) said:

6 July 2009
The CPA's thought process is so 1990ish; did he never read the rules concerning 'real estate professionals?' My lord, there are times on this board when every fifth question concerns this subject. At least taking that position might have given the client a chance to argue the case; what he did is simply wrong.

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