Author Topic: Am I an ungrateful (future) heir, or is this screwed up?  (Read 21385 times)

markbrynn

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #50 on: December 03, 2013, 07:17:30 AM »
It sounds to me like a strange set up having to pay taxes when there are apparently profits that create the taxes and could therefore pay the taxes. However, I think a lot of people responded by saying that the OP has a right to 40% of the profits because they own 40% of the company. I disagree. The parents set up the company this way to avoid inheritance tax (presumably), so the "ownership" is really just a construct to enable things to be advantageous to the family (vs. the IRS) in the future. To then turn around and say that the OP should claim 40% of the profits seems misdirected to me. It's like putting a car in your wife's name (for whatever reason) and then she won't let you drive it.

On all the rest (getting a lawyer/accountant involved, talking to the parents, possibly giving up ownership) I agree.

huadpe

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #51 on: December 03, 2013, 07:27:56 AM »
It sounds to me like a strange set up having to pay taxes when there are apparently profits that create the taxes and could therefore pay the taxes. However, I think a lot of people responded by saying that the OP has a right to 40% of the profits because they own 40% of the company. I disagree. The parents set up the company this way to avoid inheritance tax (presumably), so the "ownership" is really just a construct to enable things to be advantageous to the family (vs. the IRS) in the future. To then turn around and say that the OP should claim 40% of the profits seems misdirected to me. It's like putting a car in your wife's name (for whatever reason) and then she won't let you drive it.

On all the rest (getting a lawyer/accountant involved, talking to the parents, possibly giving up ownership) I agree.

The problem is that if OP is paying tax on 40% of the profit, but the parents are actually getting that profit, the OP's parents are engaged in tax fraud.  I'm not saying the OP has an entitlement to 40% of the profits, but the problem is that this arrangement is a crime.  The only way this would be legal would be if the parents did not take any distributions for themselves either, and just left all the profits in the company (possibly using them to keep buying real estate).  If the parents are taking distributions and then saying those distributions went to the OP, that is criminal tax fraud and they can go to jail.

CheckEngineLight

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #52 on: December 03, 2013, 07:41:42 AM »
It sounds to me like a strange set up having to pay taxes when there are apparently profits that create the taxes and could therefore pay the taxes. However, I think a lot of people responded by saying that the OP has a right to 40% of the profits because they own 40% of the company. I disagree. The parents set up the company this way to avoid inheritance tax (presumably), so the "ownership" is really just a construct to enable things to be advantageous to the family (vs. the IRS) in the future. To then turn around and say that the OP should claim 40% of the profits seems misdirected to me. It's like putting a car in your wife's name (for whatever reason) and then she won't let you drive it.

On all the rest (getting a lawyer/accountant involved, talking to the parents, possibly giving up ownership) I agree.

The problem is that if OP is paying tax on 40% of the profit, but the parents are actually getting that profit, the OP's parents are engaged in tax fraud.  I'm not saying the OP has an entitlement to 40% of the profits, but the problem is that this arrangement is a crime.  The only way this would be legal would be if the parents did not take any distributions for themselves either, and just left all the profits in the company (possibly using them to keep buying real estate).  If the parents are taking distributions and then saying those distributions went to the OP, that is criminal tax fraud and they can go to jail.

I don't really understand how it's a criminal offense if both parties have agreed to it and the taxes are getting paid...

huadpe

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #53 on: December 03, 2013, 08:01:26 AM »
I don't really understand how it's a criminal offense if both parties have agreed to it and the taxes are getting paid...

Agreement has nothing to do with it.  It is a crime to falsely report on any tax return.  If the corp is falsely reporting income accruing to the OP, that is a crime.  Beyond that, taxes are paid at the marginal rate.  If the parents are in a higher bracket than the OP, then they are avoiding paying the proper amount of tax on their income from the corporation.

markbrynn

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #54 on: December 03, 2013, 08:33:00 AM »
Quote
Agreement has nothing to do with it.  It is a crime to falsely report on any tax return.  If the corp is falsely reporting income accruing to the OP, that is a crime.  Beyond that, taxes are paid at the marginal rate.  If the parents are in a higher bracket than the OP, then they are avoiding paying the proper amount of tax on their income from the corporation.

Completely agree with the fact that it could be illegal. Also that paying taxes now for a possible future inheritance is risky even if it is your parents. Just wanted to mention that OP demanding 40% of the profits seemed to be a bit far in the other direction. If a talk with the parents can't get an easy solution that OP is comfortable with, I would definitely suggest getting out (in a friendly way) and dealing with the relationship fallout as it comes. Just think provoking negative reactions is not helpful.

