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Warning
for Nevada Businesses!
Do
you have
Multiple Corporations?
Do
you know what Sec. 482 of the IRS code is? It deals with the allocation
of income and deductions among taxpayers. Here is what it says:
In
any case of two or more organizations, trades, or businesses
(whether or not incorporated, whether or not organized in the
United States and whether or not affiliated) owned or controlled
directly or indirectly by the same interests, the Secretary
may distribute, apportion, or allocate gross income, deductions,
credits, or allowances between or among such organizations,
trades, or businesses, if he determines that such distribution,
apportionment, or allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any of
such organizations, trades or businesses. In the case of any
transfer (or license) of intangible property (within the meaning
of section 936 (h)(3)(B)), the income with respect to such transfer
of license shall be commensurate with the income attributable
to the intangible.
What
does that mean? If the IRS invokes Sec 482 on your corporations
or entities, get out your checkbook because you will owe a lot
in taxes! The feds will re-write all the books and ledgers among
the companies, reallocating income and deductions between the
companies and between fiscal years in such a way as to maximize
the income tax for all concerned. This usually happens several
years later when all the profits have been spent! Then everyone
gets a big tax bill which is followed in short order by execution
of levy and public sale of everyone’s assets.
Section
482 comes into play under two scenarios:
- Anytime
that there is a significant element of tax avoidance or evasion
OR
- When
there is a sharp separation of the expenses of producing a gain
from the gain itself such as when one company exports losses
to one company to offset income and imports income from that
company in another fiscal year to offset losses (does this sound
like a familiar strategy promoted in the world of corporations?).
The
feds of course don’t care if a state loses taxes. They are
concerned about you having multiply corporations and not filing
as a controlled group, thereby paying less in federal corporate
income tax.
Section
482 is invoked most often where the relationship between the offenders
is a close one. Don’t be alarmed about legitimate transfers
between your corporations. The tax court has ruled that the fact
that one corporation could have earned all the income without
expenses is no reason to tax all income to it. On the other hand,
loans between corporations which aren’t at market rates and
terms with respect to the collateral security credit standings
are a red flag!
Your
corporation may be a controlled group and that may not be all
bad! If the corporations qualifies to file as an affiliated group
and file a consolidated return with losses of one company and
gains of another they can offset each other (as long as the losses
were not part of inter-company transactions)!
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