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Lev
Lev, Tax Advisor
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I have a couple of tax questions. Question #1: Married

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I have a couple of tax questions.

Question #1:
Married couple who is going thru a divorce. A settlement has been agreed upon. Part of the divorce settlement is stated as follows:

"Husband owns a C-Corporation in Alaska. In exchange for any interest wife may have in the business, husband agrees to pay her $375,000. Payment to the wife, shall be made within 5 days of date of divorce. Payment may be made directly to wife's attorneys trust account to be distributed to wife. After payment is made, wife shall have no interest in the C-corporation nor be responsible for any debts of the C-corporation"

The question is:
Can the $375,000 be paid out of the C-corporation and taken as a expense of the corporation? And if yes, should it be taken as a payroll to the wife or a direct expense?

Here is the situation:
The husband is the sole stock holder in a C-corporation. He has been involved in the corporation since it began in 1980. The couple was married in 2003. In 2006, the wife became an officer(secretary/treasurer) of the C-corporation, but owns no shares of the corporation. The wife did not work at the business, but had her own employment. In September 2010, the husband was in a serious car accident. At this time the wife had to become involved in the business of the C-corporation. She was put on the payroll as a manager at that time, wages paid to the wife were that of or higher than employees in a similar business. She was still an officer of the C-Corporation but owned no shares. She continued to work in the business and be paid until the couple separated in October 2012.


Question #2:
I have a C-corporation that has Appropriated Retained Earning of $2,800,000 to day trading activity. The main business of the C-corporation is a Restaurant/Bar. The balance of the day trading stock account on the balance sheet is approximately $2,000,000. How do I go about separating the day trading business into a separate corporation from the Restaurant/Bar business? And what would be the tax consequences of doing so?

LEV :

Hi and welcome to Just Answer!
The question is: Can the $375,000 be paid out of the C-corporation and taken as a expense of the corporation?
See here - http://www.law.cornell.edu/uscode/text/26/162
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business...
So - this payment is neither ordinary nor necessary expenses - and as such may not be deducted. Possible tax treatments for that payment are
- wages paid to the husband or to the wife if he/she is an employee of the corporation.
- dividend distribution to shareholders of the corporation.
- nondividend distribution to shareholders of the corporation if distribution is taken not from retaining earnings.

LEV :

Generally - only wages may be deducted as business expenses for the corporation.
How do I go about separating the day trading business into a separate corporation from the Restaurant/Bar business? And what would be the tax consequences of doing so?
That would be internal issue for the corporation - and will not affect corporation taxes.
Seems as the corporation involved into two activities - and one activity is profitable while another had losses. If you want to separating the day trading business - I might suggest to register an LLC fully owned by the C-corporation - there will be separate books but results will be reported for tax purposes on the corporate's tax return because a single member LLC is a disregarded entity.
While you may choose the LLC to be treated as a corporation - that might be not good for tax purposes because in case of gain - there will be additional level of taxation, but in case of losses - there will be limited options to use them for offsetting income from other activity.

Customer:

So if I take the $375,000 as a wage to the wife, then I can take as a business deduction on the C-corporation. But it is not a expense otherwise?

LEV :

In order that to be deductible expense - that payment should be both ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business.
If that is a compensation for services that the wife provided for the corporation - then - yes - wages are deductible.
If that is NOT a compensation for services that the wife provided for the corporation - wages may not be deducted.

LEV :

Please be aware that wages paid are reported on form W2 and are taxable for the recipient.

Customer:

If I separate the day trading business into a LLC owned by the C-corporation. Will the LLC (day trading) be safe legally from anything that happens at the C-corp(restaurant/bar)??

LEV :

It will be opposite - the C-corporation will be only responsible for the LLC up to the amount contributed.
If you want to protect day trading activity from possible claim against restaurant/bar activity - you may separate the restaurant/bar activity into the LLC. Or you may separate each activity into two LLC - and the original C-corporation will hold interest in each LLC.
If your intention is to completely separate these activities because of legal protection - you may need to do reorganization - there will not be tax liability - but each corporation will be liable for its own income taxes or losses.
See here - http://www.law.cornell.edu/uscode/text/26/368
For purposes of parts I and II and this part, the term “reorganization” means—
(D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356;

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