KingCoin

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #55 on: December 03, 2013, 08:57:25 AM »
It might also be worth talking to an expert in trust and estates to see what they recommend. I'm sure there's a better way to structure this so that everyone's goals are met.  Unfortunately, since you're paying 40% of your parents taxes, they might be resistant to any change.

I'd just take a stand. Explain that you need to focus on saving for your own retirement, and that while you appreciate the gesture of handing over ownership, paying taxes on a corporation you don't control or currently benefit from isn't a financial priority.

huadpe

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #56 on: December 03, 2013, 09:05:48 AM »
Quote
Agreement has nothing to do with it.  It is a crime to falsely report on any tax return.  If the corp is falsely reporting income accruing to the OP, that is a crime.  Beyond that, taxes are paid at the marginal rate.  If the parents are in a higher bracket than the OP, then they are avoiding paying the proper amount of tax on their income from the corporation.

Completely agree with the fact that it could be illegal. Also that paying taxes now for a possible future inheritance is risky even if it is your parents. Just wanted to mention that OP demanding 40% of the profits seemed to be a bit far in the other direction. If a talk with the parents can't get an easy solution that OP is comfortable with, I would definitely suggest getting out (in a friendly way) and dealing with the relationship fallout as it comes. Just think provoking negative reactions is not helpful.

I wish there were a "like" button. In lieu of that, I have to reply to say I agree with the above completely and that was the basis of my suggestion to speak with a tax attorney: you may be an unintentional accessory to tax fraud and the IRS are not likely to be very understanding.

I agree with that entirely.  I said in my original post that the OP isn't entitled to the 40%, but this corp is probably unnecessary to estate planning as was mentioned upthread, and can likely make everyone's lives easier if it is dissolved in a way that keeps people happy.  And #1 on my list would be keeping the IRS happy.  Also, the entire thing seems to have been founded on a sham transaction to evade (now unnecessarily) estate taxes, which is always a poor foundation for a business venture.  Then again, don't take legal advice from some dude on a forum.  Get real counsel from a tax attorney.

Daleth

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #57 on: December 03, 2013, 11:18:11 AM »
I'm puzzled why some posters think that the OP doesn't have a right to or shouldn't push so hard as to ask for 40% of the profits. That's what partnership, or percentages of ownership, means: if you own X%, then you get X% of the profits--that's why you get taxed on X% of the profits. The OP has a legal right to a percentage of the profits equal to his percentage of ownership.

If the parents intended to keep most/all of the incoming cash for themselves since they're doing most/all of the work running the business, which is totally understandable and fair, then they need to have the business hire them and pay them salaries. If they pay themselves salaries that eat up all the profits, then there won't be any profits for the OP to owe taxes on.

The only reason I can think of for them not to have done this is because they don't want to pay all the taxes that they owe. In other words, if they paid themselves salaries, they'd have to report those salaries to the IRS and pay taxes on the entire salaries. The way they've set things up, they're getting the OP to pay their taxes for them--and probably at a lower bracket than they'd have to pay themselves (since admitting to the IRS that they're actually getting the 40% on top of the 60% would put them in a higher tax bracket than they're at now).

OP, you need to talk to a lawyer and find out not only what your rights are here, but whether you, by going along with this, are liable for anything along the lines of conspiracy to commit tax fraud. If you are it might actually make things very simple when it comes to dealing with your parents: you could say, "Hey, my tax guy noticed that I wasn't actually getting that 40% that I'm paying taxes on, and suggested I see a lawyer about that, and the lawyer said it's not kosher and has to stop. Here's what he said you could do: either actually pay me the 40%, or pay yourselves salaries that eat up the profits..."

dragoncar

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #58 on: December 03, 2013, 12:20:32 PM »
I'm puzzled why some posters think that the OP doesn't have a right to or shouldn't push so hard as to ask for 40% of the profits. That's what partnership, or percentages of ownership, means: if you own X%, then you get X% of the profits--that's why you get taxed on X% of the profits. The OP has a legal right to a percentage of the profits equal to his percentage of ownership.

If the parents intended to keep most/all of the incoming cash for themselves since they're doing most/all of the work running the business, which is totally understandable and fair, then they need to have the business hire them and pay them salaries. If they pay themselves salaries that eat up all the profits, then there won't be any profits for the OP to owe taxes on.

The only reason I can think of for them not to have done this is because they don't want to pay all the taxes that they owe. In other words, if they paid themselves salaries, they'd have to report those salaries to the IRS and pay taxes on the entire salaries. The way they've set things up, they're getting the OP to pay their taxes for them--and probably at a lower bracket than they'd have to pay themselves (since admitting to the IRS that they're actually getting the 40% on top of the 60% would put them in a higher tax bracket than they're at now).

