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John Michael Goralka
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John Goralka’s Answers

26 total

  • Does the IRS still share information with the CA Franchise Tax Board?

    A person under audit told me the IRS auditor stated the IRS no longer shares information with the CA Franchise Tax Board so he is not going to report his understated tax liability to the CA FTB. Has the IRS changed this policy? Should he file a...

    John’s Answer

    A Califonia taxpayer is required to report an IRS adjustment within 6 months. If you do so, FTB has 2 years to issue an adjustmnent or notice of Proposed Asessment. FTB has a separate unit referred to as the RAR or revenue agents report unit to do so. ( I was an auditor and hearing officer with FTB prior to my life as an attorney). If no notice is provided, then there is no statute of limitations and an assessment may be issued by the IRS at any time in the future with interest. A more detailed discussion of these rules can be found on FTB Publication 1008 which is available with a google search.

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  • How do we add a shareholder, ie - a Director of Operations, to our S-Corp? I am the President and, and my husband is the VP.

    We started out just the two of us. We would like to add someone as a shareholder and Director of Operations and Secretary. I am the President and Treasurer, My husband is the VP and Secretary. This person would also most likely be the Secretary...

    John’s Answer

    You have 2 options in adding a new shareolder. First, either or both of the current shareolders and sell some of their shares to the new investor. This is often not the preferred approach as this would be a taxable transaction for the existing shareholders. Second, the corporation may issue additional shares directly to the new shareolder. This would avoid a taxable transaction for the shareholders. If the buy in or subscription price paid by the new shareholder is paid in cash, then there should not be a taxable transaction to the corporation. If property is contirbuted, be certain that the income basis of the property contributed is greater than or exceeds and debt or mortgage secured by the property contributed. In California, a corporation with 3 shareholders is required to have at least 3 directors so an additional director may be required. The officers are elected annually by the directors. If the new shareholder is to be the corporate secretary, then the current secretary should provide a written resignation to the board. the board may then fill that vacancy with the new sharholder. You should also consider wny changes to the corprate structure prior to the admission of the new shareholder such as creating a second class of shares. For example, if you and your husband want to maximize your ongoing control of the corporation, then we may want tocreate a second class of stock and issue nonvoting shares to the now shareholder. nonvoting shares are even permissible in an S corporation. Finally, you should strongly consider a buy sell agreement to provide a way to remove the shareholder if he quits working for the corporation or if you no longer wish to continue that relationship. I typically will use a 5 year period for a buy out so that you and your husband can protect your corporation is the relationship sours later. Good luck with the continued growth of your business.

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  • CA has a $800 per year annual franchise tax for both foreign and domestic LLCs doing business in CA. There is no franchise on...

    ... general partnerships. Can I avoid the franchise tax by forming two LLCs in, say, Wyoming, then form a general partnership consisting of the two Wyoming LLCs, and register the partnership in CA?

    John’s Answer

    First, the franchise tax board's postion is that if the manager of a foreign ( non-California) LLC is a California resident or entity, the LLc is doing buisness in California irrespective of the location or situs of any other business activity. Second, if the business activities of the foreign LLC are conducted in California, then the LLC is conducting business in California. In both circumstances the foreign LLc is subject to California's franchise tax. Under the circusmstances that you describe, the Wyoming LLC's would appear to be subject to the $800 franchise tax. You should also be aware that a business that is required to be qualified to do business in California but fails to do so is denied access to California courts to defend itself in an action here.

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  • I had to use some of my own personal money to help pay for a lawsuit against my corporation

    Can I taek this off my personal income taxes? Thanks

    John’s Answer

    First, I am sorry about the lawsuit and the use of your personal funds. Your ability to receive a tax benefit for the funds spent defending this matter depends in part on the nature or basis of the lawsuit against the corporation and whether the corporation is an "S" corporation or a "C" corporation. An S corporation is a pass through entity which may enable you to recieve some benefit for the funds spent. Whether the claim or lawsuit will support a current deduction depends upon the basis for the lawsuit or claim. while this depends on the nature of the claim and the analysis is somewhat technical, but if the lawsuit and defense was to protect or preserve the receipt of taxable income, then there may be a basis for the deduction for legal fees. If the lawsuit is regarding ownership of property or another captiol asset, the n the fees may be required to be capitolized to be amoritized over future years. Needless to say, some ceativity may be possible on those issues and the analysis can be somewhat technical and fact specific. You should review this with and CPA or attorney who focuses on tax issues.

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  • What happens in a revocable trust, when the primary trustee no longer has full mental capacity to make decisions?

    The trust lists people having durable powers of attorney in a descending order. Practically speaking, the first person has established their power of attorney with the various institutions which require direction. What needs to be completed t...

    John’s Answer

    A careful review of the trust terms should be made. Typically, the power of attorney is used to provide control over assets outside the trust. By the trusts terms, the successor trustees named in the trust instrument govern the priority of the persons who may act on behalf of the trust. Even if a person is named as a successor trustee, he or she must agree to do so and to uphold and follow the terms of the trust. The trust instrument should also specifically establish the rules for accounting, investment and distribution. The trust instrument should also establish the compensation that the trustee is entilted to receive. If the trust is silent on those issues regarding accounting, investment standards and trustee compensation, then those provisions may be filled in or found by reference to the probate code in your state.

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  • Transferring rental properties into a trust.

    Hello. I have a small number of rental houses. I have a couple of my own, a few with my Dad and one with a brother. And I am thinking about putting them all into trusts. I don't know much about trusts and LLC's at all. But I do know there...

    John’s Answer

    You must first identify your priorities to answer your questionl. In doing so, you should first consider the present circumstances. Joint ownership with other individuals subjects the proeprty to the creditor claims or liabilities of any of the individual owners. In California and in most states, a creditor can force a partition action and has the ability to force the sale of the property through a partition action. Co-ownerhip with individuals can also result in conflict because in most states each co-owner has an equal right to the use and enjoyment of the property. Even if the current owners agree, that may change when ownership moves to the next generation. The use of an LLC may reslove these issues and provide both asset protection and a means to oversee the use of the property. An LLC will also keep the record title less complicated as the new owners inherit an LLc interest and not a direct interest in the property. If an LLc is not used, you may also consider the use of a co-ownership agreement to provide a means to oversee the use of the porperty and the sharing of income and expenses. Trusts may be used to avoid probate and basic or foundational estate planning issues. If this approach is used in conjunction with the LLc for asset protection, then the property is owned by the LLc and your interest in the property is held by your trust. A basic estate planning trust is generally a revocable, grantor trust. Other types of trusts may be used to enhance the asset protection charecteristics of the estate plan and to enhance other objectives such as to reduce potential estate tax. The best overall plan should be custom tailored to your specific circumstances and objectives.

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