Discussion:IRS Audit: Reclassify Premium as SE Income
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| {{ForumReplyPost|UserID=Death&Taxes|Date=27 October 2009|Text=Sounds like the buyer decided the write off of start up costs wasn't enough for him; I don't see how he could give a 1099-MISC when there was no income to apply that payment against, but the auditor will say that is none of your business. Essentially the route was worth more because the buyer would not have to battle for shelf space in the stores, for if the seller quit, other cookie mfrs would take the space in his absence. }} | {{ForumReplyPost|UserID=Death&Taxes|Date=27 October 2009|Text=Sounds like the buyer decided the write off of start up costs wasn't enough for him; I don't see how he could give a 1099-MISC when there was no income to apply that payment against, but the auditor will say that is none of your business. Essentially the route was worth more because the buyer would not have to battle for shelf space in the stores, for if the seller quit, other cookie mfrs would take the space in his absence. }} | ||
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| + | {{ForumReplyPost|UserID=RoyDaleOne|Date=27 October 2009|Text=A contingent payment sale will be treated as having a stated maximum selling price if, under the terms of the agreement, the maximum amount of sale proceeds that may be received by the taxpayer can be determined as of the end of the taxable year in which the sale or other disposition occurs. The stated maximum selling price shall be determined by assuming that all of the contingencies contemplated by the agreement are met or otherwise resolved in a manner that will maximize the selling price and accelerate payments to the earliest date or dates permitted under the agreement. | ||
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Revision as of 17:54, 27 October 2009
Discussion Forum Index --> Advanced Tax Questions --> IRS Audit: Reclassify Premium as SE Income
Discussion Forum Index --> Tax Questions --> IRS Audit: Reclassify Premium as SE Income
| 27 October 2009 | |
| I could use a little help and opinion. On the tail end of an IRS exam. My client sold his franchise rights. The Sales price was determined as a base contract AND A PREMIUM IF THE SELLER KEPT THE FRANCHISE OPEN AND IN OPERATION BETWEEN THE CONTRACT SALE DATE AND THE SETTLEMENT DATE. We handled the base and the premium as the sales price of the franchise and included on 4797. IRS wants to put the premium on Schedule C, as SE income. We believe that the premium was tied to the contract and inseparable. IRS has not given us a good explanation except that it was a premium commission and called that in the contract..a commission. Do I have an argument with IRS..would most likely end up in Tax Court? | |
| 27 October 2009 | |
| No comments...maybe its simple and Im making it difficult.
The premium "commission" is a pct of the base contract price and is paid only as long as the seller "keeps the doors open". | |
| 27 October 2009 | |
| Doesn't keeping the doors open involve work? Isn't he just making more per hour than he would of.
As a count erexample: a no compete clause does not involve work. Sorry I'm coming down on the other side. | |
RoyDaleOne (talk|edits) said: | 27 October 2009 |
| I think it should be part of the selling price. | |
Death&Taxes (talk|edits) said: | 27 October 2009 |
| "The Sales price was determined as a base contract AND A PREMIUM IF THE SELLER KEPT THE FRANCHISE OPEN AND IN OPERATION BETWEEN THE CONTRACT SALE DATE AND THE SETTLEMENT DATE"
Did he not pick the income during this period, and pay the expenses? I suppose there is an argument that this premium is a reimbursement of the costs of keeping the doors open, or it could be likened to the seller remaining with the business during the transition and thus drawing a salary, but I tend to agree with Roy in that it is linked to the selling price. | |
| 27 October 2009 | |
| If the contract had been worded more like
-- it is a condition of sale that the business be fully operational on settlement date then I would not hesitate to include it in the selling price. But as stated above, there are two possibilities: $500k sale price, if business shuts doors. $500k sale price + $50k seller premium, if business stays open. One could argue that it is a "Going Concern" premium, rather than the seller was contracted to keep it open. Also one could argue that while seller still had title to the business, he was protecting his investment, rather than working for the buyers. Worth a shot. Good luck! Report back the outcome. PS. To bolster the clients case, I would avoid the word 'commission', since it gives a connotation of the seller working for the buyer. | |
Death&Taxes (talk|edits) said: | 27 October 2009 |
| I think it would help to know the type of franchise: certainly a buyer would want a fast food franchise to stay open. | |
| 27 October 2009 | |
| An open and operating business is certainly more valuable than a business that is closed and shuttered. The premium is a means to adjust the price to its true value at settlement date. The buyers use of the word commission I suspect is so the buyer could take a current deduction rather than capitalize. | |
| 27 October 2009 | |
| I appreciate your comments and opinions.
The franchise was a cookie delivery route. The buyer notified the seller how the "Enhanced Offer" would be determined. There were two parts of the Enhanced Offer; first was the increased commission on top of regular commissions and paid in lump sum at check out; the second part was the 20% premium on the BUY-OUT OFFER if he stayed with route until closing. The IRS wants to call both of these Enhancements SE income. The buyer treated them on the 1099 that year as "non-employee compensation", but we disagree with this treatment. I am really sitting on the side of the equation that this "premium" is integral to the contract base and belongs on 4797. The contract refers to three parts of the "price". A base value, an estimated additonal commission (we put this on Schedule C) and an additional 20% premium (there is no reference to commission...just the word premium). the footnote says "these will only be paid if you remain operating your delivery route until closing"...so therefore he was still working the delivery route and earning income. He could have chosen not to work the route and go find another job...but the premium was the "carrot". It makes me further lean that way when the premium is a pct of the base value. We are really feeling like there is a valid argument or at least one worth pushing back at the agent. | |
Death&Taxes (talk|edits) said: | 27 October 2009 |
| Sounds like the buyer decided the write off of start up costs wasn't enough for him; I don't see how he could give a 1099-MISC when there was no income to apply that payment against, but the auditor will say that is none of your business. Essentially the route was worth more because the buyer would not have to battle for shelf space in the stores, for if the seller quit, other cookie mfrs would take the space in his absence. | |
RoyDaleOne (talk|edits) said: | 27 October 2009 |
| A contingent payment sale will be treated as having a stated maximum selling price if, under the terms of the agreement, the maximum amount of sale proceeds that may be received by the taxpayer can be determined as of the end of the taxable year in which the sale or other disposition occurs. The stated maximum selling price shall be determined by assuming that all of the contingencies contemplated by the agreement are met or otherwise resolved in a manner that will maximize the selling price and accelerate payments to the earliest date or dates permitted under the agreement. | |