OP, you need to talk to a lawyer and find out not only what your rights are here, but whether you, by going along with this, are liable for anything along the lines of conspiracy to commit tax fraud. If you are it might actually make things very simple when it comes to dealing with your parents: you could say, "Hey, my tax guy noticed that I wasn't actually getting that 40% that I'm paying taxes on, and suggested I see a lawyer about that, and the lawyer said it's not kosher and has to stop. Here's what he said you could do: either actually pay me the 40%, or pay yourselves salaries that eat up the profits..."

Yeah, I started to comment but then deleted everything.  This is a legal and social mess.  Best to get a firm legal grasp on everything and then consider how the different options impact your family relationship.

I'm most worried about potential liability for things the "partnership" may have done without your knowledge.

Daleth

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #59 on: December 03, 2013, 12:41:33 PM »
I'm most worried about potential liability for things the "partnership" may have done without your knowledge.

Yes. And that could include tax fraud, since it's not just the parents who are underreporting their income (and the OP who's going along with this), it's probably also the partnership that's filing false informational tax returns (whether this is a partnership, an LLC or an S-corp, it must be filing returns that say it paid 40% of the profits to the OP--when in fact it didn't).

gimp

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #60 on: December 03, 2013, 04:33:36 PM »
Sounds like tax fraud, and maybe embezzlement (what else do you call using company funds on family affairs? I assume that's the name for it, though I'm not well versed in law.)

chasesfish

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #61 on: December 03, 2013, 05:27:42 PM »
I'm afraid this thread may have gone way off track.

I work in a line of work that sees tax returns on closely held businesses all the time.  Its not uncommon to see the 2nd generation be given a non-controlling interest while the first generation does what they want with the money.

It is very uncommon to not at least distribute 40% of the taxable income to help the 2nd generation with the tax liability.   All the problems stem from this issue (because the 2nd generation is effectively contributing capital when you balance the equity accounts)

Daleth

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #62 on: December 03, 2013, 05:39:17 PM »
I'm afraid this thread may have gone way off track.

I work in a line of work that sees tax returns on closely held businesses all the time.  Its not uncommon to see the 2nd generation be given a non-controlling interest while the first generation does what they want with the money.

It is very uncommon to not at least distribute 40% of the taxable income to help the 2nd generation with the tax liability.   All the problems stem from this issue (because the 2nd generation is effectively contributing capital when you balance the equity accounts)

Exactly. To be clear, I totally agree that there's nothing wrong with giving minority shareholders a noncontrolling interest and not paying them the percentage of the profits equal to their percentage of ownership--IF you either keep the money in the company (use it to buy more real estate, just let it accumulate, etc.), or pay everyone enough to cover their tax liability, or pay the people who are actually running the business salaries (which would reduce and could eliminate the profits on which everyone's tax liability is calculated). What's incredibly strange and possibly illegal about the OP's situation is that the majority shareholders (parents) are NOT paying the second generation anything and are telling the IRS that they're only paying themselves 60% (i.e., they're skimming off 100% of the profits into their own pockets but probably only being taxed on their 60%, instead of paying themselves salaries consisting of 100% of profits and being taxed on the full 100%).

huadpe

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #63 on: December 03, 2013, 06:06:00 PM »
I'm afraid this thread may have gone way off track.

I work in a line of work that sees tax returns on closely held businesses all the time.  Its not uncommon to see the 2nd generation be given a non-controlling interest while the first generation does what they want with the money.

It is very uncommon to not at least distribute 40% of the taxable income to help the 2nd generation with the tax liability.   All the problems stem from this issue (because the 2nd generation is effectively contributing capital when you balance the equity accounts)

Exactly. To be clear, I totally agree that there's nothing wrong with giving minority shareholders a noncontrolling interest and not paying them the percentage of the profits equal to their percentage of ownership--IF you either keep the money in the company (use it to buy more real estate, just let it accumulate, etc.), or pay everyone enough to cover their tax liability, or pay the people who are actually running the business salaries (which would reduce and could eliminate the profits on which everyone's tax liability is calculated). What's incredibly strange and possibly illegal about the OP's situation is that the majority shareholders (parents) are NOT paying the second generation anything and are telling the IRS that they're only paying themselves 60% (i.e., they're skimming off 100% of the profits into their own pockets but probably only being taxed on their 60%, instead of paying themselves salaries consisting of 100% of profits and being taxed on the full 100%).

The rule, if I'm not mistaken (For S-corps and LLC filing S which this sounds like), is that you can choose not to distribute the corporate earnings, but if you distribute earnings, they must be distributed to all owners proportional to ownership.  The parents appear to be committing two frauds here.  1 is that they are filing a false return stating that the OP is receiving a distribution when the OP is not, and the other is that they are fraudulently withholding the OP's distribution and spending it themselves. 

All of this is stemming from a fraudulent sham transaction to evade estate taxes, which made the OP owner of 40% of something without paying close to fair market value.

$120,000 is enough money to where a sit down with a tax attorney is well worth it.  Especially if it looks like the money is about to go down the drain to help the other brother.

bugbaby

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #64 on: December 03, 2013, 06:09:13 PM »
It is not illegal for OP to pay someone else's tax bill, coz it's paid with after-tax money & OP didn't deduct it from her own taxes, and of course if mutually consented on, i.e. a gift. Just as you can pay someone else's mortgage or tuition, medical or  property tax bill.  If the parents reported the correct income and filed the correct amount of taxes, the IRS doesn't care who's bank acct the payment comes from.  This appears to be a separate issue.


Letj

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #65 on: December 03, 2013, 06:31:27 PM »
It is not illegal for OP to pay someone else's tax bill, coz it's paid with after-tax money & OP didn't deduct it from her own taxes, and of course if mutually consented on, i.e. a gift. Just as you can pay someone else's mortgage or tuition, medical or  property tax bill.  If the parents reported the correct income and filed the correct amount of taxes, the IRS doesn't care who's bank acct the payment comes from.  This appears to be a separate issue.

You are absolutely right.  Your comment is one of the few rational ones I've seen.  So many people are jumping to conclusion and getting excited over this being illegal.  It's so interesting reading comments from people who clearly don't know what they're talking about.  At the very worst, this is a gift tax issue.

chasesfish

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #66 on: December 03, 2013, 06:48:40 PM »
I'm afraid this thread may have gone way off track.

I work in a line of work that sees tax returns on closely held businesses all the time.  Its not uncommon to see the 2nd generation be given a non-controlling interest while the first generation does what they want with the money.

It is very uncommon to not at least distribute 40% of the taxable income to help the 2nd generation with the tax liability.   All the problems stem from this issue (because the 2nd generation is effectively contributing capital when you balance the equity accounts)

Exactly. To be clear, I totally agree that there's nothing wrong with giving minority shareholders a noncontrolling interest and not paying them the percentage of the profits equal to their percentage of ownership--IF you either keep the money in the company (use it to buy more real estate, just let it accumulate, etc.), or pay everyone enough to cover their tax liability, or pay the people who are actually running the business salaries (which would reduce and could eliminate the profits on which everyone's tax liability is calculated). What's incredibly strange and possibly illegal about the OP's situation is that the majority shareholders (parents) are NOT paying the second generation anything and are telling the IRS that they're only paying themselves 60% (i.e., they're skimming off 100% of the profits into their own pockets but probably only being taxed on their 60%, instead of paying themselves salaries consisting of 100% of profits and being taxed on the full 100%).

I don't know which entity it is, but one of the pass through corporations doesn't require equal distributions of profits.  I think it's S-Corps require proportional distributions and LLCs do not.

dragoncar

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #67 on: December 03, 2013, 07:50:16 PM »
It is not illegal for OP to pay someone else's tax bill, coz it's paid with after-tax money & OP didn't deduct it from her own taxes, and of course if mutually consented on, i.e. a gift. Just as you can pay someone else's mortgage or tuition, medical or  property tax bill.  If the parents reported the correct income and filed the correct amount of taxes, the IRS doesn't care who's bank acct the payment comes from.  This appears to be a separate issue.

You are absolutely right.  Your comment is one of the few rational ones I've seen.  So many people are jumping to conclusion and getting excited over this being illegal.  It's so interesting reading comments from people who clearly don't know what they're talking about.  At the very worst, this is a gift tax issue.

At the very worst it's much worse than that.  But as you say we have no idea what the details are and that's why it's better for OP to consult an attorney.

It's not a "gift" if payment is coerced.  OP certainly thought something was amiss.

Daleth

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #68 on: December 03, 2013, 08:28:28 PM »
It is not illegal for OP to pay someone else's tax bill, coz it's paid with after-tax money & OP didn't deduct it from her own taxes, and of course if mutually consented on, i.e. a gift. Just as you can pay someone else's mortgage or tuition, medical or  property tax bill.  If the parents reported the correct income and filed the correct amount of taxes, the IRS doesn't care who's bank acct the payment comes from.  This appears to be a separate issue.

It's perfectly legal to pay someone else's tax bill, but not to mislead the IRS about how much money you're getting. It's a problem if the parents are reporting 60% of profits as their income when they're actually taking 100%. They need to report what they actually distribute to themselves. And it's especially problematic if the parents' tax bill would be higher (due to being in a higher tax bracket) than the OP's tax bill on that same 40%.

I don't know which entity it is, but one of the pass through corporations doesn't require equal distributions of profits.  I think it's S-Corps require proportional distributions and LLCs do not.

LLC's may not be required to actually distribute profits, but to my knowledge they ARE required to report what they distribute and to whom as part of the informational return. And they're also required not to commingle funds with their members (such as the parents), or I should say, if the parents commingle the LLC's funds and their own, the parents are putting themselves on the hook personally for any lawsuit that might get filed against the LLC (such as a slip-and-fall by some tenant). In any case we still don't know what kind of entity this is or how old the OP is. LLC's didn't become popular/widespread until the late 90s, so not knowing the OP's age I can't even guess as to how likely it is that this is an LLC.
« Last Edit: December 03, 2013, 08:37:12 PM by Daleth »

bugbaby

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #69 on: December 03, 2013, 09:17:00 PM »
It is not illegal for OP to pay someone else's tax bill, coz it's paid with after-tax money & OP didn't deduct it from her own taxes, and of course if mutually consented on, i.e. a gift. Just as you can pay someone else's mortgage or tuition, medical or  property tax bill.  If the parents reported the correct income and filed the correct amount of taxes, the IRS doesn't care who's bank acct the payment comes from.  This appears to be a separate issue.

It's perfectly legal to pay someone else's tax bill, but not to mislead the IRS about how much money you're getting. It's a problem if the parents are reporting 60% of profits as their income when they're actually taking 100%. They need to report what they actually distribute to themselves. And it's especially problematic if the parents' tax bill would be higher (due to being in a higher tax bracket) than the OP's tax bill on that same 40%.

I don't know which entity it is, but one of the pass through corporations doesn't require equal distributions of profits.  I think it's S-Corps require proportional distributions and LLCs do not.

LLC's may not be required to actually distribute profits, but to my knowledge they ARE required to report what they distribute and to whom as part of the informational return. And they're also required not to commingle funds with their members (such as the parents), or I should say, if the parents commingle the LLC's funds and their own, the parents are putting themselves on the hook personally for any lawsuit that might get filed against the LLC (such as a slip-and-fall by some tenant). In any case we still don't know what kind of entity this is or how old the OP is. LLC's didn't become popular/widespread until the late 90s, so not knowing the OP's age I can't even guess as to how likely it is that this is an LLC.


I've re-read the original post and OP's replies, and I don't see anywhere she mentions any fraudulent activity such as under-reporting income or playing with tax brackets. Why do we need to assume there's such an issue? As far as we can tell, It sounds the parent's kept 100% of the profits for their own use and other businesses, and purportedly fully reported the full 100%, but then asked her to pay 40% of the legitimately filed taxes. 

She appears to have been perfectly OK with this, until the issue comes up of the folks trying to use her payments to fund a home for her dead-beat bro, at which point she feels 'Enough with this, I no longer feel comfortable riding this train...'   But the parents have got addicted to the gravy and declare 'It's how the world works! You can't stop now!'  To make matters worse, they're not asking any tax payments from the siblings (and we don't know what % ownership said siblings have)

I concur with Honest Abe's assessment that "what really seems to be happening is they are seeking financial assistance from you in some convoluted way. Why else would they "cover" your siblings who can't afford to pay and not cover you?"

huadpe

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #70 on: December 03, 2013, 09:51:36 PM »
I've re-read the original post and OP's replies, and I don't see anywhere she mentions any fraudulent activity such as under-reporting income or playing with tax brackets. Why do we need to assume there's such an issue? As far as we can tell, It sounds the parent's kept 100% of the profits for their own use and other businesses, and purportedly fully reported the full 100%, but then asked her to pay 40% of the legitimately filed taxes. 

She appears to have been perfectly OK with this, until the issue comes up of the folks trying to use her payments to fund a home for her dead-beat bro, at which point she feels 'Enough with this, I no longer feel comfortable riding this train...'   But the parents have got addicted to the gravy and declare 'It's how the world works! You can't stop now!'  To make matters worse, they're not asking any tax payments from the siblings (and we don't know what % ownership said siblings have)

I concur with Honest Abe's assessment that "what really seems to be happening is they are seeking financial assistance from you in some convoluted way. Why else would they "cover" your siblings who can't afford to pay and not cover you?"

It's not legal for a corporation to work that way.  If the corporation is a "pass through" like a subchapter S corporation, then the profits of the corporation are taxable income on each individual owner's personal 1040 return in proportion to their ownership.  If the corporation is not a pass through, then the corporation itself files a tax return and pays corporate income tax on the profit.  After corporate income tax, the corporation can keep the profits in house as retained earnings, or pay them as a dividend to the owners (who would then pay tax on the dividend income).  This is probably pass through corporation since making it a C-corporation or the like would make no sense and incur double taxation.

If the corp is a pass through, then the corporation has to give each owner a form called a Schedule K-1 which details how much they own, and the profit and loss of the business attributable to that ownership share.  If the OP is having to pay tax, that is because the OP is getting a K-1.  From how the original post is phrased, it very much sounds like the OP is getting a K-1, and reporting it on his 1040 as income. 

I am basing this on these two paragraphs specifically:

Quote
Unfortunately, that 40% stake means I have to pay taxes on 40% of the profit out of pocket, from my work as a consultant. My parents take 100% of the profit and view the taxes I incur as the "price" of my inheritance. So far, it's left my husband and me on the hook for about $60,000 in extra taxes over our working lives, and my parents still have long lives ahead of them.

I don't feel that the profit from the business should be mine, as I didn't do anything to earn it, but I feel the taxes are a business expense, and so should be covered by the business. I've told my parents as much, but they're adamant this is simply the way the world works. I don't want to cause a rift in the family, but I find the situation more and more unbearable as the years drag on. I just don't see what I can do about it.

If the situation is what I just described, then the parents are filing fraudulent K-1s, both for the OP and siblings.  By law, subchapter S corps must distribute profits proportionally to ownership.  They don't have to distribute all the profits (or indeed any), but if they do distribute profits, the profits must be distributed proportional to ownership.  If this is structured as I described, the parents are engaged in embezzlement and then tax fraud to conceal the embezzlement.

The fair thing to do (since the OP has no moral stake to the 40% even if she has a legal stake) would be to transfer full ownership of the corp to the parents and then just leave it in their estate.  It's a $300,000 corp, so the current estate tax really shouldn't be an issue.  This would require the parents to pay their proper amount of tax though and not foist it upon their kid, which they seem unwilling to do.

Leaving an inheritance to your children should be an blessing to them.  These parents aren't leaving a blessing; they're leaving a mess.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #71 on: December 04, 2013, 12:21:57 AM »
Forgot to add, it's common to assign shares/pay dividend income to family members for income splitting purposes, but I've never seen one where the main stakeholders (your parents) are leaving you on the hook for taxes for something that you have zero involvement in, hence why I am thinking they are using you as a subsidy more than anything, which would lead me to also believe the business is not cash flow positive/leveraged/not enough working capital/could be a number of things.

Thanks for the input. I sure feel like i'm subsidizing them. For what it's worth, their CPA agrees that the situation is wrong-headed. He's the one who originally advised them to make us, the children, partners, but he doesn't agree with them leaving us the tax bill.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #72 on: December 04, 2013, 12:25:43 AM »
As above, have you considered buying your siblings shares so you can get majority ownership ASAP?

Alternatively, have you considered selling your 40% stake to an external property investor?

I could buy my siblings out, but that would make me very heavy on real estate, and, while it would give me the legal means to do what I wanted, I'd still have to have the confrontation with my parents.

As far as external investors go, I'm not sure who would be interested in a minority stake in a family business.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #73 on: December 04, 2013, 12:30:22 AM »
I wonder if you need to decide what is more important - your relationship with your parents or the potential financial advantage.

You also have to factor in the impact that this is having on HER family aka her husband and future children. If you are a little angsty about your parents using your success to help themselves and now your chronically-needing-rescue brother, I imagine your husband is less than thrilled with the arrangement.

When parents pass away and kids grow up and leave the nest, the spouse is the one you are left with. Make sure to support that relationship as well.

He's an awesome guy, and he did totally understandably complain about it for a while. It made for some heated discussion in the beginning. We're both on the same page about it, and can discuss it cooly now.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #74 on: December 04, 2013, 12:35:21 AM »
It sounds to me like a strange set up having to pay taxes when there are apparently profits that create the taxes and could therefore pay the taxes. However, I think a lot of people responded by saying that the OP has a right to 40% of the profits because they own 40% of the company. I disagree. The parents set up the company this way to avoid inheritance tax (presumably), so the "ownership" is really just a construct to enable things to be advantageous to the family (vs. the IRS) in the future. To then turn around and say that the OP should claim 40% of the profits seems misdirected to me. It's like putting a car in your wife's name (for whatever reason) and then she won't let you drive it.

On all the rest (getting a lawyer/accountant involved, talking to the parents, possibly giving up ownership) I agree.

The problem is that if OP is paying tax on 40% of the profit, but the parents are actually getting that profit, the OP's parents are engaged in tax fraud.  I'm not saying the OP has an entitlement to 40% of the profits, but the problem is that this arrangement is a crime.  The only way this would be legal would be if the parents did not take any distributions for themselves either, and just left all the profits in the company (possibly using them to keep buying real estate).  If the parents are taking distributions and then saying those distributions went to the OP, that is criminal tax fraud and they can go to jail.

I'm pretty sure they're not engaged in fraud. Their lawyer and CPA both say this is on the up and up. It just remains to be dcided how far my husband and I want to push to get the taxes paid.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #75 on: December 04, 2013, 12:56:26 AM »
To clarify, I don't think anything illegal is happening. I think my parents are wrong on this issue and I feel like they're taking advantage of me, but that doesn't make them criminals. I also trust their accountant, who wouldn't risk his reputation in the community in order for a couple of clients to get a illegal $60,000 tax break.

My husband and I need to decide how far we're willing to push the issue, and what we're comfortable with losing, financially and personally.

On a positive note, after a family meeting, my brother is going to rent an apartment from a third party, so at least that's been settled.

Thanks to everyone who's commented.

Daleth

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #76 on: December 04, 2013, 10:32:02 AM »
To clarify, I don't think anything illegal is happening.

You could be right, but then you're not a lawyer and you don't even know what kind of business structure this is (LLC, S-corp...), which suggests that there are a lot of details about this business and its finances that you don't know. In other words, there's not really any basis for you to feel confident that your belief about whether they're breaking the law is correct. Especially since some lawyer/accountant types on this thread have all pointed out potentially serious tax/legal issues with what your parents are doing. We're not trying to insult your parents or drag their reputations through the mud when we say what they're doing may be illegal. It's possible to commit criminal tax fraud without even realizing that what you're doing is a crime.

That is just one of the reasons that I was suggesting you spend a couple hundred bucks talking to a competent lawyer with a background in small business, tax, and ideally (but not necessarily) also estates and trusts.

Glad to hear about the positive development re: your brother. That's good.
« Last Edit: December 04, 2013, 10:38:48 AM by Daleth »

dragoncar

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #77 on: December 04, 2013, 02:16:50 PM »
Forgot to add, it's common to assign shares/pay dividend income to family members for income splitting purposes, but I've never seen one where the main stakeholders (your parents) are leaving you on the hook for taxes for something that you have zero involvement in, hence why I am thinking they are using you as a subsidy more than anything, which would lead me to also believe the business is not cash flow positive/leveraged/not enough working capital/could be a number of things.

Thanks for the input. I sure feel like i'm subsidizing them. For what it's worth, their CPA agrees that the situation is wrong-headed. He's the one who originally advised them to make us, the children, partners, but he doesn't agree with them leaving us the tax bill.

That's what I didn't understand.  The point of making you partners early is that the "gift" is under the taxable threshold at that time and (hopefully) when your parents die the value of the partnership is above the taxable threshold. 

If they now consider these extra tax payments "buying" your inheritance, well they could have done that without any shenanigans whatsoever.  Just sell you shares each year.  But then they'd have to report capital gains on the sales of the shares. 

So it appears they are trying to make a sale look like two gifts:
One from them to you in childhood making you a partner
One from you to them now ("taxes")

The IRS may not be happy with this and honestly if I were you I'd try to get this thread deleted.

ch12

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #78 on: December 04, 2013, 07:44:53 PM »
Forgot to add, it's common to assign shares/pay dividend income to family members for income splitting purposes, but I've never seen one where the main stakeholders (your parents) are leaving you on the hook for taxes for something that you have zero involvement in, hence why I am thinking they are using you as a subsidy more than anything, which would lead me to also believe the business is not cash flow positive/leveraged/not enough working capital/could be a number of things.

Thanks for the input. I sure feel like i'm subsidizing them. For what it's worth, their CPA agrees that the situation is wrong-headed. He's the one who originally advised them to make us, the children, partners, but he doesn't agree with them leaving us the tax bill.

That's what I didn't understand.  The point of making you partners early is that the "gift" is under the taxable threshold at that time and (hopefully) when your parents die the value of the partnership is above the taxable threshold. 

If they now consider these extra tax payments "buying" your inheritance, well they could have done that without any shenanigans whatsoever.  Just sell you shares each year.  But then they'd have to report capital gains on the sales of the shares. 

So it appears they are trying to make a sale look like two gifts:
One from them to you in childhood making you a partner
One from you to them now ("taxes")

The IRS may not be happy with this and honestly if I were you I'd try to get this thread deleted.

Yes +1
To clarify, I don't think anything illegal is happening.

You could be right, but then you're not a lawyer and you don't even know what kind of business structure this is (LLC, S-corp...), which suggests that there are a lot of details about this business and its finances that you don't know. In other words, there's not really any basis for you to feel confident that your belief about whether they're breaking the law is correct. Especially since some lawyer/accountant types on this thread have all pointed out potentially serious tax/legal issues with what your parents are doing. We're not trying to insult your parents or drag their reputations through the mud when we say what they're doing may be illegal. It's possible to commit criminal tax fraud without even realizing that what you're doing is a crime.

That is just one of the reasons that I was suggesting you spend a couple hundred bucks talking to a competent lawyer with a background in small business, tax, and ideally (but not necessarily) also estates and trusts.

Glad to hear about the positive development re: your brother. That's good.

I'd suggest the same - shell out a few hundred to talk to a lawyer specializing in this kind of thing. It used to be de rigueur to set up family limited partnerships where the kids had noncontrolling interest and the parents owned a small percentage but held all of the power; a couple of people on this thread are very familiar with that sort of arrangement.

You need to see their books; you may not feel comfortable, since you know that the accountant is talking to your parents, but you have the full right to bring in an auditor and see what's going on.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #79 on: December 04, 2013, 11:21:10 PM »
The IRS may not be happy with this and honestly if I were you I'd try to get this thread deleted.

There are too many independent professionals involved, three accountants and one lawyer now that I think about it, who would have to be willing to risk their reputations for the kickbacks my parents would supposedly pay out of the $60,000 they've saved by me paying that chunk of the taxes over the past 10 years. It just wouldn't make sense for them all to take such a risk that when we're talking about such small sums. Plus, I know these people. They're really boring (in a good way), eagle scout types with a lot to lose.

I will have a look at the books myself, though, along with my accountant. If nothing else, I won't be so cllueless about the structure of the partnership afterwards. Thanks for the advice!

Cheddar Stacker

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #80 on: December 05, 2013, 10:00:59 AM »
Bronze,

I'm a CPA so I deal with items like this regularly. While everything your parents are doing is likely very legal and above board, nothing they are doing sounds fair to you. A few points/clarifications from yours and other comments:

1) Someone mentioned you are entitled to 40% of the profits. While this is correct, and I'm sure 40% of the profits are allocated to you on your K-1 each year, this does not "entitle" you to 40% of the available cash every year. Most partnership agreements will provide for a payment of cash to cover your tax liability, but some simply don't. It doesn't sound like your partnership is required to make "tax distributions" since it isn't.

2) If your parents have control of the partnership, which they can have in various ways, they have full authority to make any decisions related to the operations, including what to do with all the cash. If they are General Partners and you are a limited partner, it's likely they have full control, even if they only own 1% of the partnership.

3) Someone else mentioned a partnership requires a pro-rata distribution (i.e.-you own 40% so you get 40% of all cash distributions). I believe they are confusing partnerships with S-Corps. Partners in a partnership can take a "draw" from their equity, however this is likely subject to approval of the controlling partner. This does not have to be pro-rata. In direct contrast, S-Corps are required to pay pro-rata distributions at all times to avoid major IRS consequences.

4) MOST IMPORTANT ITEM - This one is in your favor substantially; therefore it's likely detrimental to your parents - By paying taxes on your profits, but not actually receiving any of the cash, you have built up a very large partnership basis. This means when your interest is sold, the building is sold, or you obtain control of your future cash "draws", you will not be paying much tax. If the building is sold you will likely pay capital gains, but your "Partnership Basis/Cost Basis" for the sale will be very large due to all the profits you've paid taxes on. If you sell your partnership interest the same thing is true, lower taxes due to your current situation. When/if you ever gain control of the partnership, or when you are able to begin drawing cash out, you will not pay taxes on the cash you take out. You will continue to pay taxes on the profits, but not the cash. However, all cash you take out will reduce your partnership basis (cost basis in the partner interest).

Summary - It's likely legal, but not fair based on all the facts you provided. I'm glad they decided not to fund your brother's lifestyle with your company. If you stick with it you will have some major tax benefits in the long run once you start to see some cash from this operation.

And no, you are not an ungrateful future heir. Good Luck.